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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.