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In the future there will be no interest on money

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Joseph in Egypt

The Bible contains a story about the Pharaoh having dreams that he could not explain. The Pharaoh dreamt about seven fat cows being eaten by seven lean cows and seven full ears of grain being devoured by seven thin and blasted ears of grain. Joseph was able to explain those dreams to the Pharaoh. He told the Pharaoh that seven good years would come and after that seven bad years would follow. Joseph advised the Egyptians to store grain on a large scale. They followed his advice and built storehouses for grain. In this way Egypt survived the seven years of scarcity.

What is less known, because it is not recorded in the Bible, is that the storage of grain resulted in a financial system. The historian Friedrich Preisigke discovered that the Egyptians used grain receipts for money and had built a sophisticated banking system based on this money [2]. Farmers bringing in the food received receipts for grain. Bakers brought in the receipts, which could be exchanged for grain. According to the Bible, Joseph took all the money from the Egyptians. This may have prompted them to invent an alternative currency.

It may not have taken long before the grain receipts were accepted as money. The degradation of the grain, and mice eating from it, caused the value of the receipts to decrease steadily over time. This stimulated people to spend the money. The grain-receipt system lasted for many centuries. It made sense to store food to provide for hard times. The actions of Joseph may have created this system as he allegedly proposed the grain storage and took all the money from the Egyptians. When Joseph came to Egypt, the country had already passed its zenith and the time of the building of the great pyramids was centuries earlier.

A few centuries later, during the reign of Ramesses the Great, Egypt became again a leading power [3]. Some historians suggested that the wealth of Egypt during the reign of Ramesses the Great was built upon the grain-financial system [4]. The grain money remained in function in Egypt after the introduction of coined money around 400 BC until it was finally replaced by the Roman currency. The money and banking system were stable and survived for more than a thousand years without collapsing, possibly because the storage fee made people more willing to lend out money without charging interest. It seems therefore possible to have a sophisticated banking system with Natural Money.


Research


So why does this supposedly efficient money with a holding fee not dominate the world already? Similar experiments like the one in Wörgl did not produce similar results. The success of the Woergl currency has been inflated by the payment of taxes in arrears that could be spent by the town council [5]. Maybe it is too good to be true after all, but the theory suggests that it isn't. Making the idea work in practise is a major challenge. Many assumptions behind community currencies and interest-free money conflict with accepted economic theories on interest. This may explain their limited success. It also seems that the currency must be legal tender in order to make it work.

If interest-free money is more efficient then it must be provable and it must be possible to discover the preconditions that need to be satisfied for interest-free money to become a success. If the proof is there and the preconditions are uncovered then it may still be a long way to the moment that the idea is first put into practise, unless an economic crisis occurs. This could happen any time because interest on money is unsustainable in the long run. During a crisis people may be willing to try out new ideas. Out of the experiments, the most efficient system may emerge. Most likely this will be Natural Money.

The unsustainability of interest on money and the effects of demurrage are both not mainstream economics. There is little thought on the consequences of interest on money for risk-taking in the financial system and the effects of interest on the stability of the financial system, which are both core issues in the theory of Natural Money. As a consequence there is some ground-breaking theory making in the economic model of Natural Money and there is not much reference material to back it up.

A common mistake is that a ban on interest is a ban on business profits. Within the theory of Natural Money capital deserves a reward to be employed. Another mistake is that credit is not available with Natural Money. It is likely that credit will be restrained and that debts cannot grow out of control, but there will be credit with Natural Money. It may also be difficult to understand that Natural Money can emerge as the dominant type of money because a ban on charging interest on money may cause interest rates to be higher in real terms.

The paper intends to explain how an economy based on Natural Money will operate. To this aim economic models are made using regular economic theories. It is assumed that the reader of this document has basic economic knowledge. Economic thought is an important development as it is about making the best out of limited resources. Without organisation and trade it would not be possible to have the standard of living we have nowadays. On the other hand, economic thinking is about to create a disaster of unprecedented proportions. The growth of economic activities will hit the limits of our planet in the foreseeable future.

Self-interest is the basic driver for economic development. The pursuit of self-interest does not always lead to desirable outcomes but government interventions in the economy tend to make problems worse. The political debate now focuses on economic freedom versus government regulation and intervention, but ancient economic thought has produced at least one great achievement that may help to reduce this tension, which is identifying the problematic nature of interest on money.

With Natural Money it may be possible to achieve most of the goals aimed at by government intervention without the need for government intervention as the economy may be able to achieve the desired policy objectives on its own. Many economists assume that government interventions make the economy less efficient so Natural Money may enhance the efficiency of the economy.

The document explains the merits and limitations of different influential schools of economic thought, such as classical economics, Keynesian economics, monetarism, rational expectations, and supply-side economics. Some other schools of thought are also explained, such as the Austrian School, the community-currencies movement, Socialism, and steady-state economics. Those approaches have all contributed to the theory of Natural Money. Finally, an outline is given of the expected effects of Natural Money on the economy. Natural Money may help to produce a more efficient market economy.

Main tenets of the theory


Interest and economic crises


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http://www.naturalmoney.org

I was born in a village in the East of the Netherlands and have lived in this region as a child. I studied Business and Information Technology and Philosophy of Science, Technology and Society in Enschede, which is also in the East of the (more...)
 

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Wow! Interesting concept. I see this as one valid... by Paul Repstock on Saturday, Sep 28, 2013 at 1:05:34 PM
One reader mentioned in a message that the powers ... by Bart Klein Ikink on Sunday, Sep 29, 2013 at 1:33:56 AM
This has almost already happened.  Interest r... by Sorgfelt on Sunday, Sep 29, 2013 at 5:04:43 PM
If you have a mortgage or credit card debt, you st... by Bart Klein Ikink on Monday, Sep 30, 2013 at 2:16:38 AM
During the 1930s Depression, which was a monetary ... by Derryl Hermanutz on Sunday, Sep 29, 2013 at 8:32:29 PM
The main assertion is that the proposed system is ... by Bart Klein Ikink on Monday, Sep 30, 2013 at 2:30:44 AM