CHAPTER TWO
Creating an Interest and Inflation Free Money
TOWARDS THE END of the 19th century Silvio Gesell,
a successful merchant in Germany and Argentina,
observed that sometimes his goods would sell quickly and yield
a high price, and at other times slowly and attracted lower
payments. He began to wonder why this was so. Soon he
understood that these ups and downs had little to do with the
needs of people for his goods, nor their quality, but almost
exclusively with the "price" of money on the money market.
So he began to observe these movements and discovered
that when interest rates were low, people would buy, but if they
were high, they would not. The reason why there was
sometimes more, sometimes less money, had to do with the
willingness of the money owners to lend their money to others. If
the return on their money was under 2.5%, they tended to hold
on to their money - thus causing a halt in investment, with
subsequent bankruptcies and decreasing numbers of jobs. Then
after a while, when people were ready to pay more interest for their
money, it would be available again - thus creating a new
economic cycle. There would be high interest rates and
high prices for goods at first, then gradually a larger
supply of money would create lower interest rates, and
finally there would be a "strike" of capital again.
Silvio Gesell's explanation for this phenomenon was
that money, unlike all other goods and services, can be
kept without costs. If one person has a bag of apples and
another person has the money to buy those apples, the
person with the apples is obliged to sell them within a
relatively short time period to avoid the loss of his
assets. Money owners, however, can wait until the price
is right for them; their money does not necessarily
create "holding costs. "
Gesell concluded that if we could create a monetary
system which put money on equal footing with all other
goods and services, (charging, on the average, a 5%
annual maintenance cost, which is exactly what has been
paid in the form of interest for money throughout
history) then we could have an economy free of the ups
and downs of monetary speculation. He suggested that
money should be made to "rust," that is, to be subject to a
"use fee."
REPLACEMENT OF INTEREST BY A CIRCULATION FEE
In 1890, Silvio Gesell formulated a theory of money
and a "natural economic order" (6) which relates to
capitalism or communism as the world of Copernicus
does to the world of Ptolemy. The sun indeed does not
turn around the earth; the earth turns around the sun -
although our senses still defy this scientific truth. Gesell
suggested securing the money flow by making money a
government service subject to a use fee. And this is the
central message of this book. Instead of paying interest to
those who have more money than they need and in order to
keep money in circulation, people should pay a small fee if
they keep the money out of circulation.
In order to understand this idea better, it is helpful to
compare money to a railroad freight car which also helps
to facilitate the exchange of goods and services. In
contrast to governments which issue money, however,
the railroad company does not pay the user a premium to
unload the freight car and thereby bring it back into
"circulation" - instead the user pays a small per diem fee
if he or she does not unload it. This is all we would have
to do with money. The community or nation which
issues "new" money in order to help the exchange of
goods and services charges a small "parking" fee to the
user who holds on to new money longer than he or she
needs for exchange purposes. This change, simple as it
may seem, resolves the many societal problems caused
by interest and compound interest throughout history.
While interest nowadays is a private gain, the fee on the
use of money would be a public gain. This fee would have
to return into circulation in order to maintain the
balance between the volume of money and the volume of
economic activities. The fee would serve as an income
to the government, and thereby reduce the amount of
taxes needed to carry out public tasks.
The technical side of this monetary reform will be
explained in the next two sections.
THE FIRST MODEL EXPERIMENTS
During the 1930s, the Freiwirtschaft (free economy)
followers of Gesell's theory found opportunities to
initiate interest-free money projects, in order to
overcome unemployment and to demonstrate the validity
of their ideas. There were endeavours to introduce
free-money in Austria, France, Germany, Spain,
Switzerland, and the United States. One of the most
successful was in the town of Wörgl in Austria. (7)
Between 1932 and 1933, the small Austrian town of
Wörgl started an experiment which has been an
inspiration to all who have been concerned with the issue
of monetary reform up to this day. The town's mayor
convinced the business people and administrators that
they had a lot to gain and nothing to lose if they
conducted a monetary experiment in the way suggested
in Silvio Gesell's book "The Natural Economic Order".
People agreed and so the town council issued 32,000
"Work Certificates" or "Free Schillings" (i.e.,
interest-free Schillings), covered by the same amount of
ordinary Austrian Schillings in the bank. They built
bridges, improved roads and public services, and paid
salaries and materials with this money, which was
accepted by the butcher, the shoemaker, the baker.
The fee on the use of the money was 1% per month
or 12% per year. This fee had to be paid by the person
who had the banknote at the end of the month, in the
form of a stamp worth 1 % of the note and glued to its back.
Otherwise, the note was invalid. This small fee caused
everyone who got paid in Free Schillings to spend them
before they used their ordinary money. People even paid
their taxes in advance in order to avoid paying the small
fee. Within one year, the 32,000 Free Schillings
circulated 463 times, thus creating goods and services
worth over 14,816,000 Schillings. The ordinary
Schilling by contrast circulated only 21 times. (8)
At a time when most countries in Europe had severe
problems with decreasing numbers of jobs, Wörgl
reduced its unemployment rate by 25 % within this one
year. The fees collected by the town government which
caused the money to change hands so quickly amounted
to a total of 12% of 32,000 Free Schillings = 3,840
Schillings. This was used for public purposes.
When over 300 communities in Austria began to be
interested in adopting this model, the Austrian National
Bank saw its own monopoly endangered. It intervened
against the town council and prohibited the printing of
its local money. In spite of a long-lasting battle which
went right up to the Austrian Supreme Court, neither
Wörgl nor any other community in Europe has been able
to repeat the experiment up to the present day.
In his book "Capitalism at its Best", (9) Dieter Suhr
presents a report on the U.S. "stamp scrip movement" by
Hans R. L. Cohrssen who, together with economist,
Irving Fisher, tried to introduce Gesell's concept of
cost-bearing money into the U.S.A. - also in 1933. At
that time, more than 100 communities, including several
large cities, had planned to implement stamp scrip
money. The issue went right up to the Secretary of Labor, the Secretary of
the Interior and the Secretary of the Treasury in
Washington, D.C., none of whom were opposed - but
none of whom had the power to grant the necessary
permissions. Finally, Dean Acheson (who later became
Secretary of State) asked for an opinion from the
government's economic advisor, Harvard Professor
Russell Sprague, before he could make a decision.
Cohrssen remembers the meeting as a very cordial one:
Professor Sprague told me ... that in principle there was
nothing to be said against the issue of stamp scrip for the
purpose of creating jobs. However, our scheme went much
further: It was an attempt to restructure the American monetary
system and he had no authority to approve such a proposal.
That put an end not only to our stamp scrip movement but to a
model project that might indeed have led to monetary reform. (10)
On March 4, 1933, President Roosevelt directed the
banks to be temporarily closed, and he forbade any
further issue of emergency currency. Cohrssen
concludes:
In summary we can say that the technical difficulties of
attaining currency stability seem minor in comparison to the
general lack of understanding of the problem itself. As long as
the "Money Illusion" ... is not overcome it will be virtually
impossible to muster the political will power necessary for this
stability."
According to Otani's proposal, (12) the technical side
of the reform, based on the payment modes of today,
would make a "use-fee" on the new money a much
simpler issue. Ninety percent of what we call "money"
are numbers in a computer. Thus, everyone would have two
accounts: one checking account (in Europe this is called
a current account, in Australia an access account) and
one savings account. The money in the checking account,
which is at the disposal of the owner continually, would
be treated like cash and might lose as little as 1/2 % per
month or 6% per year. Anyone with more new money in
her or his checking account than needed for the payment
of all expenses in a particular month, would be prompted
by the small fee to transfer that amount to a savings
account. From there, the bank would be able to lend this
money without interest to those who needed it, for a
certain amount of time, and, therefore, the savings
account would not be debited with a fee (see Chapter 6).
By the same token, the new money owner would not
receive any interest on his or her savings account - but
the new money would retain its value. As soon as interest
is abolished, inflation becomes unnecessary (see Chapter
1). The person receiving a credit would not pay interest,
but risk premium and bank charges quite comparable to
those which are included in every bank loan. This
amounts in Germany today to about 2.5% of the normal
credit costs.
Thus very little would change in practice. Banks
would operate as usual, except that they would be more
interested in giving loans because they too would be
subject to the same use fee that everybody else would
have to pay. In order to balance the amount of credit and
savings available temporarily, banks might have to pay or
receive a small amount of interest depending on whether
or not they had more new money in saving accounts than
they needed or whether they had liquidity problems. In
this case the interest would only serve as a regulatory
mechanism and not as a wealth redistribution mechanism
as it does today.
The basis of this reform would be a fairly accurate
adaptation of the amount of money in circulation to the
amount of money needed to handle all transactions.
When enough new money has been created to serve all
transactions, no more would have to be produced. That
means new money would now follow a "natural" physical
growth pattern (curve A, Figure 1) and no longer an
exponential growth pattern.
Another technical aspect of the implementation of
such a monetary reform includes the prevention of
hoarding cash. A more elegant solution than gluing a
stamp on the back of a banknote would be the printing of
different coloured banknotes so that various series could
be recalled once or twice a year, without prior
announcement. This would be no more expensive for the
government of a country than the replacement of old
worn-out banknotes by new ones as happens today.
As the Austrian and American experiences show, the
political side is more crucial than the technical. It will
be dealt with in Chapter 3.
If the above-described monetary reform were to be
implemented on a large scale, an accompanying land tax
reform would be required. Without land reform there
would be a tendency for surplus money to be attracted to
land speculation. Without tax reform, the economic
boom following the introduction of interest free money
might have some serious environmental consequences.
THE NEED FOR LAND REFORM
Money and land are two things everybody needs in
order to live. Whether we eat, sleep or work, life is
impossible without land. Land, like air and water,
therefore, should belong to everybody. The North
American Indians say "The Earth is our Mother. How
could we divide her up and sell her?" Land should belong
to the community and then be rented out by the community
to those who use it. This was the concept and the custom
in many European countries until the introduction of
Roman law in the Middle Ages with its emphasis on
private property.
Today, the world is split into two systems:
- private ownership and private use of land in the capitalist countries;
- communal ownership and communal use of land in the communist countries.
In capitalist countries, the majority of the people pay
for the huge profits from speculation in private land
(Figure 7), and more land is concentrated in the hands of
ever fewer people. In communist countries, the
uneconomic use of communal land is the major problem.
In former West Germany about 70% of the land
belonged to 20% of the people. In Brazil and other Third
World countries, the land-owning minority is often as
small as 2-3% of the population. The problem in
capitalist countries, therefore, has to do with private
ownership of land.
Figure 7
In communist countries, in the former Soviet Union,
for example, where land was communally owned and
used, about 60% of the food was being produced on that
4% of the land which was owned privately. This meant
that the problem here was communal ownership and use.
A combination of private use and communal ownership
would be the most advantageous solution for achieving
social justice and allowing individual growth. This is
what was suggested by Henry George in 1879, (13)
Silvio Gesell in 1904, (14) and Yoshito Otani in
1981. (15)
In practical terms today, it would mean that a
community would buy up all its land and lease it out to its
inhabitants. Countries with a progressive constitution
would have no trouble implementing this change from an
ideal point of view. Thus the constitution of the former
Federal Republic of Germany described land as an asset
which carries a "social" responsibility. Up to this date,
however, this social responsibility has not been met.
Figure 7 shows that, on the average, people had to work
three times as long in 1982 as they did in 1950 in order
to pay for a piece of property.
After the catastrophic results of expropriation in
countries with a communist constitution, no western
nation today would be able to discuss the dispossession
of land by the state without compensation. Although
Roman law, which introduced private ownership of land
into western civilization (roughly 500 years ago), was
forced on the people by their conquerors, those who
profited - at first - belong to history, and today's owners
have either bought or inherited quite legally the soil they occupy.
Therefore, some compensation must be paid if a society
wants to create a more equitable situation.
One long-term possibility is to levy a small fee of
about 3% per year on the value of each plot of land. This
fee would be paid to the community and would be used
to buy land which came on the market. Thus the community
would acquire the ownership of its land in a little over
33 years.
An alternative would be that land owners would be
notified that they had the option not to pay the fee but to
sell their land to the community. For instance, the 3 %
fee would be set off against the normal price over 33
years. No money would be exchanged. Meanwhile the
owners still would have the right to use the land - but
after the 33 years they would have to pay a 3 % lease on
the value of the land annually to the community.
The immediate effect of this regulation would be to
stop land speculation. Most land which people hold
today without using it would be offered on the market in
order to avoid a continual loss. As more land became
available, the price of land would fall and more people
would have a chance to use the available land in a
productive manner. Mainly in developing countries, this
could have a considerable effect on food production, as
the diminishing ratio of food in comparison to the
amount of people to be fed is not a question of
agricultural technique, but a question of the availability
of land for small scale farms.
Whether in developing or industrialized countries,
the tenants would have all the advantages of today's
hereditary leasehold regulations in this new system.
They could use their property within the confines of
local planning restrictions. They could build on it. They
could sell their houses. They could bequeath their
houses to their descendants. They could let them out to
third parties without involving the community as long as
the next tenants would pay the lease. By determining the
exact amount of the rent through public bids, auctions or similar processes,
the inefficiency of the planned economy or bureaucratic
procedures could be avoided.
This change would, at long last, take an enormous
load off the shoulders of the working population who, in
the end, always pay for every profit based on
speculation. The latter, indeed, is what land has always
been used for. A realistic change towards a social
solution, therefore, must eliminate speculation with land
and money. Again, the proposed solution does not aim at
punishing those who profit from the present system, but
it is designed to put an end, slowly but surely, to the
preconditions which allow enormous advantages to a few
people while requiring the large majority to pay for
them.
THE NEED FOR TAX REFORM
In Germany today it has been estimated that between
one-half to two-thirds of the Gross National Product
may be termed "questionable" in respect to maintaining
an ecologically sustainable future. (16) Therefore,
removing the barriers to initiate more production and
employment through the proposed money and land
reforms may require two changes in the way taxes are
levied, or else environmental devastation would likely
increase:
(1) a change from an income tax to a product tax;
(2) an assessment of the costs to the environment
included in this product tax.
Hermann Laistner, (17) who explains this idea in
detail in his book "Die Ökologische Wirtschaft" (The
Ecological Economy), points out that income taxes
eventually make labor more expensive and, therefore, makes more
mechanization necessary. This encourages the
consumption of finite resources through increasingly
cheap consumer products. If a tax on products would be
introduced, instead, which also would include the costs
of the product to the environment, products would tend
to become relatively more expensive. Combined with
lower labor costs, this would reduce the pressure for
more automation and more people could find employment.
Right now, society pays twice if a laborer is replaced
by a machine. It loses the income tax - as incomes of
machines are not taxed - and subsequently pays
unemployment benefits to the laid-off laborer. In
addition, a sizable portion of work is carried out
illegally at present, in order to avoid income taxes. If
income tax were abolished, this shadow economy would
finally become legal.
While not causing any lowering of the standard of
living to start with, because the increase in prices for
products would be balanced by a tax-free income, this
change would create very different and more
ecologically-sound consumer behaviour in the long run.
People would think twice before they got a new bicycle
or car if it were a lot more expensive than to repair the
old one.
The change in taxation could be introduced gradually
and would make sense even without the monetary and
land reforms. It would support effectively a large number
of demands and proposals from ecologists during the
last decades. Combined with the two other reforms, this
change would render redundant many environmental
issues and "protection measures" while contributing to
solving unemployment problems.