C H A P T E R     O N E

Four Basic Misconceptions About Money

EVERY DAY almost everyone on this planet uses money.
Yet few people understand how money works and
affects their lives directly and indirectly. Let us, therefore,
take a closer look at what money is and what would hap-
pen without it.
  First, the good news: Money is one of the most inge-
nious inventions of humankind, as it helps the exchange
of goods and services and overcomes the limits of bar-
ter, that is, the direct exchange of goods and services. For
example, if you live in a village which relies entirely on
barter, and you produce works of art but there is nobody
to exchange your artwork with except the undertaker, you
will soon have to change your occupation or leave. Thus,
money creates the possibility for specialization, which is
the basis of civilization. Then why do we have a "money
problem"?
  Here comes the bad news: Money does not only help
the exchange of goods and services but can also hinder
the exchange of goods and services by being kept in the
hands of those who have more than they need. Thus it
creates a private toll gate where those who have less than
they need pay a fee to those who have more money than
they need. This is by no means a "fair deal." In fact, our
present monetary systems could be termed "unconstitu-
tional" in most democratic nations, as I will show later.
Before going into more detail let me say that there are
probably more than just four misconceptions about money.
Our beliefs about money represent a fairly exact mirror
of our beliefs about the world in which we live, and those
are as varied as the number of people who live on this
planet. However, the four misconceptions which will be
discussed in the following pages are the most common
hindrances to understanding why we must change the
present money system and what mechanisms we need in
order to replace it.

First Misconception
THERE IS ONLY ONE TYPE OF GROWTH

  The first misconception relates to growth. We tend
to believe that there is only one type of growth, that is,
the growth pattern of nature which we have experienced
ourselves. Figure 1, however, shows three generically dif-
ferent patterns:

  Curve A represents an idealized form of the normal
physical growth pattern in nature which our bodies fol-
low, as well as those of plants and animals. We grow fairly
quickly during the early stages of our lives, then begin
to slow down in our teens, and usually stop growing physi-
cally when we are about twenty-one. This, however, does
not preclude us from growing further - "qualitatively"
instead of "quantitatively."
  Curve B represents a mechanical or linear growth pat-
tern, e.g., more machines produce more goods, more coal
produces more energy. It comes to an end when the ma-
chines are stopped, or no more coal is added.
  Curve C represents an exponential growth pattern which
may be described as the exact opposite to curve A in that
it grows very slowly in the beginning, then continually
faster, and finally in an almost vertical fashion. In the physi-
cal realm, this growth pattern usually occurs where there
is sickness or death. Cancer, for instance, follows an ex-
ponential growth pattern. It grows slowly first, although
always accelerating, and often by the time it has been dis-
covered it has entered a growth phase where it cannot be
stopped. Exponential growth in the physical realm usu-
ally ends with the death of the host and the organism on
which it depends.
  Based on interest and compound interest, our money
doubles at regular intervals, i.e., it follows an exponen-
tial growth pattern. This explains why we are in trouble
with our monetary system today. Interest, in fact, acts like
cancer in our social structure.

  Figure 2 shows the time periods needed for our money
to double at compound interest rates:

     at 3%, 24 years;
     at 6%, 12 years;
     at 12%, 6 years.

  Even at 1% compound interest, we have an exponen-
tial growth curve, with a doubling time of 72 years.
  Through our bodies we have only experienced the
physical growth pattern of nature which stops at an op-
timal size (Curve A). Therefore, it is difficult for human
beings to understand the full impact of the exponential
growth pattern in the physical realm.
  This phenomenon can best be demonstrated by the
famous story of the Persian emperor who was so enchanted
with a new chess game that he wanted to fulfill any wish
the inventor of the game had. This clever mathematician
decided to ask for one seed of grain on the first square
of the chess board doubling the amounts on each of the
following squares. The emperor, at first happy about such
modesty, was soon to discover that the total yield of his
entire empire would not be sufficient to fulfill the "modest"
wish. The amount needed on the 64th square of the chess
board equals 440 times the yield of grain of the entire
planet. (1)
  A similar analogy, directly related to our topic, is that
one penny invested at the birth of Jesus Christ at 4% in-
terest would have bought in 1750 one ball of gold equal
to the weight of the earth. In 1990, however, it would buy
8,190 balls of gold. At 5 % interest it would have bought
one ball of gold by the year 1466. By 1990, it would buy
2,200 billion balls of gold equal to the weight of the earth. (2)
The example shows the enormous difference 1 % makes.
It also proves that the continual payment of interest and
compound interest is arithmetically, as well as practically,
impossible. The economic necessity and the mathemati-
cal impossibility create a contradiction which - in order
to be resolved - has led to innumerable feuds, wars and
revolutions in the past.

  The solution to the problems caused by present
exponential growth is to create a money system which
follows the natural growth curve. That requires the
replacement of interest by another mechanism to keep
money in circulation. This will be discussed in detail in
Chapter 2.

Second Misconception
WE PAY INTEREST ONLY IF WE BORROW MONEY

  A further reason why it is difficult for us to understand
the full impact of the interest mechanism on our mon-
etary system is that it works in a concealed way. Thus the
second common misconception is that we pay interest only
when we borrow money, and, if we want to avoid paying
interest, all we need to do is avoid borrowing money.
  Figure 3 shows that this is not true because interest
is included in every price we pay. The exact amount varies
according to the labor versus capital costs of the goods
and services we buy. Some examples indicate the differ-
ence clearly. The capital share in garbage collection
amounts to 12 % because here the share of capital costs
is relatively low and the share of physical labor is particu-
larly high. This changes in the provision of drinking water,
where capital costs amount to 38 %, and even more so in
social housing, where they add up to 77 %. On an aver-
age we pay about 50% capital costs in the prices of our
goods and services.
  Therefore, if we could abolish interest and replace it
with another mechanism to keep money in circulation,
most of us could either be twice as rich or work half of
the time to keep the same standard of living we have now.

Third Misconception
IN THE PRESENT MONETARY SYSTEM 

 WE ARE ALL EQUALLY AFFECTED BY INTEREST

 A third misconception concerning our monetary sys-
tem may be formulated as follows: Since everybody has
to pay interest when borrowing money or buying goods
and services, we are all equally well (or badly) off within
our present monetary system.
  Not true again. There are indeed huge differences as
to who profits and who pays in this system. Figure 4 shows
a comparison of the interest payments and income from
interest in ten numerically equal sections of the German
population. It indicates that the first eight sections of the
population pay more than they receive, the ninth section
receives slightly more than it pays, and the tenth receives
about twice as much interest as it pays, i.e., the tenth re-
ceives the interest which the first eight sections have lost.
This explains graphically, in a very simple and straight-
forward way, why "the rich get richer and the poor get
poorer."

  If we take a more precise look at the last 10% of the
population in terms of income from interest, another ex-
ponential growth pattern emerges. For the last 1 % of the
population the income column would have to be enlarged
about 15 times. For the last 0.01 % it would have to be
enlarged more than 2,000 times.
  In other words, within our monetary system we allow
the operation of a hidden redistribution mechanism which
constantly shuffles money from those who have less money
than they need to those who have more money than they
need. This is a different and far more subtle and effec-
tive form of exploitation than the one Marx tried to over-
come. There is no question, that he was right in pointing
to the source of the "added value" in the production sphere.
The distribution of the "added value," however, happens
to a large extent in the circulation sphere. This can be seen
more clearly today than in his time. Ever larger amounts
of money are concentrated in the hands of ever fewer
individuals and corporations. For instance, the cash flow
surplus, which refers to money floating around the world
to wherever gains may be expected from changes in na-
tional currency or stock exchange rates, has more than
doubled since 1980. The daily exchange of currencies in
New York alone grew from $18 billion to $50 billion
between 1980 and 1986. (3) The World Bank has estimated
that money transactions on a world wide scale are from
15 to 20 times greater than necessary for financing world
trade. (4)
  The interest and compound interest mechanism not
only creates an impetus for pathological economic growth
but, as Dieter Suhr has pointed out, it works against the
constitutional rights of the individual in most countries. (5)
If a constitution guarantees equal access by every indi-
vidual to government services - and the money system
may be defined as such - then it is illegal to have a sys-
tem in which 10% of the people continually receive more
than they pay for that service at the expense of 80% of
the people who receive less than they pay.
  It may seem as if a change in our monetary system
would serve "only" 80% of the population, i.e., those who
at present pay more than their fair share. However, I will
show in Chapter 3 that everybody profits from a cure, even
those who profit from the cancerous system we have now.

Fourth Misconception
INFLATION IS AN INTEGRAL PART OF FREE MARKET ECONOMIES

  A fourth misconception relates to the role of inflation
in our economic system. Most people see inflation as an
integral part of any money system, almost "natural," since
there is no capitalist country in the world with a free market
economy without inflation. Figure 5, Development of
Various Economic Indicators, shows some of the factors
that may cause inflation. While the governmental income,
the Gross National Product, and the salaries and wages
of the average income earner "only" rose by about 400%
between 1968 and 1989, the interest payments of the gov-
ernment rose by 1,360%.

  The tendency is clear - government debts will sooner
or later outgrow government income, even in the indus-
trialized nations. If a child grew three times its size, say,
between the ages of one and nine, but its feet grew to eleven
times their size, we would call it sick. The problem here
is that very few people care to see the signs of sickness
in the monetary system, even fewer people know a rem-
edy, and nobody has been able to set up a "healthy" work-
ing model which has lasted.
  Few realize that inflation is just another form of taxation
through which governments can somewhat overcome the
worst problems of increasing debt. Obviously, the larger
the gap between income and debt, the higher the infla-
tion needed. Allowing the central banks to print money
enables governments to reduce debts. Figure 6 shows the
reduction of the value of the DM between 1950 and 1989.
This devaluation hit that 80% of the people hardest who
pay more most of time. They usually cannot withdraw their
assets into "inflation-resistant" stocks, real estate or other
investments like those who are in the highest 10% income
bracket.

  Economic historian, John L. King, links inflation to
the interest paid for the "credit balloon." In a private letter
to me, dated January 8, 1988, he states:

    I have written extensively about interest being the ma-
   jor cause of rising prices now since it is buried in the price
   of all that we buy, but this idea, though true, is not well ac-
   cepted. $9 trillion in domestic U.S. debt, at 10% interest,
   is $900 billion paid in rising prices and this equates to the
   current 4% rise in prices experts perceive to be inflation. I
   have always believed the compounding of interest to be an
   invisible wrecking machine, and it is hard at work right now.
   So we must get rid of this mindless financial obsession.

   A 1,000% expansion of private and public debt occurred
in the U.S.A. during the last 33 years, the largest share
coming from the private sector. But every resource of the
Federal Government was utilized to spur this growth: loan
guarantees, subsidized mortgage rates, low down-pay-
ments, easy terms, tax credits, secondary markets, deposit
insurances, etc. The reason for this policy is that the only
way to make the consequences of the interest system
bearable for the large majority of the population is to create
an economic growth which follows the exponential growth
rate of money - a vicious circle with an accelerating,
spiraling effect.
  Whether we look at inflation, social equity, or envi-
ronmental consequences, it would seem sensible from
many points of view to replace the "mindless financial
obsession" with a more adequate mechanism to keep
money in circulation.