Implementing an Interest-free economy: Currency reform

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 whithin 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'.

If we could create a monetary system which put money on an equal footing with all other goods and services (charging, on averate, a 5% annual maintenance cost, which is exactly what has been paid in the form of interest for money thorught history) then we could have an economy free of the ups and downs of monetary speculation. Money should be made to 'rust', that is, be subjected to a 'use fee'.

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.
--Excerpted from Margrit Kennedy, Interest and Inflation Free Money p. 13

Okay, so how should we best go about doing this? Here are some ideas, I want to talk about the feasibility, obstacles, whether or not you think they're a good idea.

Idea 1: Charge people to store their money. (Margrit Kennedy p.27)
For several years in Switzerland, investors ... had to pay interest in order to leave their money in a bank account.

Idea 2: Rust from auto-devaluation of currency functions as taxes.
Worgel Experiment (Margrit Kennedy p. 14)

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."

Idea 3: Otani's Use-fee (Margrit Kennedy p. 15)
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.

Idea 4: The Terra TRC – a global “Trade Reference Currency”
(This article, "A Case for Complementary Currencies" also by Margrit Kennedy is actually a very good summary of the argument against our current economic system.)

Some years ago Bernard Lietaer … saw that three unresolved issues are haunting the global monetary scene. Firstly, there is no international standard of value – a critical function of any money system. Since the floating exchanges of the 1970s, the US Dollar has stopped playing that role, and no other currency has been able to fill in that gap. Secondly, currency instability persists. According to the World Bank, 87 countries have experienced monetary crises in the past 25 years. And thirdly, institutional deadlock: The banking system is not pushing for monetary reforms because “hedging” products (insurance against monetary instabilities) constitute significant profit centres.

The solution he advocates is what the International Air Transport Association (IATA) successfully did 25 years ago through an internal currency arrangement among its members, for example to create an independent global Trade Reference Currency (TRC) useable across industries, designed to provide an inflation-resistant international standard of value, to stabilise the business cycle, and realign stockholder’s interests with long-term sustainability.

The so-called ‘Terra’ would be backed by a standard basket of the most important commodities and services traded in the global market (for example oil, wheat, copper, gold and other assets, and some standardizable services like carbon emission rights, international freight or telecommunication units). A ‘Terra Alliance’ would issue electronic inventory receipts for commodities sold to it by producers. It could include both governmental and private sector actors who represent the main producers or users of the components in the basket.

The bearer of the Terra would pay the cost of storage of the physical commodities (estimated at 3.5 to 4 percent per annum), which makes the Terra a ‘demurrage’ currency and encourages its use as a contractual, planning and trading device, not as a store of value. The benefits of the Terra compared to conventional money include not only the resolution of the three issues identified above, but also the creation of an ideal standard of international value, given that its basket would capture main elements of global trade. By the very definition of a basket, it would be more stable than any component of the basket (such as gold), and it would also be a robust standard, given that it is a fully backed currency.

As any Terra trade is basically stand- ardised counter-trade (international barter), it doesn’t require new legal agreements. Counter-trade is routinely practiced today in over 100 countries, with a volume of more than $1 trillion per year. The Terra would operate as a complement to conventional national currencies, in parallel with them, and would be an inflation-resistant currency, ideal to track results over long time periods or across countries. Like most complementary currencies the Terra would be counter-cyclical to the conventional money creation process, thereby stimulating the world economy in downturns and cooling it off in boom periods. Last but not least, the demurrage feature would realign financial interest with long-term thinking, thereby resolving the conflict between shareholders’ optimisation and long-term sustainability.

The solutions for financial stability, presented here, will be a surprise for conventional economic thinking, which invariably assumes monopolies for national currencies as an unquestionable given. The examples mentioned show that monetary sustainability will be enhanced by a diversity of currency systems, so that multiple and more diverse channels of monetary links and exchanges can emerge. We have all the technologies to make the use of multiple currencies feasible. While at the moment they are proving their capacity to play a stabilising role on a small scale, it is urgent to recognise that they can contribute to sustaining the global economic system tomorrow, if we are able to implement them on the scale necessary to make a difference.

Why not Welfare? (Margrit Kennedy p. 29)
The largest factor in the redistribution of wealth is interest with transfers daily millinos of DMarks fro those who work to those who own capital. Although most gvts try to rectify the resulting imbalance through taxations, the result is nowhere near a balance. in addition…the human costs in terms of time and energy, plus the humiliation involved in getting through the 'red tape' are seldom if ever taken into account.
The absurdity of a monetary system which robs people first of their fair share in the 'free market economy' and then --through some of the most inefficient procedures imaginable -- returns some of this money in the form of welfare payments to the same people has rarely been exposed by the 'experts' nor has been discussed in public. As long as those 80% of the people who pay don't understand how they pay, could it be otherwise?

Other Ideas: Land Reform
(Margrit Kennedy p. 17)
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.

(Margrit Kennedy p. 18)
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.