the plan for the future

Saving the economy and restoring financial sanity

17 August 2020 (latest update: 24 December 2020)

the price of distrust

A matter of trust

Why would you lend money interest-free to someone you do not trust? This is perhaps a not-so-well understood feature of interest-free money. Ending usury is all about trust in debtors, currencies, governments and financial institutions. You wouldn't lend money to a person, a government or a financial institution you don't trust unless you are compensated for the risk of default in the form of interest.

And if you don't trust the currency you want interest to compensate for currency risk too. For that reason interest rates range from 40% in Venezuela to -0.75% in Switzerland. And interest rates in Switzerland would have been even lower if it wasn't for the existence of cash. Lower interest rates may cause a flight into cash so the Swiss central bank instead manipulates its currency to keep it from rising by buying up foreign currencies, stocks and bonds.

Undermining the integrity of money

Interest undermines the integrity of money. Banks lend money at interest and governments run deficits. But it is the accumulation of capital and most notably the lending at interest that can make government deficits appear necessary. Nowadays most money is debt. Money is loaned into existence and must be repaid with interest. If the interest rate is 5% and there is € 100 in existence then € 105 must be returned. But where does the extra € 5 come from?

Here are the options:
  • Lenders spend some of their balance so borrowers can pay the interest.
  • Some borrowers default so a part of the balance is not returned.
  • Borrowers borrow more.
  • The government borrows more (fiscal policies).
  • The central bank creates the shortfall out of thin air (monetary policies).

  • All these things happen and often together. If too many borrowers default in a short time this can escalate into a financial crisis, and subsequently an economic depression. Financial institutions may have to cut back their lending because their capital isn't sufficient so the creation of new debt to pay for the interest comes to a halt. Interest was a major cause of the Great Depression. Interest is an important reason why the capitalist economy is inherently unstable.

    In the 1930s this wasn't recognised. Instead the leading economists of that time tried to find ways around it. John Maynard Keynes proposed a more active role of the government. This marked the beginning of fiscal policies or a shift towards a dependence on government deficits to keep the scheme of interest going. At the same time the economist Irving Fisher laid the foundations for central bank interventions or monetary policies with a similar aim.

    Apart from that interest is a reward for risk so lenders are enticed to lend money to questionable borrowers if they are rewarded with a high enough interest rate. The usurious lending hits poor people the hardest. It might be better for them if they can't borrow at all as that would increase their purchasing power. It could also end the use of leverage in financial engineering schemes. Ending interest could therefore improve the integrity of the financial system.

    Gold standard

    Some people believe that we should return to the gold standard. A gold standard makes it unattractive to lend money at zero or negative interest rates as keeping the money in a safe deposit box yields zero. Large scale borrowing and lending in a modern economy would over time produce the same problems we have now. In fact the current predicament is a legacy of a gold standard that became untenable because of interest charges.

    Interest charges under a gold standard cause systemic failure. A simple example can explain it. Suppose that Jesus' mother had put a small gold coin weighing 3 grammes in Jesus' retirement account at 4% interest in the year 1 AD. Jesus never retired but he promised to return. Suppose now that the account was kept for this eventuality. How much gold would there be in the account in 2020? The answer is an amount of gold weighing 12 million times the mass of the Earth.

    If only a small portion of the world's money is lent or if lenders spend their interest received, a gold standard might not run into this problem, but in a modern capitalist economy most money is lent and then some while capitalists accumulate capital by reinvesting their interest, so that the scheme is destined to fail. And that is why we now have fiscal and monetary policies, which amounts to governments going into debt and central banks printing money.

    An alternative

    There is an alternative. Both Keynes and Fisher noticed it. Only, they didn't properly understand the alternative because they didn't identify interest as the cause of the depression. It is possible to keep the economy going without the need for more debt or printing currency. In 1932, in the middle of the Great Depression, the Austrian town of Wörgl began a remarkable monetary experiment. The town issued a local currency known as stamp scrip.

    The Wörgl money required a monthly stamp to be stuck on the circulating notes to keep them valid amounting to 1% of the note’s value which worked like a negative interest rate.1 2 Nobody wanted to pay for the monthly stamps so everyone receiving the notes would spend them. Anyone could exchange scrip for 98% of its value in schillings but that rarely happened because the scrip could be spent as one schilling after buying a new stamp.1 2

    The key to its success was the faster circulation of the scrip money within the local economy. This increased trade and employment. Unemployment in Wörgl dropped while it rose in the rest of Austria. Six neighbouring villages copied the idea successfully. The French Prime Minister, Édouard Daladier, made a special visit to see the 'miracle of Wörgl'.1 2 In January 1933 the idea was copied in the neighbouring city of Kitzbühel.

    In June 1933 major Unterguggenberger addressed a meeting with representatives from 170 different Austrian towns and villages. Two hundred Austrian townships were interested in the idea. At this point the central bank decided to assert its monopoly rights by banning scrip money.1 2 The Wörgl currency indicates that the economy can do well without more debt if money keeps circulating with the help of negative interest rates.

    Fisher advocated copying the Wörgl currency in the United States. It didn't work out as well. Most townships introduced far higher stamp fees amounting up to 1% per week, four times as high as in Wörgl. Keynes later realised that Silvo Gesell, who proposed the holding fee on currency, might have been a monetary genius. He then issued the prophetic statement that 'the future will learn more from the spirit of Gesell than from that of Marx'.3

    Ending the current depression

    The issued notes were backed by money deposited in a bank. No new debts were made. No new money was printed. And the economy did very well. Now fast-forward to 2020 where governments and central banks try to halt a depression by borrowing and printing money on an unprecedented scale. It may be possible to end the depression without borrowing and printing money. And it may be done fast too.

    In a depression the markets for money and capital stop operating because the equilibrium interest rate where supply and demand equal is at a negative interest rate. If the equilibrium interest rate is below zero then potential borrowers aren't willing to pay zero interest while cash offers an interest rate of zero so potential lenders are not willing to lend at lower rates. Identifying this as the cause of a depression may end the need for government and central bank intervention.

    The stimulus could come from the interest rate seeking equilibrium rather than government borrowing or central bank intervention. Governments may not need deficits and central banks may not need to set interest rates for the economy to recover, but only if there is a penalty on holding currency like there was in Wörgl. In fact, quantitative easing can be undone as a holding fee on currency can make debts on the balance sheets of central banks attractive to hold.

    In other words, the depression can end soon. And even when banks face write-offs, they may not need support. Negative interest rates will cause net discounted value of the performing loans to rise. That can offset their losses. That points at another outcome of negative interest rates. The net discounted value of future income will rise so businesses might find it easier to attract capital even when the economy still is in a (partial) lock-down.

    A permanent solution for the future

    Negative interest rates can end the depression once the lock-downs have ended. We may not see positive interest rates again after the economy has recovered because there is a surplus of capital or a lack of demand at an interest rate of zero. The equilibrium interest rate could remain below zero indefinitely. This is pointed out in the paper The End Of Usury that can be found here:

    It can also be an opportunity to end all interest charges on money and debts, meaning that all interest rates on money and debts are negative and capped to zero. This is deflationary as it reduces the incentive to lend and therefore the creation of credit. It also means that only trustworthy debtors can borrow. Financial engineering and usurious lending can end. The financial system and the economy can henceforth be inherently stable.

    The negative interest rate provides a stimulus while the maximum interest rate of zero curbs lending. This is likely to work like it did in the Austrian town of Wörgl during the Great Depression. The economy will recover without more debt or more money printing. This is explained in the paper Feasiblity Of Interest-free Demurrage Currency that can be found here:

    Ending interest requires trust in currencies and therefore governments. Hence government, must be honest, provide quality public services, and live within their means. This points at a momentous challenge that lies ahead. But there is a great reward in doing so, and that might a reason why this is going to happen. Just imagine what receiving 3% of GDP in interest rather than paying the same amount can do for public services and taxes.


    1. The Future Of Money. Bernard Lietaer (2002). Cornerstone / Cornerstone Ras.
    2. A Strategy for a Convertible Currency. Bernard A. Lietaer, ICIS Forum, Vol. 20, No.3, 1990.
    3. General Theory of Employment, Money and Interest. John Maynard Keynes (1936).