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.
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.