Natural
Money has the following features:
-
On the money in circulation a holding fee or demurrage is levied by
the issuing government.
-
The amount of real money (M1) is fixed.
-
Governments must always maintain a balanced budget and there is no
government debt.
-
A bank can only provide banking services and cannot invest directly
in other types of businesses.
-
No holding fee needs to be paid on money in a savings account.
-
Loans must be made out of savings and only savings are subject to the
risk of bank failure.
-
Money in current accounts is not part of bank capital. It is not
available for lending nor is it subject to the risk of bank failure.
-
Banks must keep a reserve against savings that can be withdrawn on
short notice.
Whether
or not fractional-reserve banking should be allowed is of lesser
importance than the acceptance of the risks of banking. As banks have
a maturity-transformation function it is difficult to make a clear
distinction between fractional-reserve banking and making loans out
of savings. It may be possible to have savings accounts with deposits
available for immediate withdrawal. In the Natural Money arrangement
it is only possible to use money in current accounts for payment.
Money in savings accounts has to be withdrawn and deposited into a
current account before it can be used for payment.
Within
the context of Natural Money the following interest rates can be
distinguished:
-
The reward for capital or business profits, which is often named
interest on capital;
-
The
nominal rate of interest, which is the rate of interest on money
expressed in money terms;
-
The
real rate of interest, which is the rate of interest on money after
accounting for changes in the price level;
-
A
usurious rate of interest, which is a positive interest rate on money
relative to the change in the amount of real money (M1).
Economic
stability
A combination of mechanisms will curb the increase of money substitutes (M2). First, banks must keep a reserve against savings that can be withdrawn immediately, so a growth in savings will reduce the amount of money in circulation (M1). Second, loans must be made out of savings so for every borrowing there must be a sacrifice in the form of saving. When the expansion of M2 produces price inflation there will be an increased reluctance to lend funds at a maximum rate of zero percent and there will be fewer funds available for borrowing. During a potential economic boom more funds will be invested directly in promising projects and the funds available for borrowing will reduce, so a potential economic boom will not be fuelled by lending and borrowing.
Increased efficiency
With Natural Money banks can lend money at a maximum interest rate of zero percent. For this banks can charge an intermediary fee to savers so savings have negative interest rates. For long-term deposits those rates tend to be close to zero. Interest rates near zero percent with Natural Money may be more attractive to savers than interest rates in the current financial system because they may be higher in real terms or they may offer a better risk/reward ratio. For example, if the money supply growth in the current financial system is seven percent and the long-term interest rate is three percent then the Natural Money interest rate of zero percent may be four percent higher in real terms assuming that economic growth is the same.
Financial instability caused by positive nominal-interest rates an d fractional-reserve banking as well as policy actions to deal with financial instability have been a boon to informed people in the financial sector. They operate at the expense of the real economy. Reducing financial instability and trading in the financial system to a certain extent may improve economic efficiency. Financial activities have become a plague in recent decades because of financial innovations that exploit the instabilities caused by interest and fractional-reserve banking as well as the policy actions to counter them.
An
economy operating under the regime of Natural Money may be more
efficient as it may be on the maximum sustainable-growth path most of
the time while less productivity is lost on unproductive financial
activities and government interventions. This may attract capital at
the expense of economies allowing usurious rates of interest and
managed economies that try to avoid usurious interest rates by fiscal
and monetary policies. With Natural Money real returns could be
higher if the natural rate of interest keeps the economy on the
maximum sustainable-growth path. In the future all monetary systems
may therefore be based on Natural Money.
Decentralisation
of currencies and government
Natural
Money currencies can be issued on the international, national,
regional, as well as the local level. With Natural Money it may be
possible to support national as well as regional and local economies
and to decentralise economic decision-making. Regional and local
currencies introduce exchange costs and will make it profitable to
localise production when the benefits of the economies of scale are
smaller than the currency-exchange costs. In such a situation local
and regional currencies may reduce external competition, giving
regions and communities the opportunity to become more
self-dependent. Increased currency-exchange costs may cause higher
interest rates and this could become an impediment to more regional
and local self determination.
Government
bureaucracies have a tendency to expand and waste resources as
maximising profit is not a motive in government bureaucracies. The
problem of bureaucracy is the belief that a government can solve many
perceived problems, relieving citizens from their responsibility to
deal with them. Citizens are not likely to counter this trend because
the cost of a central government is spread over a large number of
people. Delegating government responsibilities to the regional and
local level may give people a greater incentive to strike a better
balance between government action and citizen engagement as the cost
of government can be more directly influenced by citizens.
For
example, if benefits are paid for a significant part from local taxes
then local employers may work together to hire difficult-to-employ
people as a reduction in local taxes benefits those employers more
directly. People may feel more pressure to find a job as their
benefits are paid for by their community. Regional and local
currencies can make an economy more efficient despite the increased
currency-transaction costs because it can reduce the overall cost of
government and enable marginally competitive people to find
employment at reasonable wages without the need for government
intervention. To offset arbitrariness, a central government may need
to apply guidelines for the operation of regional and local
governments as well as regional and local currencies.
International
trade
Natural
Money currencies are not attractive as currency reserves because of
the holding fee. Exporting nations will dispose of received currency
balances by matching exports with imports. As a consequence
comparative cost advantages will become the predominant driver of
international trade. Trade probably is more beneficial if it is based
on comparative cost advantages. This requirement may restrict trade
because of currency risk, but it also prevents the emergence of trade
imbalances as currency values will adapt more quickly to a changing
economic reality. Currency risk may cause higher interest rates and
this could become a problem as Natural Money has a maximum interest
rate.
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