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The How and Why of a New Monetary System


Dr. Erhard Glötzl






This article discusses the meaning of money and why interest is an important cause of increasing economic, ecological and social problems in our society. It shows how our monetary system has to be reformed to overcome these problems.







Interest causes a consecutive growth of monetary assets and their concentration in the hands of a few (see section 7). The destabilisation of society caused by these facts have been realized in former centuries. But because interest is necessary to insure traditional money circulation (see section 4.2) and the system would crash without interest (see section 4.4), interest was never abolished. After World War II the negative effects of the interest orientated system could be compensated by a growing economy but the effects get worse as the economy ages (see section 7.7). This is the origin of various social tensions. In the long term there is the danger of an economic, ecological and social crash of society.


In section 8 I show that a reduction of debts is not possible within the actual economic system.


By introducing a new monetary system by means of a royalty, hoarding of money can be prevented, as shown in section 9.1. Combined with a credit fee the general level of interest can be decreased so that the rate for long term capital assets can be set near zero, whereas on the other hand the rate of credit interest is set on the free market as it is today. At the same time it is shown, that the national bank can keep inflation at exactly 0 % by prohibiting money creation by business banks.


The main consequence of the new monetary system is that the actual incomes from monetary unearned incomes from credits would be transferred to the public via the state by means of the user and credit fee (see section 9.2.). This is the price for ensuring the stability of society in the long run.


This type of money system was already put into practice with success on two occasions: once inadvertedly in the middle ages (see section 9.5) and once deliberately in 1933 in Wörgl (see section 9.6). It is mainly built on the ideas of Silvio Gesell (1916) and was discussed positively in the main work of the famous British economist John Maynard Keynes (1936).




List of contents






1. Introduction



2. Main arguments



3. Basic ideas/principles

3.1. Money as a catalyst for exchange

3.2. Different kinds of money

3.3. Money creation

3.4. Money credits

3.5. Money circulation

3.6. The basic problem of financial assets which increase due to interest

3.7. The liquidity advantage of money, user fee and "neutral money"



4. Interest

4.1. Quotations concerning interest

4.2. Interest as a means to ensure money circulation

4.3. Why interest cannot become zero

4.4. The need for growth due to interest

4.5. The difference between interest and profit

4.6. The welfare-economic approach of Dieter Suhr



5. The difficulty to control the economy

5.1. The functions of the central bank

5.2. The principal instability of the price level (purchase power, inflation)

5.3. Money accumulation

5.4. The impotence of the central bank in controlling purchasing power (inflation)

5.5. "Neutral money" as a condition for the ability to control purchasing-power




6. Inflation and Deflation

6.1. The consequences of inflation

6.2. Quotations about inflation

6.3. Deflation




7. The negative impact of interest

7.1. The need for growth of credits, debt and production

7.2. Excess growth of debt

7.3. Excess growth of monetary assets

7.4. The redistribution effects of interest flows

7.5. Unemployment

7.6. Money speculation

7.7. Problems increase in economies which are getting older

7.8. Justice

7.9. Money, wars and extermination of capital

7.10. Interest prevents qualitative growth



8. The impossibility of debt reduction in practice

8.1. Is debt reduction possible through saving?

8.2. Is the reduction of private debt possible through the sale of real assets?

8.3. Is a reduction of the debts of enterprises possible?

8.4. Is a reduction of public debt possible?

8.5. The reduction of debt through a devaluation of credits and loans

8.6. The solution of the debt problem



9. A new money system

9.1. Once again: explanation of the theory of "neutral money"

9.2. The Consequences

9.3. The difference to capital income tax

9.4. The birth of the theory

9.5. "Bracteaten"-money in the Middle Ages

9.6. The Wörgl experiment (Wörgl: small city in Austria, province of Tyrol)

9.7. Current attempts to introduce a new money system

9.8. Practice



10. Political enforcement

10.1. What "Neutral money" is not

10.2. There are only winners



1. Introduction



The wheel can be regarded as a catalyst for the transportation of goods and has contributed essentially to the increase of the wealth of mankind. Money also has a similar catalytic function for the exchange of goods and can be considered a basis for the growth of mankind's wealth. Money therefore is, like the wheel, a vital institution, but it can change from being a blessing to being a curse for humanity. The more useful something is, the more dangerous can be its lack or absence. In an economy based on the division of international labour, the lack of money represents a great danger. The persons and institutions who are able to cause a lack or an excess supply of money, possess a quite unimaginable level of power.


To fulfil its function as a medium of exchange, money not only has to exist, but essentially needs to circulate, as in the saying: "The rubel must roll". Special attention was paid to this in the period of the big economic crises during the thirties of this century. The then Prime Minister of France, Eduard Daladier, said the following during the London Conference in 1934:


"In our economic system money has the same function as blood for the body of human beings. In order to fulfil all the different functions of life, circulation of the blood must be ensured without interruption. With money it is the same - it necessarily needs to circulate in order to realize full employment."


Money keeps circulating in two ways. First, by its original trading function, purchasing goods or services, which is motivated by the necessity of satisfying human needs. Second, money keeps circulating by being borrowed, which is motivated by interest. Interest is a "price" for using money, and ensures that unspent money is lent to other persons. In this way, money is not prevented from being circulated because people just hoard it.


Money supply - by this I mean the actual amount of money - and interest are therefore the core questions of the money economy. Both can lead to serious problems.

Concerning interest, it has already been said by Aristoteles:

"Money was established for exchange, but interest causes it to be reproduced by itself. Therefore this way of earning money is greatly in conflict with the natural law."


This effect of interest was already observed in early times as an increase of strained social relations between the poor and the rich, often resulting in serfdom, slavery, revolt or social collapse.


Therefore the great monotheistic religions have continuously tried to solve the problem of interest with interdictions. Pope Alexander III said: "Every legislation which allows interest is null and void." Pope Clemens IX. stamped coins saying "noli thesaurare" on it, which means "you must not accumulate". Pope Boniface VIII stated this even more drastically: "Anyone who keeps money at home without circulating it, will be excommunicated." In reality it was never possible for this to be carried out, as the consequence would have been a collapse of the money circulation and furthermore of the economy, an even worse situation. The challenge though, is to find a way that ensures money circulation without the use of interest. To show such a way is the major aim of this paper.


Despite several attempts, it was impossible to force money to be circulated by using rules instead of interest. Especially during this century, problems concerning money supply have brought unimaginable harm to millions of people, either due to excess supply (hyper-inflation in 1923) or to lack of supply (deflation and economic depression during the 30ies). The process of learning that the money supply can only be attached to economic output, but not to gold, meant unemployment and poverty for millions of people. As John Maynard Keynes, one of the most important economists of this century, wrote: "All the terrible events, which hit wealth and fortune so deeply all over the world, occurred due to the mistakes of the heads of the central banks."


These incidents caused him to write his "General Theory of Employment, Interest and Money".


The consequences of the problem of balancing indebtedness and credit have not been realised yet. The reduction of all debts by saving money is not an action which can be undertaken by the debtors alone. It is only possible if the creditors also accept that they have to demand the additional supply of money. But generally this is not the case.


Analysing the basic problems of the money economy it soon became clear that, that our wealth is not based primarily on our diligence and intelligence, but on the functioning of the money economy, being the basis for our labour division economy. My concern is that our current money system will lead to economic and social collapse in the near future as it did already in the 30ies, because of its basically faulty architecture.


Recently Hans-Christoph Binswanger, a well-known economist in St. Gallen, Switzerland, defined the problem as follows: "99 percent of the people do not see the money problem. Science does not see it, economic theory does not see it, the latter even defines it as "not existent". As long as we do not see the money economy as a problem, there is no prospect of an ecological transformation of our society."

This is not only relevant for an ecological transformation, but for the solution of economic and social problems as well. Peace especially depends on it.


Currently it is believed that discretionary introduction of reproducible bank note money and bank money is the solution of money supply and interest problems. The following sections shall demonstrate that this is not possible in this way.


As a solution to the problems, a new money system is introduced by Helmut Creutz and other persons, based on the ideas of Silvio Gesell. It is characterised by four points:


- Money supply must be controlled directly by the central bank. This means that it has to be impossible for business banks to create money.


- Interest, as an instrument to ensure money circulation through loans, remains under the control of the money market. The negative consequences of interest are avoided by introducing a user fee on money (cash and bank money) with the effect that real interest of long term money credits tends towards zero.


- Therefore it is necessary for money (cash & bank money) to be a public institution and consequently that no private ownership of money can be established. (Note: The possibility of private ownership of money credits, meaning claims on money such as savings and securities, remains untouched.)


- Apart from the user fee, I do consider it necessary to establish an additional credit fee as further instrument of control. Further more, existing proposals for a new money system do not suggest such a fee.


The consequences within this money system would be the following:

the central bank can control inflation so that it remains at zero

the mechanism of interest rates principally remains, but the rates would be reduced

unearned income due to interest would no longer transferred any more to the holders of money credits. Together with the credit fee, it would be transferred to the community via public instruments, e.g. by doing a way with other taxes.


In order to avoid real estate speculation, a reform of real estate law would be necessary as a complementary measure.


Science and politics therefore need to address these problems of the money economy as well as finding alternative solutions. This must be done now, and not after a collapse such as the one during the thirties.




2. Main arguments


2.1. The conditions for our wealth with regards to the money economy can be seen in chart 1.

chart 1

2.2. The basic problem concerning the control of purchasing power and of the economic situation:


The central banks should assume control of purchasing power. But in our money economy, these banks do not have the power to directly control the money supply, the speed of money circulation and therefore also inflation. The reasons of this situation are:


a) Money supply is determined by money creation. As business banks have the possibility to create their own bank money, the influence of the central bank on money supply is reduced.


b) The speed of money circulation is determined by:


the incentive to buy goods, which depends on needs and on the inflation rate

the incentive to lend money, influenced by the interest rate

money hoarding: if money is not brought into circulation through buying or lending, it is accumulated.


The influence of central banks on interest rates is also very limited and there are no possibilities of direct control.


Direct control of inflation demands direct control of money supply and speed of money circulation, both of which the central banks cannot do. Therefore the control of inflation is very limited. Because the control of inflation is very limited and because deflation would lead to consequences even worse than inflation, the central banks always control the money system in such a way that inflation is higher than zero.


Inflation itself has undesired consequences - a continuous change of the price level, undesired redistribution effects, etc. Inflation together with insufficient control through the central banks leads to deviations of the economic cycle (ups and downs) with undesired consequences such as unemployment.



2.3. The basic problem of interest and the increase of financial assets:

continuous growth of financial assets together with positive interest incomes leads compulsively to social destabilisation:

- due to economic collapse or inflation, or

- due to growing social problems, or

- due to the need for economic growth.



2.4. Interest is the price for giving up the liquidity advantage of money. Therefore, and as money supply can be reduced artificially by accumulation, interest can never become zero. Additionally, neither governments nor those possessing capital want lower interest rates, as money circulation would be interrupted due to money accumulation. The economy would consequently collapse and interest income would decrease.



2.5. Real interest incomes from credits have the following negative consequences:


a) Concerning controllability:

The instability of the price level increases, complicating control through the central banks.


b) This leads to:

- a growth of all credits and debts and a decrease of the backing of credits with tangible assets

- a concentration of credits on a small group of persons, leading to social problems and crises

- the need for growth of production, leading to an increase of ecological problems

- problems due to financial speculation.


c) High interest rates on credits lead to a preference of quantity instead of quality, due to future devaluation's.



2.6. Because of the increasing impossibility of control and the negative consequences of interest, economic, ecological and social crises within the existing money system are unavoidable.


2.7. The reduction of overall debt by saving cannot be realized in practice. It is only possible by hyperinflation or by a user fee on money in combination with the taxation of financial assets (see section 8)


2.8. A new money system must consist of the following:


a) Direct control on money supply by the central bank (i.e. no creation of bank money by business banks) in order to maintain the inflation rate at zero.


chart 0


b) Direct control of the speed of money circulation by the central bank by introducing a user fee on cash and bank money and a credit fee. The first would be an instrument of control of money supply as money accumulation would be reduced. The second fee would be an instrument to control credit demand. The consequence of these measures should be the reduction of the overall interest rate so that the real interest rates of long-term financial assets becomes zero (see chart 0) and interests on credit will be reduced (see chart 00). As real interest becomes zero for long term money credits, the current negative consequences due to positive real interest rates will cease. As user and credit fees have to be transferred to the state, unearned incomes from credits, as is currently the case, are then distributed from credit owners to the state and consequently to the public. Credit interests are reduced as well because no inflation has to be compensated and because the liquidity advantage is removed - these effects are not very strong due to an additional credit fee.



chart 00



c) Therefore it is necessary that money (cash and bank money) is managed exclusively by public institutions and consequently that no ownership of money can be established. Naturally the possibility of ownership of credits remains.


d) As an additional measure new real estate laws are essential




3. Basic ideas/principles



3.1. Money as a catalyst for exchange

At the beginning of mankind, a subsistence economy dominated. The introduction of an exchange economy made a first substantial increase in wealth possible (see chart 2). The development of specialisation and exchange was mutually dependent.


chart 2


The second increase in wealth was established by an economy based on the division of labour and the introduction of money economy (chart 3), i.e. the introduction of money as a catalyst of exchange. Again the development of money and the economy based on the division of labour was mutually dependent. An economy based on the division of labour needs the money economy as the latter would be senseless without an economy as described above.


chart 3


Simple exchanges of goods are bound to a certain time and a certain place: only if a hungry tailor meets a clothless farmer is direct exchange possible. The catalyst function of money is its capacity to allow exchange without the necessity of temporal and geographical coincidence. Today one good does not have to be exchanged for another, but for money as a publicly accepted instrument of exchange. This is called purchase or incomplete barter.





chart 4






In a third step, possible constraints of a limited money supply were abolished by credit economy (chart 4). As money represents a catalyst for the exchange of goods, the possibility of credit and debt creation can be defined as the catalyst for money circulation. Despite the advantages, there are also dangers: the possibility of unlimited growth of credit and consequently also of debt, especially through the mechanism of a positive feedback of interest (chart 5). The following analogy to an electric switching circuit will describe this situation better (see chart 30).


chart 5


Without interest, the system is similar to an electric switching circuit, consisting only of resistors and capacitors (these are storage elements such as stocks, purse and credit/debt). These kind of switching circuits are easy to control. By introducing interest, credit/debt develops from a capacitor (storage element) to an amplifying element (transistor). Switch circuits with transistors are difficult to control because of the intensifying effects and a possible positive feedback.



3.2. Different kinds of money

Unperishable goods such as salt used to be the means of exchange. The value was deduced from its direct value as a good. Later on, scarce and unperishable goods, such as silver and gold, were used as means of exchange. The value of silver and gold consisted in its value as a good (e.g. for the use as jewellery) and the symbolic value of having the quality for a mean of exchange and therefore the possibility of putting through claims on property of an economy's outputs. Today the following is considered as money (defined as M1 money supply in economic language):

- coins

- bank notes

- bank money.


chart 30



Later on we will learn that today also other interest-bearing credits are considered as a means of exchange and therefore also as money in a wider sense (M2 and M3 money supplies). The value of today's money consists only of its symbolic value, i.e. its capacity as a means of exchange (which is publicly guaranteed by the constraint to accept it) in order to put through claims on property of an economy's output and to register self-produced output.



3.3. Money creation

Money creation is the production of money and putting it into circulation. The state has the exclusive right to produce coins; the central banks have the exclusive right to create bank notes and bank note money; business banks have the exclusive right to create bank money.


The importance of coins is constantly reduced whereas the importance of bank money increases. Hence the right of money creation is shifting more and more from the state via central banks to business banks. Money creation by central banks consists of the printing of bank notes (or by opening giro accounts for central bank money). The printed money is lent to business banks against the deposition of security papers. Business banks therefore have to pay interest. Bank note money is created by debt. Bank money is created by business banks when clients get a loan. Instead of receiving the loan cash, they deposit it on a giro account with the possibility to have it cashed. In this sense, interest has to be paid also for newly created bank money. Bank money is also created by indebtedness.




3.4. Money credits

For later discussion it is important to clearly distinguish amongst the different basic concepts which are used as the term "money" (chart 6). In the following pages we only consider as money cash (coins and bank notes) and bank money. A credit is not money, it is only a claim on money. This claim is registered in deposit books, time deposits or the possession of securities. Shares are not considered credits as they do not represent a claim on money but a property right on existing assets of a public limited company.


chart 6


It is important to understand that the amount of credits has nothing to do with the money supply.


Credits are increased by

- lending money

- interest incomes

- credits of money on deposit books (which means nothing else but the lending of money carried out through a bank).


Credits are reduced by

- repayments

- withdrawal of deposit book money (which means nothing else but the acceptance of a repayment through a bank).


For a better understanding a simple example:

If a tailor lends me a 10 Dollar note and later on I get my hair cut by the same tailor for 10 Dollars, I give the 10 Dollar note back to him. The tailor then has as much cash as before; his credit is the 10 Dollars. My debt is 10 Dollars. If this proceeding is repeated ten more times, the tailor and I still have the same amount of cash as at the beginning, his credit and my debt have increased to 100 Dollars each.


At the same time you can see that credit and debt are always in symmetry.


Financial assets are the sum of money and the claim on money (credit).



3.5. Money circulation

A simple example in chart 7 helps to understand money circulation. Plain flashes represent money circulation during purchase, dotted flashes represent money circulation by lending money. A buys from B, B does not need the money and lends it to C etc. Due to money circulation B and D have got a credit, C and E debt. They are deleted in the second chart, where the dotted flashes represent money circulation due to repayment. The main conclusion is:

If A had not bought or B had not lent money, all the other activities would not have been possible. This means that if money is not brought into circulation through purchase or lending, economy is disturbed.


chart 7



3.6. The basic problem of financial assets which increase due to interest

The consequences of saving and therefore increasing financial assets shall be described with a simple example:

Consider an island with 10 inhabitants, each of them offering products and services worth 1,000 Dollars per month and also demanding each month the same amount of products and services. Consider money circulates once a month, then 10,000 Dollars are necessary on the island in order to be able to carry out all the activities. If the 10,000 Dollars are constantly spent, circulation and therefore the economic situation are stable on the island.


What are the consequences, if one inhabitant regularly saves 100 dollars per month, without reducing his financial assets by an increased demand?


Case 1: He or she can accumulate the money at home.

The consequence is that money supply for exchange is continuously reduced. Demand becomes smaller than supply, deflation is the consequence and economy contracts. Only an increase of the money supply can help to solve this problem. This leads to inflation, once the saver starts to use the accumulated money.


Case 2: He or she lends money with interest.

Demand and supply remain equal, the economy is stable. But due to interest, debt is increasing exponentially for debtors without the possibility for them to consume economic output. This leads to an exponential increase of social problems. Only exponential economic growth can solve this problem.


Case 3: He or she lends money without interest.

The difference to case 2 is simply the fact, that each debt has an equivalent consumption of economic output by the debtor. Social problems occur only if debt becomes so big that debtors are in a dependence relationship to creditors.


The following conclusions, also relevant for the whole economy, can be deduced out of this:



Continuous growth of financial assets through interest logically leads to unavoidable economic collapses or inflation or increasing social problems or economic growth.


As today financial assets are constantly increasing (see section 7.3.) and economic collapse is to be avoided by all means (see section 4.3.) the only way out of this situation is inflation, increasing social problems or economic growth.


Summing up it can be said: In a barter economy, the disadvantage that exchange activities had to take place symmetrically each time, was compensated for the advantage of specialisation. In an economy based on the division of labour, the advantage of the exchange of goods through money also has a disadvantage. The advantage of a money economy is the simplification of exchange activities as temporal and geographical constraints can be reduced or even abolished. The disadvantage is, that disruptions in this type of economy can arise, if the exchange of goods in the temporal average is not approximately symmetrical, i. e. if financial assets can grow without limit. Problems especially arise if financial assets grow through interest.


Money and credit are information on unfinished exchange activities. Saving is based on the accumulation of unfinished exchange activities. To make saving possible a counterpart is needed: someone needs to borrow the saved money which another person is accumulating and lending. The market equilibrium established by the debtor also benefits the saver who increased the supply with its produced output by more than he was actually demanding. Though without the demand of the debtor his (the savers) own excess production would not be demanded.



3.7. The liquidity advantage of money, user fee and "neutral money"

Let us start with a fairy-tale: a mother had three sons. As one day they wanted to leave home in order to get to know the world, she gave the first one 30 Dollars, the second 300 apples, which she could have sold for 30 Dollars the next day at the market and the third a whetstone with which 30 Dollars could be earned each day. The mother thought that she had treated her sons equally. During the first evening, the three brothers were hungry and wanted to have diner in an inn. One meal cost 10 Dollars. The first one had no problem as he could pay with his money. The second son needed to sell 100 apples or to borrow 10 Dollars from his brother. Additionally there was the danger that a part of the apples could get bad by the next day. The third son needed to find a person who wanted to his knife sharpened. Although the mother thought that she was just, you can see that money has a natural advantage in comparison with goods or labour.


In science this advantage is called the liquidity advantage of money or, as the well-known German academic Dieter Suhr called it the "joker quality" of money. The liquidity advantage of money consists of


- its quality as a means of exchange as it can be used by anyone, at any time and at any place

- the inexistence of the constraint to be offered in comparison with goods which can perish and labour which can not be accumulated

- the inexistence of information as well as transaction costs in comparison with goods and labour, where costs for the search of a buyer and for the execution of exchange are incurred.


Therefore the value of money consists of its ability for exchange + liquidity advantage + scarcity-induced profits. (The excess price of goods exceeding production costs which can be obtained for each good on the market due to demand is called scarcity-induced profit). Therefore the first son will not lend his money to his brothers without any kind of return. Interest is the price for giving up the liquidity advantage + the scarcity-induced profit.


If a money system without real interest income is wished, liquidity advantage and scarcity-induced profits have to be replaced by a user fee on money and a credit fee as high as interest. This would lead to equality between money and goods. Money then would only fulfil its function as catalyst.


Money with a user fee is called "neutral money" (chart 8).


"Neutral money" existed for the first time in the Middle Ages, as the minting of coins had the same function as a user fee. Silvio Gesell was the first person, who described this money system theoretically in 1916. It was introduced in 1933 with a big success in Wörgl, a small city in the west of Austria. Also important economists, such as Irving Fisher 1933 and John Maynard Keynes 1936 (in his "General Theory of Employment, Interest and Money") were studying this money system in detail. Keynes talks about "carrying costs" and writes: "These reformers (he meant Silvio Gesell and Irving Fisher), who have seen in the establishment of carrying costs of money a solution to the problems, were on the right way. Such a solution could be the periodical obligation to mark legal means of payment for established fees. The practical value of their suggestions needs to be considered ... The idea behind marked money is sane."


chart 8




4. Interest


4.1. Quotations concerning interest

Prof. Dr. Ernst Abbe, founder of the Zeiss-Company around 1900:

Interest seen by an entrepreneur

"I had the possibility to observe very closely today's indications of economic life in one field of an industrial branch. ... Due to my duties arising from my job, I had to observe these indications from the viewpoint of an entrepreneur and capitalist. At the same time I had to observe them with the eyes of a workers son. ... Therefore I observed the happenings simultaneously from two very different sides and could make my conclusions from the viewpoint of public interest and public welfare. ...As it is only labour that creates value ..., there is no doubt, that all the workers of a people have to produce all the goods for the totality of proprietors and that the owners of the objects of national property retain or lend these objects of labour of the entire people as means of production.

Therefore ... all workers in all fields of activity have to work on average two days per week for the totality of proprietors, i.e. for those who are co-proprietors of national property and whose interest has to be raised ... From an economic point of view, interest is only the sign of a situation of constraint, where labour is opposite to property as objects of value of total property are absolutely necessary as means for productive labour...


Elimination of interest of the economic system of peoples is one condition for a sustainable economy that does not tend towards complete disorganisation."


Dietrich Schirmer, Head of the Lutheran Academy in Berlin, 1980:

Church and prohibition of interest

"The rise of modern capitalism was much fostered by the church's withdrawal of the prohibition of interest. Now as the interest economy has brought major conflicts to mankind and the contrast between the poor and the rich has reached a global dimension, a transformation of theologian and economists is indispensable. The tradition of the prohibition of interest has to be brought back to the consciousness of the public in order to establish a counter weight against the financial system and to search for ways and means that lead more efficiently to the task of an interest-free economy than prohibitions that can be ignored. Today it has become clear, that international financial forces - which have mainly developed in Christian surroundings - have established a practice of interest of criminal dimensions... Seen economically, taking interest is the increase of money without being linked to production of goods or services. This process must lead to the collapse of any economy in the long run.



4.2. Interest as a means to ensure money circulation

As already described in section 3.7. and also said by Keynes, interest is the price for giving up the liquidity advantage of money per time unit and the rate of return for scarcity value - or concisely defined, interest is the price of money. The lending of money consequently only happens if the giving up of the liquidity advantage is paid for. Interest therefore is a necessary instrument in order to ensure money circulation.


The price of a good is established by its production cost and a rent of scarcity, which is defined by the market, where supply and demand meet. Interest (I) as price of money is established by its liquidity advantage (L) and a rate of return for scarcity value (R), which is defined as well by supply and demand (I = L + R)



4.3. Why interest cannot become zero

As history shows, this did not happen in reality. The reasons are:

- The liquidity advantage of money always exists, therefore in theory interest can never reach zero, not even if demand for money decreases. It is the same with the price of imperishable goods, which can not be lower than the cost of production.

- The possibility of artificial scarcity. Just as the price of tomatoes can be increased by artificially reducing their supply, also the price of money (interest) can be increased in the same way.

- The reduction of money supply. As tomatoes are perishable, an artificial reduction of supply will be reached by destroying the goods. As money is not perishable, the reduction of it can be reached by simply with holding it.



4.4. The need for growth due to interest

The essential conclusion from this is: If interests are too low, money circulation by lending it is interrupted. Money is accumulated (hoarded). Following this, money circulation - and consequently the economy - collapse or at are least badly affected, in case real interest rates sink below the liquidity advantage of about 2% to 3% or only gets close to this point. Neither the state nor the credit owners nor entrepreneurs are really interested in letting this happen.


Consequently the state and the credit owners and the entrepreneurs try to increase money demand by different measures in order to increase interest rates, even though no real additional demand exists, i.e. even though real needs can already be satisfied by current economy.


Measures undertaken by the state are:

- Increase of demand by increasing money supply, which leads immediately to inflation as the increased money supply has no increased Gross National Product as counterpart.

- Artificial increase of demand, especially for goods where no real demand exists: e.g. arms, space travel, nuclear power and many other big projects, which very often result in serious ecological damage as well.


Measures undertaken by capital owners are:

- To create new demands of consumers with the extensive use of advertising.


This leads finally to an economic growth which is not based on its original function, the satisfaction of needs. On the contrary it leads to unnecessary growth, induced by artificially created wishes. Economic growth is therefore not induced by demand in order to satisfy needs, but by increasing supply, which has to be consumed by an artificially increased demand.


This means that interest leads to a supply-side economic growth instead of a demand orientated one. In this economic system human beings are no longer the subjects (tasks) of the economy but its objects (purpose).



4.5. The difference between interest and profit

It is very often argued that all that is relevant for interest is relevant for profit as well. This means that if interest becomes zero, this cannot be seen as a success, as profit leads to the same negative consequences as described before with interest. But it has to be acknowledged that there are major differences between profit and interest. Possible negative consequences due to profit cannot be compared at all with the possible negative consequences which arise from interest:


- Interest (I) is the price of money. It consists of the liquidity advantage (L) and the rate of return for scarcity value (R) (I = L + R). The price (P) of goods contains production costs (C) and profit (Pr), the latter being the rate of return for scarcity value (P = C + Pr).

As much as the price of imperishable goods will never be lower than production costs, so will interest not be lower than the liquidity advantage. Only the scarcity rents R and Pr can become zero due to competition. Consequently interest can neither theoretically nor in practice become zero due to competition. Profit therefore can tend, at least theoretically towards zero, if competition is adequate.


- Before money is lent without risk, interest is negotiated. In order to make a profit, which always is related to risk, money has to be borrowed and invested.


- Interest is an output-unrelated premium which is paid for lending money and which consequently is transferred to all material goods used in the economy. Profit is an output-related premium for entrepreneurial risk and activity, aiming to supply the market.


- The sum of all interest incomes increases proportionally with investments and the amount of capital. The sum of all profits decreases at least in relation with investments and the increased market satisfaction, which is related to it.


- As today the amount of capital is on average about four times higher than final returns, the proportion of interest within the price of a good is in-between 24% and 32%, whereas profit is only a small percentage of these amounts.



4.6. The welfare-economic approach of Dieter Suhr

Within welfare economics, those participants in an economy for whom resources and production factors have the highest value should get them. This is described as the optimal allocation of means. Dieter Suhr describes that interest leads exactly to the opposite allocation function: "For credit interest has to be paid. Interest burdens final consumers and entrepreneurs who have to lend money in order to satisfy their needs of consumption and investment. Consequently interest withdraws money from end consumers and entrepreneurs, although they do not have enough yet and goes to investors who already have more money than they need.




5. The difficulty to control the economy


5.1. The functions of the central bank

The following tasks are defined as the essential tasks of an economy:

- stability of the economic activity

- unemployment rate

- inflation rate.


Instruments in order to control these tasks are

- monetary policy (money supply and interest rate) of the central bank

- fiscal policy (public expenditure and tax rates) of the state

- control of salaries and prices

- labour market policy.


In the following section we will concentrate on monetary policy of the central bank, i.e. the control of money supply and interest rate. The legally defined task of the central bank is the control of money circulation and to ensure purchasing power, to avoid inflation.



5.2. The principal instability of the price level (purchase power, inflation)

For further understanding, the quantity theory of money is used as a basis.

P = M . V/Q


P price level

M money supply

V velocity of money circulation

Q Gross National Product


P, M, V and Q change with time t. An increase of the price level P(t) over the time is called Inflation. A decrease of P(t) is called deflation.


The basic problem is that price evolution P(t) shows an unstable system behaviour due to market mechanisms:


1) P(t) is unstable as a system as such, i.e. inflation reinforces itself (inflation spiral) as well as does deflation (deflation spiral) (for further explanation and formal evidence see text and chart 27).


chart 27

chart 28


2) This instability is reinforced by interest (for further explanation and formal evidence see text and chart 28 and 6.1.3 with chart 29)


3) This instability is additionally sustained by the possibility of money accumulation.


This instability is demonstrated on the following graph, where as P0 represents the price where supply equals demand.




This instability problem is comparable to reversing a car with a trailer. Hence a stability curve with exactly the opposite curvature should be achieved.





This would be comparable to driving a car with trailer forward without any problems.


Royalties and credit fees lead to the reduction of interest rates.

Consequently the destabilising effect of interest can be reduced and money accumulation becomes senseless due to the royalty. Therefore both instruments represent an important contribution for the increase of stability of the price level P(t).



Text to chart 27

Prices obviously increase (P' > 0), if demand N is greater than supply A (N/A -1 > 0).

Therefore P' = f (N/A -1)
where f : R
Þ R is a strongly monotonic growing function and f (0) = 0.

Further to simplify we assume f to be the simplest function, i.e. f (x) = x , but this assumption does not influence the stability statement. Therefore let P' = N/A -1.

Let the initial situation in balance be Mo Vo = Po Qo and to simplify assume the circulation speed and the GNP to be constant. If the government wishes to enlarge the demand, without this beeing covered by an increase of GNP and if the central bank follows this intention of the government without resistance, the amount of money supply will increase from Mo to M.

The demand is then N = M.Vo/Po and the supply A = Qo and therefore
P'= M.Vo/Po.Qo -1

If the central bank does not change the amount of money supply, i.e. M = Mo, then P' = 0, which means zero inflation.

But if the central bank continously adjusts the amount of money supply to the changing prices, i.e.
M = P . Qo/Vo, follows
P' = P.Qo.Vo/Vo.PoQo -1
that is
P' = P/Po -1
which means P' = P -1if you set Po = 1.

This differential equation only expresses the fact, that if the central bank does not influence the amount of money supply but on the other hand the amount is only set directly via prices and (governmental) demand this leads to well known spiraling inflation.

Text to chart 28

Positive interest increases the instability of prices because of the following:

Without discussing the reasons, it is a fact that the inflation rate and interest rate change similarly (high interest rate corresponds to high inflation rate and low interest rate corresponds to low inflation rate). If the inflation rate increases from Io to I1 = Io + x, the interest rate increases from Zo auf Z1 = Zo + x and therefore prices from Po to P1 = Po (1+Io+x) / (1+Io).

It follows
Z1 = Zo + (1 + Io) . (P1/Po -1)
and because of
» 1 follows Z1 = Zo + P1/Po -1.

For an example of this look at chart 29: If the interest rate and the inflation rate increase e.g. by x = 3 points of percent (i.g. the interest rate from 6 % to 9 %, that is by 50 %, and the inflation rate from 3 % to 6 %) the prices increase therefore by a factor of 1,06/1,03, i.g. by roughly 3 %. That shows that interest rates change rather more quickly than prices. It follows that with a small fluctuation in the inflation rate the fluctuation in the payment of interest (debt S times interest rate Z) on borrowed capital is essentially greater than the fluctuation in prices caused by inflation.

As an increase in production costs so an increase in financing expenses cause an increase in prices. Let P* be the change of prices caused by inflation without considering the financing expenses, then for the price changes taking into consideration financing expenses it follows
P' = P*' + S . Z
P' = P*' + S.P/Po - S (1-Zo)
(or more exactly P ' = P*' + f (S.Z) with f (0) = 0 and f strongly monotonic growing; but this does not influence the stability statement).

What ever P*' looks like, the term S.P/Po increases the instability, because it leads to an independent extra exponential growth.


5.3. Money accumulation

Money accumulation in its classic sense of keeping money under the mattress is no longer valid. Today money accumulation has to do with:


- money coming from criminal activities, e.g. drugs

- holding hard currency credits in countries with weak currencies

- holding credits in speculation and transactions.


The fact that money accumulation is not a fantasy but is a reality has been proved for instance by the German Federal Bank in their monthly publication of October 1992. Regarding the extraordinary increase of cash money supply in August 1992, they wrote: "The reasons for it are obviously special influences, especially the increase of cash money accumulation as a consequence of the new regulation of interest taxation and the complication of money laundering.


The propensity to accumulate money is mainly determined by the interest rate. High interest rates lead to less money accumulation, low interest rates have the opposite effect. This, for instance, can be deduced from the opposite development of interest rate and cash money supply (chart 9, 10).


chart 9

chart 10


Another indicator for money accumulation is a comparison of the evolution of Gross National Product, cash money supply and 1000-DM-Notes from the low-interest-phase of 1986-1988 to the high-interest-phase in 1988-1990 (chart 11).


chart 11


Money accumulation used to lead to deflation and economic collapse due to a relative constant money supply (gold and/or binding money to gold stocks). Today cash money which was accumulated during a period of low interest rates is replaced by the central bank. The accumulated money returns additionally to the market in a high-interest period. As the central bank cannot take the additional money out of circulation quickly, this consequently leads to inflation.



5.4. The impotence of the central bank in controlling purchasing power (inflation)

The fact that the central bank has major problems in controlling purchasing power (inflation) can be reinforced by the following quotations:


Gerhard Fels, Director of the Institute of German Economy, 1992:

"It is one of the basic errors within the discussion on monetary policy, to see the central bank as the authority which can decide on the level of interest rate which is relevant to an economy. If so, it only can influence interest rates only on a short term basis and not against market forces."


Helmut Hesse, President of the central bank of the federal province of Niedersachsen, 1992

"Interest rates have surely reached their highest level during the history of the Federal Republic of Germany. But they have never been as inefficient as today."


As P = M . V/Q, control over M (money supply) and V (velocity of moneycirculation) is necessary in order to be able to control P (price level).The velocity of money circulation is influenced mainly by the interest rate, holding conditions equal (the higher interest rates, the quicker money is lent).


The causes for the impotence of the central banks are within the current monetary system:


- Money supply can be influenced only indirectly by central banks by means of open market policies and minimum reserves as a result of money creation by commercial banks within the girosystem.


- Also interest rate is only indirectly controlled by central banks through the bank rate or the Lombard rate, etc.


- Money supply and interest rate can not be controlled independently by central banks. An increase of the money supply always leads to a reduction of money demand and consequently to a reduction of interest rates. This leads to a decrease of the real amount of money in circulation due to an increased propensity to accumulate money.


- In the same sense money supply and speed of money circulation, more over they even effect each other in the opposite way.


- The effects of all operations of the central bank show a long time lag.


The main consequence for monetary policy of central banks is:


As deflation is much more dangerous than inflation and exact control is not possible, central banks always control money supply and interest in a way that they will be in the inflation sector in any case.



5.5. "Neutral money" as a condition for the ability to control purchasing-power (inflation)

From the quantity theory of money

P = M . V/Q

we can deduce, that prices P can only be controlled by:


- regulation and control of prices P through the state (the economic collapse in Eastern Europe has shown that this does not function)


- regulation and control of production Q (the collapse of such planned economies has shown that this does not work)


- the only possibility which is left is the exact control of money supply M and the speed of money circulation V.


As said before, within the current monetary system central banks are not capable of controlling exactly either money supply M or the speed of money circulation V.


In order to be able to control the money supply M exactly by the central bank needs


- to abolish the creation of money within the girosystem by commercial banks.

- This consequently implies that in the future, money will be a single public institution and therefore no ownership of money (cash and bank money) can be established (to make it clear: the establishment of property on money credits is not touched by this and has to be possible also in the future).

- A royalty on cash has to be introduced as a direct instrument of control against the accumulation of money and consequently for money supply as well as for the velocity of money circulation.

- In my opinion also a credit fee as a direct instrument of control for money demand has to be introduced, as without it interest could not become zero.

- Through the level of the royalty and the level of the credit fee, the central bank not only can control the interest rate, but also the volume of credits, as long as this still occurs within the accumulation of money. With that the gross national product can be directed more towards saving, respectively investment, or more consumption (see chart 26, 31).




6. Inflation and Deflation


6.1. The consequences of inflation

The equation of money quantity shows that inflation can only occur, when the product of money supply M multiplied by the speed of money circulation V increases more rapidly than the real economic output Q. The causes were already explained in the above section.


The effects of inflation are:

1) Demand, especially of consumer goods, which leads to an increase in production.

2) The consequence is a decrease of the willingness to save, leading to increased interest. High interest rates are an obstacle to new investments and consequently lead to the reduction of economic growth.

3) An increase of inflation from e.g. 3% to 6% (though a change of prices by 3%) leads to an increase of interest rates by 3%, e.g. from 6% to 9%, which represents a relative change of 50%. An increase in inflation therefore leads to an overproportional increase of interest flows (see chart 29).


chart 29

4) Increasing prices due to inflation lead to increased wage demands. If the central bank cannot prevent, the increased wage demand from being satisfied by increasing the money supply, further inflation will result (see also 5.2.1.). This leads first to a redistribution towards employees and also to a reduction of investment by entrepreneurs and finally to the loss of competitiveness of companies. Company shutdowns and unemployment are the results.

5) Savers are the losers due to inflation, owners of real assets are the winners.

6) In the long run, inflation can only be reduced by decreasing economic growth. Inflation therefore leads to constant variations of gross national product with impacts on unemployment with its respective problems.

7) Due to inflation, price levels constantly change, which makes economic planing quite difficult. The problems which are related to it can be compared with problems that would occur if units of measurement such as the kilogram or the meter would continually vary without notice.

8) Inflation also carries the danger of a self-reinforcing mechanism (inflation spiral) if no counter-measures are undertaken. (see also 5.2.1.)



6.2. Quotations about inflation

The widespread social consequences of inflation and the resulting danger for democracy is expressed in the following quotations:



"Among all evils which can lead to the destruction of states, four can be defined as the most important ones: internal quarrel, a high rate of mortality, infertility of land and the reduction of the value of money. The first three ones are so evident, that nobody will question them. The fourth evil though, which arises from money, only a few recognise, and only those who think more seriously, because whole states are not destroyed in an instant. They decline slowly and in a way which is invisible."


Fritz Leutwyler, former President of the National Bank of Switzerland:

"Democracy requires a stable currency if it should remain functioning."


Peter Gillies, Chief editor "Welt", 1987:

"Inflation not only defrauds savers and redistributes wealth in the most unsocial way, but it also leads to the unemployment of tomorrow. It has been disproved for a long time that 5% inflation would be easier to handle than 5% unemployment; zero percent inflation is rather the best condition for zero percent unemployed. The belief that full employment could be bought with small increases in prices, was a very expensive bill world-wide."


Fritz Leutwyler, former President of the National Bank of Switzerland:

"By no other mean than inflation, can so few persons become so rich and so many so poor within such a short period of time."



6.3. Deflation

If demand, expressed as M multiplied with V, decreases in relation to supply, expressed as Q, prices fall and entrepreneurial income reduces. Part of the production becomes unprofitable which ultimately leads to a reduction of the level of production or even to the closure of enterprises. Unemployment and a continuing decrease of demand are the consequences. Therefore people are even more afraid of a deflation spiral than an inflation spiral.




7. The negative impact of interest


7.1. The need for growth of credits, debt and production

Helmut Creutz writes:

"Someone who takes an interest-bearing loan has to pay back more than originally received. His or her income is reduced by this additional amount - the interest - until the loan is fully repaid. To avoid this, he or she needs to work more for the amount of interest and to sell this additional offer on the market. This is valid not only for each of the loan-taking citizens but also for each enterprise, each community and each state:

either interest leads to poverty or it obliges us to increase output.

On the other hand, existing credits continuously grow due to interest, at least by the extent of interest income which is not removed from the account. Generally interest incomes are so high with big credits, that it is impossible to consume them and they have to be redeposited. These credits do not increase in a slow and linear way, but with an ever increasing speed due to the effect of compound interest.


If interest incomes are invested in material assets, the effect is only transferred from financial assets to real assets."


If debtors are not to become impoverished, economic growth has to be at least as high as the amount which was redistributed due to interest flows. To keep the relative share of debtors and creditors in the gross national product equal, the latter has to increase even more rapidly. Consequently there always a political interest to keep the level of economic growth as high as possible in order to avoid social problems.


The fact that our economic system cannot exist without economic growth was also maintained by other persons:


Hans Matthöfer, former German Federal Minister of economic affairs, 1980:

"Our economy is not designed for lower or even "zero" economic growth. Not to grow means mass unemployment and consequently the catastrophic collapse of the economy of the Federal Republic of Germany."


Lothar Müller, President of the Bavarian Central Bank, 1988:

"Without growth, the social problems with which the member states of the European Community are confronted today, cannot be resolved. Only with economic growth will unemployment be reduced, social security systems remain efficient, public households be stabilised and structural change be mastered."



7.2. Excess growth of debt

The share of debt of the different sectors can be seen in chart 12. Main debtors are obviously enterprises, private households make up the smallest part, although their share grows the most rapidly.


chart 12


Total debt in relation to the gross national product (GNP) can be seen in chart 13 and 14. Note that the total debt increases more rapidly than the GNP.


chart 13

chart 14


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.








This paper is based essentially on the examinations and analysis of Helmut Creutz, which are published in his book "Das Geldsyndrom". In this book you can also find the figures 0 and 7 as well as 9 to 25. The other figures are from Erhard Glötzl. All the figures were made by Roland Spinola with CorelDraw.


Ó 1995 Erhard Glötzl and Helmut Creutz

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