The increasing indebtedness of enterprises is
especially problematic. Lothar Späth, former Minister
President of Baden-Württemberg said the following about
this problem: "Loan-financed enterprises ruin others
first before they are ruined themselves."
Karl Zimmer, wrote the following in 1990 in the German
journal "Kreditwesen" Nr. 13: "On
average, more than a quarter of the cash flow of all of
the enterprises is used for interest payments. During the
70s this proportion still ranged between 8 to 13 per
cent, and even during the 80s it only reached 15%.
Therefore today it is more correct than ever to speak
about a "debt-economy" - an economy which is
based too much on indebtedness."
Sectors of the economy where the increase of
productivity faces natural limits have special
difficulties with the increase of debt. Agriculture in
particular is confronted with this problem.
Public debt also increases more rapidly than public
income, as you can observe in chart 15. The evolution of
public debt is of special concern for several reasons:
chart 15
- The increase of public demand brings with it
increasing interest rates and therefore the reduction of
private investment.
- The flexibility of budgetary policy is decreased, as
an always larger part of the budget has to be used to pay
back interest and for repayments.
- Due to increasing debt the state is obliged to
maintain it growth-oriented policy. A policy of economic
growth only linked to the objective to pay back debt, can
lead to growth which is not induced primarily by a demand
which aims to satisfy needs and wishes, but by an
artificial public demand for military goods or other
dangerous or senseless projects. Very often ecological
problems also arise in this context.
- Someone who takes a loan will normally produce goods
with which the loan and interest can be repaid one day.
These goods, e.g. buildings or factories, are used at the
same time as an insurance for the creditor. Even if the
state pays back interest and loan punctually and reliably
over decades (very often with new interest bearing
loans), some day the system will break down. What use
will creditors then have for public goods such as a
sports hall, a highway, a military base, a cannon or a
sewage plant?
Even the Federal Bank (of Germany) is worried about
this: "A reduced time horizon because of election
dates and the deficient political representation of
future generations are two of the main factors which tend
to lead to excessive public debt in the democracy."
Government borrowing is in the long run most unsocial,
as with each loan the rich get richer and the poor
poorer.
But it has to be considered that government borrowing
is no end in itself. If on the one hand money supply
increases with private saving and on the other hand the
money demand of enterprises is kept low, the state has to
borrow the excess money supply on the market, as without
this measure deflation would be induced produced.
7.3. Excess growth of monetary assets
As cash plays a minor role in relation to credits,
financial assets are proportionally only a little bit
higher than credits. The composition of financial assets
is described in chart 16. Statistically shares are
counted as financial assets, but within our system of
definitions they are not included. This remains without
special importance to us as, for example in Germany,
shares only represent about 6% of financial assets.
Furthermore it has to be acknowledged that statistically
only credits between the sectors of private households,
enterprises and the state are counted but not credits
within each of the sectors.
chart 16
The amount of monetary assets in relation to the gross
national product is presented in chart 17. As credits
develop symmetrically to debts, financial assets in total
increase more rapidly than the GNP.
chart 17
Chart 18 shows the shares in debt of the different
sectors. Apparently private households hold the biggest
share of financial assets.
chart 18
7.4. The redistribution effects of interest flows
The increase of credits and debts consequently leads
to an increase of interest flows. An increase of interest
rates even leads to a progressive increase of interest
flows. As with credits and debts, interest flows increase
more rapidly than the GNP, as it can be seen in chart 19.
chart 19
Interest flows lead to a further increase of total
debt and assets. An even more important fact within this
context is, that these interest flows lead to an
increasing concentration of assets among fewer and fewer
enterprises and private persons.
The redistribution effect of interest is generally
underestimated because people wrongly think hat they only
have to pay interest if they borrow money. In reality the
prices of goods contain approximately 25 % interest.
This is because not only do the financing cost for the
final products have to be counted but also the financing
costs of all initial products. If the yields of real
assets (land, estate, buildings) would be counted as
well, the amount would come up to 33%.
The effects of interest on costs are amazing,
especially within products which are very
capital-intensive. Construction is one of the branches,
where rents contain up to 77% costs for interest.
Consequently it is easy to understand why the problem of
housing would be unresolvable for many people without the
state. If the state borrows money for such support, the
problem seems to be resolved for the moment, but
indirectly problems increase, as each government
borrowing makes the poor even poorer and the rich even
richer, because of interest.
The Catholic Family Community of the Archdiocese of
Vienna wrote the following in 1990: "The root of the
evil is the current monetary system and the uncritical
belief of the faultlessness of interest. But the latter
makes the rich richer and the poor poorer, because
interest is not only paid directly for loans. As a cost
factor it is included in all prices."
Chart 20 shows interest payments (including indirect
interest payments through prices) and interest income,
divided into 10 groups of private households. It can be
deduced that 80% of the households are net interest
payers, which means that they are among the losers of
this monetary system. The higher the interest, the worse
the effects. For about 10% of private households effects
are neutral. Only 10% of them are winners within the
current interest system. This shows the immense
redistribution effects of interest. The effect of
compound interest will aggravate the existing situation
in the future.
chart 20
For enterprises more or less the same effects are
valid as for households. Chart 21 shows that interest
expense of enterprises grow quicker than net
accumulation. Therefore it can be concluded that also
among enterprises a majority consists of net interest
payers and only a few big companies are net winners.
chart 21
With increasing indebtedness, owners of real assets
increasingly face the possibility of shutdowns which
leads to in securities for creditors. Small increases of
interest rates and/or a reduction of economic activity
already lead to the shutdown of enterprises as they are
not any longer capable of paying back debts. If one day
banks can no longer bear the risks and inflationary money
creation is the only solution left for the state, even
the proprietors of money will be victims of the excess
growth of assets. An American survey argues, based on the
developments of the late 20s of this century, that the
number of potential bankruptcies of banks increases with
asset concentration.
7.5. Unemployment
Chart 22 shows that a direct relationship of
unemployment and bankruptcies with interest rates exists.
Two to three years after an increase of interest rates,
unemployment and bankruptcies increase. It is quite
obvious that increasing interest rates have a negative
impact on employment. To explain it simply, they are
causing bankruptcies and the consequence of these is
unemployment.
chart 22
If increasing interest causes unemployment, decreasing
interest should consequently induce the opposite effect.
This was the case until the beginning of the 70s. After a
period of high interest rates in 1975, unemployment
decreased only little and also in 1983 it remained over
five years at the same level, although interest rates
were constantly falling. How can this be explained?
The explanation is that primarily not the level of
interest rates is responsible for the level of
unemployment, but the amount of real interest flows.
Interest flows are the product of interest rates
multiplied by debt. As debt increases exponentially,
falling interest rates only lead to a small decrease of
interest flows. Chart 23 clearly shows this relationship.
chart 23
7.6. Money speculation
Increasing financial assets and falling yields not
only seduce private persons, but also enterprises to
invest in increasingly risky investments.
Already some years ago, the World Bank acknowledged
that money transfer is about 15 to 20 times higher than
required by world trade. These tremendous capital
transfers are obviously not done for real investment, but
for speculation. Stock and currency speculations are the
most important ones.
Whereas stocks used to be bought as some sort of life
insurance, today they are more and more speculation
papers. Normally speculation losses only affect other
gamblers/players, which would be a minor concern. But if
speculation leads to a crash, irritations that
consequently will be the effect of it also will affect
normal economic activity, bearing negative consequences
for all participating in economy.
Unfortunately, currency speculation is increasing. The
effects of this negatively influence the economy and
especially international trade in a different ways.
Normally these speculation businesses are a zero-sum game
in the end. But speculators can make real profits when
central banks engage in speculation through supporting
purchases and finally lose, i.e. they have to correct
exchange rates. If in this situation even public banks
are speculating against the proper central bank, insanity
could not be higher, as "Die Zeit" from the 2nd
October 1992 reported regarding the Hamburgische
Landesbank.
The President of the Federal Bank of Germany, Helmut
Schlesinger, described in a conference in Cologne on the
1st December 1992 with which problematic consequences and
results central banks are confronted due to speculation
against them: " Unlimited and compulsory
intervention by central banks as occurred in the past are
not contributing to the stability of the system. But they
are an immense incentive to speculation. The reality is
that debtor and creditor central banks had to face heavy
losses whereas only a single speculator announced to have
made a profit of about 950 million US$. This is not only
expensive for tax payers but also useless."
Another insider, such as the director of the
Rothschild Bank in Paris, Bernard Esambert, an advisor to
French Presidents, was complaining about the "insane
hegemony" of money within economy during the TV-Show
"Nightmare Interest - Money destroys the world"
(WDR III, 23.11.1992). "This lead to a system which
absolutely cannot be controlled any longer by democratic
institutions, neither by central banks nor by
nations."
Apparently there is the need for limits to freedom
within the monetary system which were and are
misunderstood, in order to allow central banks to fulfil
their function - to keep currencies stable. If not, even
democracy is in danger.
7.7. Problems increase in economies which are
getting older
Evolution curves for interest (see chart 24) show,
that the effect of compound interest only lead to
escalation after two to three decades. This means, that a
"young economy" starting up with a new currency
and little savings, e.g. after a war, is not so much
affected by the problem. Additionally, a large part of
interest is used for consumption. Over a longer period
financial assets increase and concentration occurs almost
solely through the effect of compound interest.
Consequently social discrepancies must increase in an
economy which is getting older.
chart 24
Within the GNP interest flows represent income which
comes from credits and is not linked to labour. As
described in section 7.4 and shown in chart 19, interest
flows increase at a higher rate than GNP. Chart 25 shows
that the share of income not related to labour increased
from 4% in 1950 to 18% in 1990 (this does not include
yields out of real assets). Due to exponential growth
sooner (variant B in the year 2000 apron.) or later
(variant A in the year 2030 apron) income from labour
(and real assets) will no longer increase, but only
decrease from that moment on. Social problems which will
arise out of this situation seem to be absolutely
uncontrollable from a current point of view. The Austrian
Federal Governments current discussions about the
reduction of public expenditure are just a small
introduction to the future.
chart 25
7.8. Justice
Today it is very popular in political discussions to
ask for the reduction of income of those who are earning
more. Although I would be concerned by such a measure, I
am fully supporting it, because redistribution from the
rich to the poor has to be accepted as a necessity of the
system and not as an ideology.
Consequently, it is also just to call for the
abolishment of incomes from a second, third or fourth
political function which is not related to work.
However, I am very surprised that income that is not
related to work but arises from interest of credits is
still not a political issue, although in my opinion the
importance of these problems is various times higher than
described above.
To make it clear: the top income of a movie star or an
entrepreneur, whatever amount of money they may earn,
does not represent a problem as long as this money is
used for consumption. Once he or she starts to deposit
the majority of this income in a bank account and
consequently interest income is earned, problems of
injustice and for the economy start to arise. The
interest which the person receives consequently
represents a burden for everybody, whether watching a
movie or not or whether buying a product from the
entrepreneur or not.
In case somebody lends money directly to a person and,
for instance, does not get back this money due to a
bankruptcy (which is relevant also for shares to some
extent), the lender may well have earned some interest
income (a dividend in the case of shares) over a period
of time. As the person bears the total risk of loss
alone, interest income can be understood in this context.
But in the case of a company which goes bankrupt and
which was financed by bank loans, generally the
respective bank has to write off a large loan. In this
case it is forbidden for the bank to deduct the lost of
the savings from which the loan was financed. The bank
can transfer half the costs of the loss to the general
public via the possibility of writing off the loss from
taxes. The remaining half finance is ensured via premium
risks, which will lead to an increase of interest rates
for credits and consequently it is again the main part of
population which is affected by this measure. Those who
profited by interest from their credits over a long
period of time do not face any risks and therefore do not
lose anything.
Also in the case of bank collapses, states generally
cover a major part of the lost.
7.9. Money, wars and extermination of capital
The December 1988 edition of the consumer magazine
"Sparkasse" reprinted an article about interest
which had first been printed in 1891 in a forerunner of
the magazine. This article, which was written more than
100 years ago, treated the problem of the evolution of
interest, especially focusing on the evolution during the
19th century. The article particularly lamented the
observed trend of falling interest rates and explained:
"The reason for the falling of interest rates
is mainly seen in the fact that today most profitable
capital assets of a larger size have reached their limits
and consequently only enterprises of small yield are
remaining."
In order to prevent a further fall of the interest
rate, which at that time was at 3%, the following was
said:
"...new countries, such as in Africa, need to
be explored as quickly as possible by European capital in
order to face the fall of interest rates."
But as also this measure would not be sufficient in
order to change the tendency of the evolution of interest
rate, the article ends with the following sentences:
"Therefore, all signs are towards the tendency
of a continuation of the fall of interest rates. Only a
general European War could stop this development due to
the enormous extermination of capital as a
consequence."
This conclusion seems to be monstrous. But as we know,
since 1891 this happened twice: two "general
European Wars", which even could be extended
world-wide, stopped the falling of the interest rate.
7.10. Interest prevents qualitative growth
The understanding that unlimited growth cannot be
brought in harmony with ecology is at the point of being
accepted more and more. One of the main arguments which
are used now is that a change from quantitative to
qualitative growth is necessary. But exactly this change
can not happen due o interest.
This can be shown with a simple example:
Suppose product A costs US$ 1,000 and has a lifetime
of 10 years. Another product B costs US$ 1,500 and can be
used for 20 years. If the interest rate were zero, it
would be advantageous to buy product B, as its annual
costs come up to US$ 70. In comparison, product A would
cost US$ 100 each year. An investment calculation which
assumes an interest rate of 8% p.a. shows that the
capital value of the investment for product A over an
investment period of 20 years is US$ 1,434 and is
therefore smaller than the capital value of product B
which is US$ 1,500. The result of this investment
calculation is that, due to interest, product A with the
shorter lifetime has to be bought.
This example shows that interest devalues the future
and works against more expensive quality products,
favouring instead cheap goods with short lifetimes. This
is, besides low energy prices, another reason why
investment in solar energy and other alternative energy
resources is not considered economical today.
8. The impossibility of debt
reduction in practice
8.1. Is debt reduction possible through saving?
As we have seen in section 3.6., saving represents the
accumulation of unfinished exchange transactions. Within
an economy of only two participants, a debtor and a
creditor, this means the following: the creditor has
produced more output (production and sale of goods) than
he or she actually is demanding (purchase and consumption
of goods). It is obvious that a reduction or termination
of the debt is only possible by finishing the exchange
transactions, i.e. only if the operation is turned
around. This means that the one who owned credits up to
now has to demand more (purchase and consumption of
goods) than he or she is producing (production and
selling of goods). Consequently not only the debtor can
control the reduction of debt but also the creditor can
do this. The reduction of debt is only possible if the
creditor wants to reduce his or her credits as well.
Chart 4 shows this relationship.
The statement remains valid for an economy with many
participants. Instead of one debtor the totality of
debtors is considered and instead of one creditor, the
totality of creditors. One debtor can pay back his debts
totally if at the same time another debtor increases his
debt by the same amount. The totality of debts and
credits remains unchanged.
The main problem in reducing debt is that generally
credit holders are not interested in the reduction of the
debt of their debtors, as their credits increase due to
the interest mechanism and as the latter also leads to an
constantly higher concentration of credits among a small
number of persons. Deposit holders are also not
interested in the reduction of their credits, as they
earn interest incomes for which they do not have to work.
Nor do they feel the need to demand more goods, as
already in the past they did not increase their demand.
The total termination of debts through saving is
therefore impossible in practice.
This basic problem is also not influenced by the way
people save money: whether they produce the same amount
of output and spend less money, or whether they work more
and their expenditure remains at the same level.
8.2. Is the reduction of private debt possible
through the sale of real assets?
Generally the sale to the creditor of real assets
still belonging to the debtor will reduce credits and
respectively debt. But in this case, a sale would only be
possible if the creditor wished to buy the assets. If all
debtors sold their real assets in order to reduce their
debt, the following would be the consequences:
- Prices would go down and banks would have too much
money due to the debts paid back. If this excess money
were not brought back into circulation in the economy via
debts, deflation and economic collapse would be the
consequence.
- In addition this would cause an increased dependency
of debtors ... In the Middle Ages this situation led
to serfdom.
If prices remained constant, no shift in properties
would occur (the balance of credits and real assets
remains the same for both parts), but dependency could
not be avoided.
Consequently, this means that a reduction of private
debts is in practice impossible through the sale of real
assets.
8.3 Is a reduction of the debts of enterprises
possible?
Fixed assets consist of all reproducible real assets
which are used in the economy, this means all buildings
for living and working, production sites, machines,
office equipment, etc. The level of all financial assets
in comparison with the totality of fixed assets was 32%
in 1950, 52% in 1970 and increased to 68% in 1990. The
share of debt of fixed assets increased from 36% to 49%
and is now at 62%. It is obvious that an increasing
discrepancy between monetary and real assets exists.
Dieter Suhr, the famous monetary expert, described this
as the increase of monetary hydrocephalic.
A direct purchase of enterprises (e.g. of shares)
through credit owners would basically be a possibility
for debt reduction. This would lead to the situation that
creditors would directly assume entrepreneurial risk. But
apparently there is a decreasing willingness to do so. In
order to make this happen, the state would have to fix an
obligatory high rate of equity capital. The consequence
of this would be a decrease of share prices.
8.4. Is a reduction of public debt possible?
The reduction of public debt through the sale of
public property is very limited. As total debt can not
decrease in practice (as already explained in 8.1.) a
reduction of public debt will only be possible, if at the
same time private debt and debt of entrepreneurs increase
by the same amount.
8.5. The reduction of debt through a devaluation of
credits and loans
The only logical but also terrifying consequence from
this is that a reduction of debts is only possible
through a devaluation of debts and loans. Basically two
possibilities exist:
- Hyperinflation and monetary reform as happened in
1923 and 1948, a possibility which does not seem to be
very welcome;
- a continuous reduction of credits through property
taxation of financial assets, which is higher than real
interest income, together with a redistribution of
monetary assets from creditors to debtors; this solution
would be very difficult to introduce due to many reasons
(e.g. differences in the real reduction of financial
assets because of different interest rates).
Theoretically it is possible to neutralise strong
positive feedback within a dynamic system through even
stronger negative feedback. However this would be
difficult, as the basic instability induced by the
positive feedback would not be abolished.
8.6. The solution of the debt problem
The avoidance of positive interest income through
"neutral money" would have the following major
impacts regarding debt:
- the automatic increase of credits and debts without
the necessary economic output would be stopped, i.e. the
destabilising positive feedback would be avoided.
- financial assets which do not bear interest are also
socially neutral, as long as they do not reach a level
which leads to dependencies due to the concentration of
economic power, because financial assets represent a
preliminary renunciation of economic output of the
creditor for the benefit of the debtor, who will have to
pay back the money at a later moment.
- a property tax as an additional element for
stabilisation (e.g. in order to reduce effects of profits
out of tangible assets) remains useful but its central
importance for stabilisation which it should have within
the existing system, is reduced.
To sum it up, there is only one single possibility
which can be sustained:
the introduction of ""neutral
money"" together with a user fee and a credit
fee.
This will only be possible once creditors have
understood the existing logic. "Neutral money"
will be more advantageous to them than hyperinflation,
where they would lose everything and not only would they
suffer, but all the others as well.
9. A new money system
9.1 Once again: explanation of the theory of
"neutral money"
Someone who wants to "consume" a service has
to offer some other service. The consumption of the one
and the execution of the other service can differ in
time. It makes sense to offer options on future services
or works.
Another example to make it clearer:
A father has surplus money now because he worked a lot
and he will not need the money until some time in the
future in order to finance his retirement. The son needs
money today in order to found a business and to be able
to work; tomorrow he will have surplus money. These needs
can be met if the father lends money today and the son
still works tomorrow.
For a sane economy both actions are necessary. Both,
father and son, profit from it. Because of the absolute
liquidity advantage the father can force the sun to pay
interest which would break the balance and shift the
advantage to the father. In my opinion, too little
attention has been given to the credit fee.
The effects of a royalty and a credit fee on interest
rates can be shown simplified in chart 26:
chart 26
The crossover point of the offer and the demand curve
is the price of money (i.e. the interest rate). Bank and
credit fees shift the demand curve to the left. The
royalty shifts the offer curve to the left because it
prevents the hoarding of money. Thus it is possible to
control the crossing (the interest rate) so that the
interests equals 0. The cost of money can (unfortunately)
not be set at 0 because of bank and credit fees.
The same situation can be shown more exactly with
chart 31 which is more precise than chart 26.
Chart 31a (actual situation without royalty):
The income of a household can be used in three
different ways: consumption (K), hoarding of money (H)
(growth of monetary assets) and saving (S) (growth of
savings). The share of consumption, hoarding and saving
depends mainly on the interest rates. If interest rates
are high, savings increase and consumption is reduced to
a minimum level (that is the marginal consumption GK). If
the interest rate decrease to an equivalent level of the
liquidity advantage of money at about 2.5 %, saving is
replaced by hoarding (see sections 3.7 and 5.3).
chart 31a
If interest rates are below the liquidity advantage of
money, there is only consumption and hoarding and the
share no longer depends on the level of the interest
rate. In the area between 2.5 and 5 %, hoarding is
constantly replaced by saving.
Following this chart it is easy to understand why a
decrease of interest rates starting with 5 % and stopping
fully at 2,5 % means an interruption of the economic
cycle. Demand decreases because money is extracted from
the market. As nobody, neither workers nor employees,
landowners nor politicians can be interested in causing
an economic crisis, they artificially increase demand by:
- increasing money supply (which finally leads to
inflation)
- artificial demand (often for useless goods like
weapons or nuclear power plants)
- creating of needs (e.g. through advertising).
The decrease of the interest rates is thus the source
of hidden inflation and one of the origins for the need
of economic growth. Without an instrument which prevents
hoarding, neither hidden inflation nor compulsory
economic growth can be avoided. The easiest instrument
for the control of money hoarding is thus a royalty.
chart 31b (low royalty):
Chart 31b shows how the shares of consumption,
hoarding of money and saving differ with the
implementation of a royalty between 0 and the liquidity
advantage of money. At high interest rates there is, of
course, no change. Only at lower interest rates than is
the case without the royalty does saving becomes an
interesting option. The total amount of hoarding
decreases, in the beginning in favour of consumption and
saving, and finally only in favour of consumption.
chart 31b
chart 32c (high royalty):
If the royalty is high enough (e.g. at 5 %) hoarding
totally disappears. At high interest rates there is no
influence on the division between consumption and saving;
saving only becomes interesting at low interest rates. If
the royalty would be increased there would be no more
change of the curve. The speed of money circulation would
increase which would have to be balanced by an increase
of money circulation to prevent inflation.
chart 31c
chart 31d (necessity of a credit fee):
The actual interest rate is a result of offer and
demand, hence of the offer curve for saving (chart 31c)
and the demand for credits. To fix the interest rates
of 0, the demand curve has to be shifted to the left
by bank and credit fees up to the point where it crosses
the offer curve at an interest rate of 0. Without a
credit fee, this would hardly be possible.
chart 31d
Control duties of the central bank:
1) The central bank has to keep the royalty at a
level where no hoarding appears. The level of the
royalty also has direct influence on the speed of
money circulation.
2) The central bank keeps the credit fee at a
level so that the interest rate is 0.
3) The central bank keeps the money circulation on
a level where inflation is 0. For the following
reasons this is always possible: The level of prices
is a result of the quantity equitation P=M.V/Q. The
speed V is determined by the royalty. No matter which
variations in time occur to V and Q, M can always be
chosen in order to keep P on constant level. But the
process of control is not to measure speed and GNP
constantly, but to calculate the money supply M which
is necessary to keep P constant: the level of prices
P is constantly measured. If P increases M is to be
reduced, if P decreases M has to be increased. This
process makes it possible to keep P at a constant
level (= inflation equals 0), just the same way as it
is possible to keep car speed constant with the
accelerator while observing the speedometer.
If the royalty is already at a level where
hoarding disappears and there is no more change of
the savings curve, just like in chart 31c it is also
possible to use the royalty as mean of control,
because it has direct influence on the speed. (Just
as it is possible to keep car speed constant either
by using the accelerator or using the brakes.)
As a conclusion, I am able to say that the means of
control
- money supply
- royalty
- credit fee
and the target measures
- interest rate = 0
- inflation = 0
can be influenced directly without interrupting money
circulation. Royalty and credit fee are paid via the
state for the benefit of the public good, e.g. other
taxes can be reduced.
9.2. The Consequences
- The non-work incomes from monetary assets are
skimmed off with the royalty - and in my opinion - also
with the credit fee and are used for the benefit of the
public.
- The interest rates decrease so that there is zero
profit for long-term investments. Hence the value of
money is also kept with long-term investments.
- It is possible to keep inflation at exactly 0 % by
exact control of the money supply or by exact control of
speed via the level of the royalty. The exchange value of
money is absolutely constant.
- The growth of the GNP is much more a function of
demand, that is the wish to satisfy real needs of people.
- The building up of money assets is economically less
interesting. Money owners must consume their capital or
work as most others.
- Surplus money is invested less in savings accounts,
debenture bonds or other bonds but increasingly in
assets. It is possible to invest in production which
increases GNP or to invest in long-term goods. Because
investment is more and more a function of demand and not
of supply, investments will increasingly be made in
long-term goods such as housing, works of art, antiques,
gold, etc.
- Surplus money is also increasingly invested in
risk-sharing bonds like shares. The shareholder bears
economically necessary risks. This is positive as long as
speculation can be controlled and bank crashes do not
occur. If a loss occurs, it is a gift to the economy.
Damage is restricted as only persons with surplus money
are affected. If there is profit it is a message from
economy like: "You are able to estimate needs. You
get a profit to make you able to bear more economic risks
in order to lead economy in the right direction."
Thus risk capital shifts the means from persons who
damage the economy to persons who encourage the economy.
- The only problem is that real estate is also a
long-term good. The flight of capital to land property
has to be prevented by new real estate legislation
because increasing prices and higher land rents influence
a new system which will then, just like the actual money
system, suffer from problems and injustice caused by
interest rates.
The new real estate legislation should guarantee that
land is owned by the public. It is not evident that land
- comparable to vital goods like air and water - is
subject to speculation and not a public good like air and
water. The use of land - this is the crucial point - and
via profit also the gains of personal initiative, have to
be private, but the profit due to land-lending has to be
paid to the citizens via the public sector. This subject
is so immense that it is a subject to be treated in its
own right.
9.3. The difference to capital income tax
The mechanism of a capital income tax can be observed
with chart 32. The different impact of the royalty and
the capital income tax can be shown by a comparison of
chart 26 or 31 and 32:
chart 32
- The capital income tax shifts the offer-curve to the
right. The willingness to borrow money is a not a
function of the interests but of net-interests (interests
minus capital income tax). By contrast, the royalty
shifts the offer-curve to the right and the credit fee
shifts the demand-curve to the left.
- The capital income tax does not avoid the hoarding
of money.
- The capital income tax will definitely lead to a
decline in credit volume. But the total capital income
tax also decreases when interests decrease. By contrast
the credit fee is independent of the interest rate. So
capital income tax only has a controlling impact when
interest rates are high. A zero interest rate can never
be reached with this instrument.
- A capital income tax of e.g. 20 % does not mean a
decrease of the net interest rate of 20 % from 5 to 4 per
cent but a decrease of only about 10 % from 5 to 4.5 per
cent because of the simultaneous shift of the offer-curve
to the right, which causes an increase of the interest of
about 10 % from 5 to 5.5 per cent.
9.4. The birth of the theory
The first person who wholly understood the
money-problem was Silvio Gesell from Argentina . In his
book "Die natürliche Wirtschaftsordnung" (The
natural economic order) of 1916 he had the idea of
"ageing money" to keep money circulating.
Following him, the founder of anthroposophy, Rudolf
Steiner, dealt with the problem.
The American economist Irving Fisher (one of the
co-founders of mathematical economics) deeply developed
the theory in his book "Stamp script" of 1933.
He tried hard to convince the American government - and
failed, possibly due to inopportune circumstances.
John Maynard Keynes also dedicated a whole section to
this subject in his "General Theory of Employment,
interest and money" in 1936. His proposition for a
new money system during World War II also consisted of a
penalty rate on liquid deposits and on overdrafts of the
International Monetary Fund. It is remarkable but not
understandable why these reflections in the "General
Theory" as much as the later concrete propositions
have been widely ignored by the economic community.
Recently more and more people started dealing with
this questions. In particular Yoshito Otani from Japan,
Dieter Suhr (constitutional law) who taught in
Augsburg/Germany and most unfortunately died in 1990,
Margrit Kennedy, professor in architecture of
Hamburg/Germany and particularly Helmut Creutz, who has
already been proposed for the Alternative Nobel prize.
Money combined with a royalty has already been given
different names: "ageing money", "free
money", "vanishing money" and others. But
in my opinion the most precise definition is
""neutral money"".
In my opinion it is only a question of time until
official economics will deal with these questions because
of the evident arguments in favour.
9.5. "Brakteaten"-money in the Middle
Ages
Helmut Creutz writes:
The vital economic and cultural life during the time
of the Staufer family (a famous European family in the
Middle Ages) is both well-known and easily verifiable.
"A gift to money order", as Hans Weitkamp
called it in the subtitle of his book "The High
Middle Ages". In these times money existed which was
not continual: the single minted "Brakteaten".
These coins were made of thin silver sheet-metal but
received their value not from the quantity of metal used,
but from the coinage. The particular quality of the
"Brakteaten" was that they were demonetized one
to two times a year. Holders had to exchange the old
coins for a much lower amount of new coins.
This demonetization combined with compulsory exchange
and a reduction of the value of normal coins has been
known from the earlier Middle Ages but only with the
inauguration of a new sovereign. But with the
introduction of the "Brakteaten" by Archbishop
Wichmann of Magdeburg in 1154, the exception of
demonetization became a rule. There is no evidence
whether this was due to a lack of precious metals or it
was an instrument to finance the public household via a
"coinage tax" (Schlagschatz or Prägesteuer).
The latter reason is more likely. But this
"Brakteaten"-money, which rapidly spread to
lots of mint authorities in Central Europe, had a
positive but surely not anticipated side effect: The
money circulated! It was rarely hoarded in chests because
by amassing this money the risk of loss increased due to
the next demonetization. So it was better to spend this
money soon after getting it. If there was no direct use
of the money, it was offered as a credit to another
person who then bore the risk of loss. The debtor bore
the whole risk, the creditor was entitled to the full
amount lent.
A study of Harvard University describes these times in
the Middle Ages as some of the happiest and most
prosperous for humanity. In the Germans peaking world
hundreds of cities were founded, the Hanseatic cities
flourished and for the first time there was public wealth
for a wide number of citizens, which can be seen in a
number of preserved cities like Dinkelsbühl, Rothenberg,
Lübeck, etc. Never again has there been a comparable
number of artists and craftsmen in history. Every joist
on every building and every last stone on the top of
churches and cathedrals was decorated artistically.
Especially cathedrals give evidence for the enormous good
fortune of those days. They were not built by forced
labour like the pyramids, but by well-paid craftsmen and
architects. And this widespread welfare was not the
consequence of increasing productivity and economic
growth in our known sense but only the result of a long
economic period without harmful recessions and a money
system which guaranteed circulation without exploitation.
Mostly a five-day working week was usual, because the
"blue Monday" was holiday for the guilds.
This analysis is proven by the fact that the
reintroduction of the "eternal pfennig"
(eternal coin) or "fat pfennig" happened at the
some time as the end of this era in the 15th century.
These solid silver and gold coins were not subject to
demonetization. In addition some mint sovereigns went too
far with demonetization. Probably large gold discoveries
also played a role. In any case the massive coins were
extracted from the economic cycle. Gold surpluses were
hoarded and lent only at high interest rates. The
creditors , like the Fugger or Welser families, became
rich, all others - including archbishops, sovereigns and
the emperor - being debtors, became poor. Unfinished
cathedrals were one of the results. "There was no
money left", a tourist guide once said, not knowing
the real causes.
9.6. The Wörgl experiment (Wörgl: small city in
Austria, province of Tyrol)
Helmut Creutz writes:
Another famous and well documented historical example
is the "Miracle of Wörgl" during the great
depression in the Thirties. Due to the reduction of the
money supply and the following deflation, the economy
declined everywhere. The then social-democratic mayor of
Wörgl, Unterguggenberger, tried to explain the origin of
stagnation and unemployment as well as the reason for
empty community coffers. He found an explanation by the
German-Argentine Silvio Gesell and his theories on social
and money reforms. In his main book "The natural
economic order" Unterguggenberger detected the
relationship between the circulation of money and the
economic crisis.
In contrast to the economic experts, Unterguggenberger
understood that one has to make money find its feet to
overcome the crisis. He issued "work certificate
bills" (Arbeitsbestätigungsscheine: These bills
certified a certain amount of work being done) which were
covered by a certain amount of money at the local bank.
The bills consisted of a "circulation engine"
which subjected the hoarding of the bills to
disadvantages: On the rear of the bill were twelve
squares to be stamped every month to secure the nominal
value of the bill. To prevent purchasing the stamp worth
one per cent of the nominal value, nearly everybody spent
the bill at the same time he or she received it. The
economy recovered, community taxes were paid and
unemployment in Wörgl declined, while everywhere else it
increased.
The "economic miracle of Wörgl" was known
internationally. The later French president Daladier
visited Wörgl and reported in detail to the French
parliament. The famous American money-theorist Irving
Fisher sent an assistant to Wörgl. Fisher thought that
the model would be able to overcome the US-recession. He
classified himself as a "modest student of Silvio
Gesell." But when hundreds of Austrian majors wanted
to copy the Wörgl-model it was forbidden by the Austrian
Central Bank. The bank classified the
"work-confirmation bills" as money and felt its
autonomy threatened. The actual positive and negative
effects of the bills and of their own money were not
thought worth reflecting on, neither for the officials of
the Central Bank nor for most of the economists. As
today, the money order was a taboo in these days.
9.7. Current attempts to introduce a new money
system
There are lot of attempts to deal with the interest
spiral by introducing interest-free money, in most cases
it is by barter clubs. Examples are the LET-System (Local
Employment and Trade) founded in 1983, the J.A.K-System
in Sweden and the WIR-barter club in Switzerland which
was founded as early as 1934. The main problem of barter
clubs is the lack of a royalty so that they depend mainly
on the good will of the members.
Barter trade, such as practised by the huge
international firms, are only instruments to reduce
financing cost by reduction to a non-interest base.
Particularly interesting is the TALENT-EXPERIMENT in
Aarau (Switzerland) organised by the INWO (International
Union for a Natural Economic World Order). It works
without cash. There is only "invisible money"
(entries on accounts) combined with a royalty. There are
already attempts to extend the system to Austria.
Initiatives to popularise the theories around
"neutral money" are:
- INWO (International Union for a Natural Economic
World Order)
- Hamburger Geld- und Bodenrechtsschule e.V. (Money
and Land Legislation School of Hamburg/Germany)
- in Austria: Überparteiliche Plattform gerechtes
Geld" (platform for fair money) and SCA (Sammlung
christlicher Alternativen - Union of Christian
Alternatives)
9.8. Practice
The introduction of a royalty on bank money is
technically no problem. The development of electronic
devices will lead to an increase of cashless transfer
systems and will ease the introduction of a royalty also
to cash money.
But there are lots of propositions to reintroduce the
demonetiziation of money known from the Middle Ages for
bank notes and coins, less important anyhow in a modern
economic cycle. The introduction is surely not prevented
by the lack of possibilities.
A general change to "neutral money" is
desirable but politically impossible. But if knowledge is
sufficiently widespread it should be possible to
introduce "neutral money" on a local level
parallel to the existing money. If this
""neutral money"" proves successful,
it is possible that it will constantly displace
traditional money due to its stability.
10. Political enforcement
10.1. What "Neutral money" is not
For political enforcement it is often necessary to
know that the public clearly understands the meaning of
"neutral money". It is important to know what
it is not:
- "Neutral money" is not a leftist or a
communist concept because building of private ownership
and private initiative is one of the vital elements.
- "Neutral money" is not a right-wing
concept because it enforces democratic structures and
powers.
- "Neutral money" is not capitalist because
capital profits are reduced to profits from capital
assets. Profits from money or land capital are no longer
possible.
- "Neutral money" does not mean the
expropriation of the rich class, by contrast the
expropriation of the rich by hyperinflation is prevented;
only the independent accumulation of money not due to
work is no longer possible.
- "Neutral money" does not change people but
only the system within which people decide.
- "Neutral money" does not mean changing of
the banking system because neither the credit system nor
interest are abolished; only interest rates are subject
to change.
"Neutral money" is clearly neutral.
10.2. There are only winners
It is important to understand that the enormous number
of problems mentioned are not due to rich people being
bad people. We have to realize hat they only act within
the framework and in correspondence to the system. It is
comparable to the prisoner's dilemma: Due to systematic
reasons every player has to choose a non-co-operative
strategy even though this leads to a bad result for all.
The only ways out are in theory:
- A voluntary change of humans from egotists to
altruists
- A involuntary change of humans through dictatorship
and totalitarianism
- A change of the system.
Because voluntary changes in people do not bear great
hope and dictatorship should be refused, the only
solution is a change of the system.
To enforce this changing of the system we have to
understand and realize that there are only winners:
The rich: Most of them would chose the
cessation of further growth of their money assets when
they realize that it guarantees a stable social system
and prevents danger of full loss due to hyperinflation or
other social crisis.
The poor: It is obvious.
Politicians: Today they are held responsible
for inflation, unemployment, ecological problems, etc.
and they react with treatment of the symptoms.
Churches and religions groups: in the sense of
justice.
Banks: Through a stable monetary system.
Enterprises: Mainly housing and the
agricultural sector being the most indebted sectors. The
small business sector because of easier regulation.
Workers: by less fear of losing their jobs.
Artists: by increasing demand for their works.
Women and children: because they suffer worst
being the last link in the chain.
Nature: because the economy is released from
its compulsive growth and more effort will be put into
quality and not into quantity.
Reference
chart
29
