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1 Fair (= neutral) money to prevent financial crises 2 Four theses on 1) The added value of money 2) The non-neutrality of money 3) Interest and compound interest 4) A fee for liquidity making money neutral 3 1st thesis: Money has not only a nominal value but also an ADDED VALUE which consists in its liquidity advantage. 4 Comparison between • Robinson Economy • Barter Economy • Monetarian Economy 5 Economy of Robinson Crusoe: 1) No division of labour. Working is not very efficient. 2) No exchange. An extremely limited economy. 6 Barter (direct exchange of products) is already much better, but has some failings: 1) Limited in space and time. Exchange only here and now. 2) Difficulty of finding partners. The hungry tailor seeks the baker feeling cold. 3) Isolated singular action. Only two take part in it; otherwise it may go as with „Happy Harry“. 7 “Happy Harry” (Hans im Glück) Chain of barter = quite disavantageous exchanges chunk of gold horse cow pig goose grindstone nothing 8 Monetarian economy: Replacing a difficult exchange by two easy exchanges. Instead of roses for a car roses for money / money for a car 9 Barter: one difficult exchange 1.500 Bunches of roses for a car? But the car factory is in no need of roses. 10 in a monetarian economy replaced by two easy exchanges: € 8.990 11 Barter Economy A B The liquidity advantage of money consists in its easy exchangeability against everything. Monetarian Economy A C E M B D F • Money as a standardised means of exchange, • to be divided at one’s whim, • trans-temporal, • acting as a catalyst, not itself being consumed, but only going into other hands. 12 A jewel is better not divided; it would loose its value. 13 Money can be divided and re-composed without loosing its value. 14 Monetarian Economy seems to be best: Without limits of time or place. For money there are no costs of transport; it can be used transtemporarily. 2) Money as standardised means of exchange. To be divided at one’s whim; no major problem to find partners. 3) Exchanges in chain reaction. The money remains after an exchange; it is not “consumed”, but has only gone into other hands; it can broker further exchanges. But retained, it can also interrupt a chain of exchanges. 4) But it is normally easier to buy than to sell. Anyone who wants to sell, has to wait for a buyer and has many other costs (transport, stocking, maintenance, publicity). 15 Money is accorded validity through the declaration of the State that one may pay taxes with it. It is not necessary that it be covered by gold or other assets, but its quantity must remain controlled. 16 The functions of Money: 1) Unit of measurement for prices 2) Means of exchange 3) Way of storing (claims to) values either – or ? As long as one retains cash, an entire chain of exchanges is interrupted. 17 Holding cash: 1) Possibility of direct transactions 2) Security provision 3) Chances for speculation Monetary service stream = Liquidity advantage 18 If money instead of being used as a means of exchange is retained as a way of storing (claims of) values, (= hoarding), an entire chain of exchanges is hindered. If there were no interest, But normally, wouldasanyhow peopleithoard little as possible, bethey morewould advantageous to hoard interest, one’s money because have to renounce of lending it: which instead one receives It is anmoney advantage to benefitagain from its liquidity for bringing in circulation (= monetary service stream). by lending it. 19 1 2 3 4 5 selling buying selling buying selling buying selling buying selling buying circulation of money 20 1 2 3 4 5 selling buying hoarding money selling buying selling buying selling buying selling buying If money is hoarded, it is withdrawn from its function to mediate exchanges. An entire chain of exchanges is hindered. 21 Money is not consumed, but • it is either transmitted (by buying, donating or lending) • or it is retained (hoarded) (disappearing for a time from circulation). 22 Should not a scale of measurement itself remain unchanged? 23 Should not a scale of measurement itself remain unchanged? Yet: money as a scale contineously changes its value. The same nominal sum after a time becomes worth only half as much. [This inflation becomes necessary, as we will see, in order to cope with the effects of compound interest.] 24 Non-neutrality of money Merchandises and services • Transport costs • Maintainance costs • Publicity costs • Constrains in timing Money and its joker privilege • Freedom of choice • Freedom of timing Disadvantages on the side of merchandises and services, advantages on the side of money. 25 Stocking merchandises “Saving money” (lending, not hoarding) Costs of storing, of maintenance, of compensation for losses, of surveillance Gain through interest 26 Therefore: by its added value (its advantage of liquidity) money is a JOKER on the market always winning the trick. 27 – + Nominal value € 100,00 fixed, like km + annual added value € 3,00 streaming, like km/h 28 2nd thesis: In traditional money the owner of money can disfruit gratis of its inherent added value, or when lending money, he can sell the added value against interest going in his own pocket. 29 Net interest = premium for renouncing the advantage of liquidity In brutto interest there may be added • the banking costs (personal, buildings), • a compensation for inflation, • a compensation for risk. 30 Net interest = premium for renouncing the advantage of liquidity this may presuppose renouncing consumption, but the premium is not given for renouncing consumption, but only for renouncing the advantage of liquidity. Even in the traditional system one would not gain a premium only for hoarding money. 31 3rd thesis: It is the non-neutrality of money which makes simple interest and compound interest possible. The effects are desastrous. 32 Our traditional money is not neutral on the market. It is priviliged by its added value which consists in its advantage of liquidity. If one lends money, one remains the owner, but renounces for a time its advantage of liquidity; this is paid for by the net interest given to the owner, although the advantage of liquidity in reality is a public product. Interest is not a reward for not consuming or not spending, but for forgoing the advantage of liquidity. 33 What happens when lending money? One continues to be its owner, but instead of hoarding it, one lets it circulate anew. In exchange for what does one receive interest? One renounces the liquidity advantage of money. And this is paid by interest. 34 GERMAN CIVIL LAW CODE § 248 Compound interest (1) An agreement made in advance that interest not paid in due time is to carry recurring interest again, is null. The State wishes to guard against compound interest, but with interest bearing money this is technically not possible. (2) Savings banks, loan corporations and owners of banking affairs may reach an advance agreement that interest left in the account are to be considered as new interest-bearing deposits. Loan corporations, having the right to edit interest-bearing debenture bonds according to the amount of the loans granted to the holder are enabled to receive the promise in advance, that interest not paid in due time may be charged anew with interest. 35 $ 10.000 Guess, please! with 3 % compound interest will be in 50 years …………. with 4 % compound interest will be in 50 years …………. with 11% compound interest will be in 50 years …………. with 12% compound interest will be in 50 years …………. In order to calculate roughly the time during which the initial capital doubles, the number 72 must be divided through the interest rate. 36 $ 10.000 with 3 % compound interest will be in 50 years $ 43.839 with 4 % compound interest will be in 50 years $ 71.066 with 11% compound interest will be in 50 years $ 1.845.648 with 12% compound interest will be in 50 years $ 2.890.021 with 12% compound interest will be after the first 10 years still only: $ 31.058 with 12% simple interest will be in 50 years: $ 70.000 37 Interest would not be a big problem, if there were not compound interest, which increases exponentially. But if money brings interest, there is no technique to avoid its earning compound interest. 38 Interest is the rental price for the added value of money. It compensates justly for renouncing this added value. Therefore it cannot be forbidden. Otherwise people would not lend their money, but hoard it and thus hinder its circulation. 39 In Germany, in the prices for merchandises and services incl. rents for appartments on the average was hidden, ten years ago, ca. 30% of interest. Today on the average ca. 40 % of our prices is hidden interest to be paid for the debts of other people. cfr.: 40% Zinsanteil in den Preisen — eine Diskussion http://www.humane-wirtschaft.de/pdf_z/creutz_zinsanteil-in-preisen_diskussion.pdf 03.11.2009 40 ‘Third-world debt’: the original sums are – by interest – repaid many times over while the poor countries remain indebted. 41 A child feels cold and asks his mother: “Why doen‘t you turn up the heating?” “We don’t have coal.” “But why don’t we have coal?” “We have no money to buy it.” “But why don’t we have money to buy it?” “Because your father as a miner is unemployed.” “But why is he unemployed?” “Because the mine has too much coal stockpiled, and nobody buys it.” 42 Why is it necessary that the economy should always grow? Only with a growth of the economy of ca. 3% annually can growing interest charges be coped with. Otherwise, the interest charges grow at the cost of all other parts of the budget. 3 % General growth: part of interest growing in absolute terms, but in terms of percentage remaining the same. No general growth: The interest component growing at the cost of the rest. 43 Interest 40% in all prices With the time, the part of interest may grow to 60% and more. If you wish to avoid this, the entire cake must grow. That’s the reason why economy is forced to grow exponentially. Interest 60% in all prices 44 What would we think about the engine of a plane which had constantly to accelerate in order not to stutter? 45 normal growth exponential growth and so on 46 Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist. Kenneth Boulding, economist 47 A statistic from 20 years ago. If one divides the German households into ten groups, equal in number of households, according to the level of their income, the eight (or today even nine) lower groups have a negative interest balance, while the highest group has a positive balance of daily (according to estimations) between € 100 and 300 millions. 48 An advertisement (some years ago) for the German “Bank for Social Economy”: How you can obtain money without any real work … “What I am just doing? I am earning money.” You may let your money earn some extra. 9 % annually. 49 Voluntary unemployment of some people because they can let their money “work”. Unvoluntary unemployment of many other, because 1) in the long run all enterprises will cease to exist, which do not achieve the rentability of money and 2) servicing debt service and therefore the shortage of money means ‘economising’ on workers. 50 Rentable enterprises interest level (less) rentable enterprises will be dropped. 51 We need growth according to our real needs instead of growth oriented on returns. Why do share values increase when workers are “let go”? 52 Normally new money comes into circulation in form of a loan, for which interest is to be paid although nobody yet has “saved” anything. So this interest is in reality the fee for supplying the advantage of liquidity (= a. l.), and this money in the beginning is neutral. But from the moment this money is used to pay a bill, it goes – with its advantage of liquidity – separately on its own way, and the costs for this advantage remain with the first who borrowed it. From now on, this money is no longer neutral and it becomes possible for individuals to sell its added value for interest going into their own pocket. So they can make money with money. loan a. l. interest fee a. l. interest 53 It would be better to bring new money into circulation as payment for goods and services for the state, instead of being given as a loan. But nevertheless it is to be recommended that a fee for supplying the added value of money’s liquidity advantage be permanently bound to this money. 54 If somebody pays an addition with money he has borrowed, from then on the money with its liquidity advantage goes its own way, while the interest charge (the fee for the liquidity advantage) remains with him. Separated ways Annual liquidity advantage € 3 Nominal value € 100 Annual supply fee € 3 Annual supply fee € 3 55 A A gives B a loan. Sum of accumulated simultaneous interest for the same sum of circulating money. Interest from B to A. B C With the loan from A, B buys the same day from C. C, already rich, gives the same day D a loan with the money got from B. = 2x Interest from D to C D May be: and so on. 56 It is possible to charge the same sum of money with a private fee (interest) for the supply of the liquidity advantage several times during the same runtime: Separated ways Everybody who is paid with (even borrowed) money can eventually again lend it out against interest. Annual liquidity advantage € 3 Nominal value € 100 Annual supply fee € 3 Annual supply fee € 3 57 Interest: a private tax for the use of a public means of traffic. as if somebody would demand a ransom payment for returning rail freight waggons that had carried merchandise to his property … 58 Interest: To give money to someone who causes a traffic jam, that he may drive on. Thus it is a reward for ceasing to hoard money, for ceasing to be a spoilsport in commerce. 59 Lending money should be equated by means of a fee for its liquidity advantage, to lending other assets. ? Lending bread: Instead of having had costs by stocking one’s bread in the deep freezer, one gets back a fresh bread, but not more. 60 4th thesis: The added value of money, which consists in its liquidity, should be compensated by payment of a fee for the supply of this added value; and this fee should always remain bound to the liquidity itself: NEUTRAL MONEY 61 – + + annual added value € 3,00 Nominal value € 100,00 – annual fee for the supply of the added value € 3,00 Neutral Money. 62 Konfucius (551−491 B. C.) If language isn’t correct, then what is said, isn’t what is meant. If what is said, isn’t what is meant, then also the actions will not be in order … and people don’t know where to put their hands and feet. Therefore one should pay attention to that the words be correct. This is the most important of all. 63 Such an annual fee for the supply of the liquidity advantage would prevent money from being hoarded instead of remaining in circulation. So the fee also secures circulation. But originally it is the compensation for enjoying an advantage. Therefore it should be called “fee for the supply of the liquidity advantage” rather than “fee for assuring circulation” as if one had only duties and had not received an advantage before. 64 The fee for the supply of the added value can be deducted • from giro accounts automatically, • from banknotes recalling them from time to time e. g. according to their coulour drawn by lot and exchanging them against payment of a charge. 65 There should be coins of even € 10 and € 20. From coins a deduction may not be necessary because they are not suitable for the exchange of big sums of money. 66 This would mean • that hoarding cash is costly; • lending out money relieves one from these costs; • so there remains an incentive to lend money instead of stocking it; • but there would be no more net interest on ‘savings’, and a fortiori no more compound interest. • loans continue to have to be repaid after the time agreed upon, but this now is easier because no interest is charged. 67 Fair money? 1) Inflationary money: The owners of money lose value from their propriety. 2) Deflationary money: The owners of money are privileged. 3) Stable money: The owners of money are still privileged unless the advantage of liquidity is not compensated by a fee. 4) (Stable) money with a fee for the supply of its advantage of liquidity: The joker privilege is compensated: Neutral money / fair money. 68 The supply fee for the liquidity advantage of money Annual liquidity advantage € 3 should always remain with the money itself. linked Nominal value € 100 Annual supply fee € 3 69 In medieval Germany there were coins called bracteates which regularily had to return to the mint and were given back discounted. This was neutral money. With this sort of neutral money the township of Ulm (then less than 10.000 inhabitants) was able to construct (from 1377) its famous minster. 70 Imposing a fee for the supply of the advantage of liquidity would be an “Archimedes’ screw” to influence directly the circulation of money. 71 To influence the circulation of money by controlling its quantity works like a very long lead. 72 To influence the circulation of money by setting a fee for the supply of the advantage of liquidity works like a short lead. 73 Objection: – This proposal unjustly penalizes the ownership of money which has been earned with hard labour. Answer: The nominal value of money may indeed have been earned with hard labour by the owner. The nominal value of money is therefore the due and just compensation for this labour. But the added value of money, its liquidity privilege, is a public product and should be paid for. He who enjoys this added privilege should bear costs for it. 74 Aristotle (in his “Politics”, I, 1256b 26 – 1257 a 17) distinguished between two ways of acquisition: • οἰκονομία (oikonomía), the exchange of products (by means of money), and • χρηματιστική (khrēmatistiké), making money with money, which he considers “unnatural”. With neutral money, χρηματιστική would no more be possible. And there would no more be possible a financial crisis as that of 2008/2009. 75 If you wish to know more: http://userpage.fu-berlin.de/~roehrigw/suhr/nngengl.html Prof. Dr. Dieter Suhr (+ 1990) The Neutral Money Network (NeuMoNe) A Critical Analysis of Traditional Money and the Financial Innovation "Neutral Money" 76 77