Complementary Currencies and deflationary crisis

Complementary currencies and deflationary crisis

Complementary currencies are alternative currencies to the legal tender. Except from foreign reference currencies which sometimes rule out national currencies in some very small countries or suffering emergency economies, complementary currencies are distinguished from the legal tender by different behaviour. Countless approaches are possible to design market exchange by alternative monetary systems but most of them can be roughly subdivided into

1)    interest free money (Freigeld)

2)    local exchange time systems (LETS)

3)    barter trade (electronic market places)

Our current monetary system of the legal tender is interest based and interest compound is the most powerful mean to collect money, the so called mass gravity behaviour of interest based money. In a long term consideration led the concentration of money capital to an accelerated concentration of productive capital. Due to this, business cycles have shifted more and more from local to global dimensions and local business cycles disappearing slowly.¹⁾

Complementary currencies are a contrary scheme and mainly used on bounded markets or by delimited social groups or communities. It can be seen as a mean to support local business cycles. But the globalization detracts most of the business and leads subsequently to strong reduction of capabilities for transactions in local business cycles. It is more convenient for market participants to use the legal tender and makes it doubtful that in times of non-crisis globalization can be inverted by the mean of these complementary currencies. The capitalized world of west Europe and North America smile at citizen initiatives which run or try to implement these alternative monetary systems. However, the ignorant capitalized world goes wrong as usual.

In times of deflationary crisis complementary currencies are the best mean to relieve the distress. If expectation of gains decline, legal money will be hoarded or attempts to escape into offshore financial places. Money gets narrow in business cycles, business activities decline, supply increases and prices decreases, what we call deflation. Most approaches of complementary currencies are designed to enable transactions which would not take place by the use of legal tender and almost all of these approaches are not focused on the earning of money by money. As consequence, in times of narrow money complementary currencies can replace parts of the legal tender and speculative transactions will be kept out of the business cycle. The more deflationary crisis will destroy business the more complementary currencies come up and will be appreciated.

Complementary currencies can be seen as emergency monetary systems

But globalization and global business cycles have destroyed great parts of local production and local barter will get more and more ineffective. This endangers also the efficiency of emergency money. We must assume that examples such as Woergl or stamped scripts cannot be repeated in the same way. We might have to think bigger.

The greatest hindrance to think bigger is that the exchange rates of complementary currencies are mostly linked to the legal tender and money creation will be done by the exchange from the legal tender into complementary currencies. If alternative money is not linked society must create a second price formation for the exchange and tends to give up acceptance into this money. As consequence, complementary currencies keep in strong dependence of the legal tender or a current global reference currency and must follow the price formation of the conventional monetary system. It restricts the potentialities of complementary currencies to be only a reactive system and does not allow the prevention of deflationary crisis in advance.

In a long term consideration we must assume that the current global monetary system based on credit creation and interest rates tends to be increasingly unstable¹⁾. Complementary currencies in a more global scale which will stabilize business cycles, which do not need a second price formation and which can be used independent from the legal tender are possible and can be designed by the approach of monetary superneutralisation²⁾.

The principle of monetary superneutralisation

Money plays an important role in our daily life. To accept money as payment is an accomplishment of the society which renders division of labour feasible and is therewith absolutely essential for modern life. Among others is it a medium of exchange and allows for the setting of prices and the comparison of values of different goods. It also allows the comparison of currencies by exchange rates.

Superneutralisation means that the money supply growth in the real economy has no effect on the activities of the production of goods. While the prices changes, does not change the productivity in response to supply and demand. The orthodox economics insists on the neutrality of money, but likes to conceal the variable velocity of circulation in their quantity equations. The statement of these equations can be hardly overbid in meaninglessness. It completely contradicts our individual experiences completely, that money should have no impact on our daily decisions.

Let's change the perspective from the side of money capital to the side of real life, of the side of productivity, services and the production of goods. The main target is to balance demand and supply, to keep our life human. It can be seen as the main target of economy respectively the main target of homo reciprocan. Life is the irrevocably value to act. Values which results from our productivity and production of goods are relative and variable values, because they are transient. Life as an absolute value is discrete and eternal. To be or not to be, nothing is in between.

Relative or variable values ​​mean that the corresponding prices are negotiatable, An absolute value cannot be negotiated.

As a unit of account refers our current money to these relative or variable values ​​and thus is money in his assessment related to this relativity. It interacts with the reality and is therefore probably not a neutral medium.

Can we charge the absolute value of our life with money? The answer is subjected to ethical and philosophical questions and more related to our belief and faith than rational reasons. If it will get common agreement, money will be creates that reflects the absolute value of life. It is simple a never changing amount of money, simplest one monetary unit is one world.

Conclusion: Superneutralisation does not arise from the interaction of money and the real world, it will be created by definition.

This superneutralisation can be implemented as a complementary currency, described in the essay “model of a neutralised currency and exchange system for central banks” ²⁾. In practical use would it be a global reference currency and exchange rate system for central banks. The name of this global reference currency is ANNA. Like other proposals of global reference currencies is it not based on a leading national currency and therefore independent from the interests of the country which own the leading national currency. This superneutralised global reference currency will stabilize the global monetary system and the global trading due to the effect of reconciliation. It balances trading imbalances and could be used at least as a tool to reduce or even avoid inequitable exploitation for the 99% of world citizens which will be underprivileged by the current system. It is a system of crossrating against the superneutralised global reference currency which leads to a very accurate and direct correlation between all national currencies. ANNA is an exchange rate regime which allows flexible exchange rates to fulfil the requirements of each participating national economies. The speculative up and downs through the deregulated financial markets will be better absorbed and becalmed. Speculative trading based on the spread of exchange rates disappear. The introduction of superneutralisation will improve our monetary system in its best sense to lead its function back to the social accomplishment as a medium of exchange. Money will get neutral.

Attempts to generate profits, which we still experience on the financial markets, which also led to the current crisis, attempts like  leveraging and multiple lending money creation to earn money by increasing the money supply, will be punished in a superneutralised monetary system by a reactive change in exchange rates. In a long term consideration the financial markets would have to say goodbye to this way of business and would have to learn to make profits in a real economy in a much more modest way. Markets of the real economy follow other laws than the financial markets, where growth cannot by reached by multiple money creation.

Conclusion: The superneutralisation of our monetary system would change the focus from a abstract and virtual world of financial markets to the economy of reality of goods and services for a human world.

Speculative attacks against the Euro zone, as we experience at this time, could be avoided in a superneutralised monetary system. It would make no sense. But we must be aware that all ideas which stabilize economic and social life will limit profit expectations. It seems that the society and therefore also the markets choose these earning expectations against a stable system.  So it is implausible that ideas which could stabilise the economy, will establishing themselves, also not the idea to superneutralise our monetary system.

Financial markets and the current money capital are not limited in growth. The real world will show those limits very well. Sooner or later we will face the need to recognize these limits. Therefore it makes sense to think about a change in our economical thinking, even if the realisation remains unrealistic. More and more we perceive that our money system will be immanent for this change. Superneutralisation is the mean to transfer the knowledge gained from the development of regional complementary currencies onto national and international levels, to pave the way for monetary systems, serving the needs of humans in a better quality.

The essay „model of a protected currency area for developing countries” ³⁾ shows that it is not necessary to implement superneutralisation on a global level. It can also be transferred to a national level, but gives much stronger advantages to common currency areas. Indeed, superneutralisation would be a tailor-made solution for the common currency area of the Euro zone and the current Euro crisis.

Superneutralisation of the EURO

The equations are quite simple to set the global monetary system into superneutralisation.

First step – determination of word money supply

1)    World money supply is the sum of all national money supplies

Figure 1) equations for superneutralisation - step one – determination of World Money Supply WMS

Money supply is the main item in a superneutralised monetary system. It is the legal tender, official and valid money as mean of payment in a country or currency area

It means the money itself but not any other kind of assets which must be exchanged to be money. We can assume that central banks are able to determine and to supply the right values or at least to estimate money supply quite well, also as part of fractional reserve banking. Important is the highest value, usually is it M3. It is not necessary to have exact values of world money supply, the important characteristic is that the exchange of all money in one moment into the superneutralised reference currency ANNA must be less or equal 1 [ANNA] – ever. Less than 1 is allowed and means that the calculated WMS can be higher than the real one. This is

•             helpful to compensate errors in the determination
•       allows a security shift to influence the response time of exchange rates from fast and reactive to slow and active 

Second step – fixation of the share

2)    The share of a currency is national money supply divided by world money supply - The fixation of the currency is a picture of the situation in the moment of participation - a settlement of society – like to accept money as a mean of payment or ANNA as a equivalent to the total of world money supply

The calculation of step one and two are only one time necessary. It is the step into superneutralisation.

Figure 2) equations for superneutralisation - step two and three – fixation of share and determination of exchange rates

 Third step – independent determination of exchange rates

2)    The exchange rate is the share of the currency divided by the money supply in the own currency unit - In this equation the calculation of exchange rate will become independent from the figures of other currencies. The national money supply m_x is the flexible item in this equations and allows to keep the exchange rates flexibles. Also foreign liabilities and receivables will be seen as part of the money supply and added or subtracted from national money supply m_x.  The exchange rates e_x in this system are always correct, it means that there is no spread in the exchange of currencies, is it possible to transform foreign money into the national currency instead to keep them as foreign currency reserves at the central banks in case of receivables or to issue treasury bonds in case of liabilities.

If we consider NMS_x as the money supply of a currency area like the EURO, then NMS could be seen as the sum of all complementary currencies in this area. In the case of Europe are complementary currencies the former national currencies like DM, France, Lira etc. but also new national inventions of currencies with different functionalities for example like LINA’s and TINA’s ³⁾.

The transformation to a superneutralised European currency area would be similar to transformation of the global monetary system into a superneutralised system. Only the total world money supply must be substituted by the money supply of all Euro States €MR. We can assume that the European central banks knows the amount of the European money supply quite well ⁴⁾.

Figure 3) equations for the superneutralisation of the EURO zone

 Sense of this exercise is it to re-establish national currencies N€NA’s in the common currency area of the EURO zone. Domestic trading would be done in the new national currencies N€NA’s and foreign trading would be kept in EURO. In this sense a superneutralised European currency incorporates the advantages of a common currency with the advantages of national currencies. The problems with inner European trading imbalances could be minimized due to the flexible exchange rates of this system.

The concept of a superneutralised EURO differs from the concept of a protected currency area for developing countries so far that an additional complementary currency for the foreign trading FENA³⁾ would be not used. The EURO as a strong currency would still be traded on the FOREX. Due to this, the EURO is not really superneutralised, but the method will be used to re-establish the new national currencies.

  

Consideration of inner European trading imbalances

At the start exchange rates between Euro and the new European national currencies N€NA’s are 1:1. The different measures for growth and employment and the imbalance of trading would lead to a different growth of the money supply between N€NA's. Imbalance of trading should then be considered by additional parameters in the divider of the equation to determine the exchange rates. One important assumption is that foreign N€NA's of the inter European trading will be exchanged and not longer kept as foreign liabilities and receivables in stock of the national central bank. The equation for the determination of the inner European exchange rates e_xN€NA would get the additional parameters:

•  Addition of money lent from other countries, exchanged into the target currency foreign liabilites
• Subtraction of money lent to other countries, exchanged into the target currency = foreign receivables

It would lead to the following effects

•  Additional money supply => decrease of exchange rate
• Deficit in foreign trading => decrease of exchange rate
• Surplus in foreign trading => increase of exchange rate
•  and vice versa

Figure 4) consideration of inner European trading imbalances

 Trading imbalances will be considered and compensated by exchange rates e€ between the national currencies of the European Union. The problem of trading imbalances between the inner European countries would disappear and every country could follow the own economical demands without the race of wages to the bottom. The race of wages to bottom transliterated into political discussion is named improvement of competitiveness.

Like in a protected currency area national economies have to trade with the new national currencies, inner European and global trading must be done by the exchange of prices from national currencies into EURO. Only the EURO appears on the FOREX markets and treasury bonds will be traded on the global markets also only in EURO.

To reach the balance of trading is the main challenge to keep Europe political and economical common in the near future. And the above described measure would be that tool to reach this target. The EURO can still be considered as one of the most stable currencies on the global markets. We can assume that the economies and infrastructures in all European states are quite sophisticated and public debts in all European countries are moderate in relation to the global situation. So it is not very reasonable for actors on the global financial markets to speculate against the common European currency as one of the main factors which keep financial markets stable. The usual measures would let disappear the European Dept crisis, as

•  to take over treasure bonds by the European central bank
•  common treasure bonds
• lowering to negative interest rates for money which will be saved at the central bank
• economical politics of demand

The superneutralisation of the EURO currency area would not only let help to disappear the crisis, it additional would stabilize the European economies itself, due to the consideration of trading imbalances in the EURO zone. It would lead to benefits for European countries which are still not participating onto the common EURO to rethink their position and to move into the common currency area. If countries like Switzerland, Lichtenstein and UK are convinced to join the currency area, supports it the efforts to domesticate off-shore financial places in a kind that all parties will gain benefit.

    

The consideration of trading balances is part of the effect of reconciliation based on monetary superneutralisation. Another part of this reconciliation is the possibility to install low interest national currencies LINA’s. It is a measure for heavily indebted poor countries and would in fact not be necessary for the sophisticated economies of Europe. But due to the prolonged speculations against the European countries in the south it will come closer to be an option. These low interest monetary systems could start to compete with the current interest based monetary system and allows to solve the problems of public debt crisis in a more reasonable and sustainable way, also for sophisticated economies like in Europe.

Effect of reconciliation and dept crisis

Figure 5) effect of reconciliation on the monetary time beam

 The installation of a low interest national currency means the reconciliation between the exchange rates of debtor and creditor currencies.

The exchange rate of the interest based currency decreases in correlation to the exponential growth of money supply of this currency caused by the interest compound – purple red curve in figure 5. While the money supply and therewith the exchange rate of the interest free money keep more or less constant due to the absents of interest compound – blue curve in figure 5. A heavily indebted poor country which will run into insolvency and changes into a interest free national currency has only to wait for the decreasing exchange rate of the creditors currency.

Nevertheless - the Debtor still has to repay the liabilities, but only in the absolute value of the superneutralised global reference currency and the creditor get back the outstanding receivables, but only in absolute value of the superneutralised global reference currency. It is more than fair for the creditor and debtor - it is the reconciliation. It interrupts the helix of increasing receivables and debts and this helix of debts is probably the main issue or main cause for financial crisis, like the current debt crisis.

It is the most reasonable tool to solve the problems of public debts

It is the unique solution to break out of the economical circulation and coercion of growth and ruination.

Compatibleness of low interest and interest free money in a superneutralised currency area

superneutrality is the never changing value of money. It is the superneutrality of the superordinated complementary currency. It is a different theory to the quantity theory respectively neutrality of conventional money!

Superneutralisation is related to money and not to prices of visible commodities. The price of commodities are still related to conventional money and not affected by superneutralisation.

Creation of conventional money is not affected. Money supply and monetary policy remain in responsibility of the national central banks. Money supply and interest rates of Central bank are not restricted by superneutralisation. The interest based legal tender behaves in a superneutralised environment not different to the current situation.

Figure 6) the non-neutrality of interest based money

 Exchange rates e€ in a superneutralised currency area are affected, because their determination are based on money supply

Exchange rates of interest based national currencies decrease in correlation to the exponential growth of money supply caused by interest compound

If we assume that money is not neutral exchange rates related to the prices of a basket of commodities would decrease slower. The gap will be caused by the disturbed effectiveness of demand due to the concentration of money. The theory of Freigeld would have described it at hoarding of money. Nowadays we will name it speculative trading on the financial markets. Does this effect lead to a distortion in the price building?

Figure 7) effect of money supply on price creation

 We can assume that all interest based currencies must growth in a similar way

The exchange rates to the superneutralised superordinated complementary currency decreases but the relation between the exchange rate of the national currencies itself keeps more or less the same. Foreign trading is not affected, neither nor the domestic trading.

Also the different growth of currencies caused by trading imbalances will be considered in the equation for exchange rates e_x. Trading surpluses strengthen the exchange rate, trading deficit weaken the exchange rates and imbalances will be balanced. That it the advantage of a superneutralised currency area to consider the different economical situation of all involved countries.

The situation changes if the first country will change into a low interest national currency.  Money creation of low interest money not effected by interest compound. Due to this, low interest money is closer to neutrality (see red curve in figure 7). In a long term consideration prices of foreign goods based on interest based money could decrease faster (see purple red curve in figure 7) due to the increasing exchange rate e_x of the low money creation of low interest currency.

Does it affect the trading balance between economies? The answer does maybe not convince, because it will keep a theoretical approach which cannot be validated!

But it can be assumed, that in a long term consideration the price formation in foreign trading will follow the exchange rates as it is doing currently. Also if the exchange rates e_x are related to the curve which indicates neutral money (see blue curve in figure 7). In the worst case it will be compensated by the consideration of trading imbalances in the equation for the calculation of the exchange rates e_x.

Figure 8) implementation shock and monetary time beam of a low interest national currency

 Another effect will endanger national economies much more, which will change to low interest currencies. An implementation shock will appear. It is the flight of Money capital and money owners will try to by up all available real assets. It appears in deflationary crisis too, also without the implementation of a low interest currency.

For the implementation of low interest currencies are measures helpful to ease the shock, which are described in the essay “model of a protected currency area for developing countries” ³⁾, like:

• To protect the properties of lower social classes – especially real estates
•  And to introduce a national time account to reduce the gap cause by capital flight

Two effects will oppose to the implementation shock, because the effect of reconciliation increases exchange rate e_x

•       when capital leaves the country
•       and the neutrality of low interest money - the so called bad money.
  It keeps local demand high and will strengthen local business cycles.

To strengthen local barter is the claim of community currencies. But as long as they are only in particular use, as long as they are not the legal tender and will compete with the legal tender, as long they will miss the claim.

It can be assumed that the aspects of reconciliation and the neutrality of low interest money will lead to a fast recovery of economies, which will change to these low interest currencies.

Summary

Our current money is not neutral. It influences the decisions of our daily life strongly. Many people suffer by the success of homo economicus, who is able and willing to destroy the existence of humans and whole nations, if it is beneficial for himself. Means, money is everything but not neutral.

I repeat myself if I predicate that it would be very useful to have a look onto our current monetary system, which is not perfect It can be improved and it should be improved to come closer to a monetary system which works neutral and benefits our life.

Appendix

1. essay with the title “financial crisis explained by the theory of Freigeld“
   available at
   http://www.slideshare.net/SehrGlobal/model-of-a-neutralised-currency-and-exchange-system-for-central-banks
   
   
2. availability of the essay “model of a neutralised currency and exchange system for central banks - part I introduction “ at
   http://www.slideshare.net/SehrGlobal/model-of-a-neutralised-currency-and-exchange-system-for-central-banks
    
3. availability of the essay “model of a protected currency area for developing countries - part II application“ athttp://www.slideshare.net/SehrGlobal/model-of-a-protected-currency-area-for-developing-countries
   
   
4. money supply of the EURO zone - see http://sdw.ecb.europa.eu/browse.do?node=2120793
   
   
5. reference list of figures
   
   
1. figure 1) – equations for superneutralisation – step one – determination of world money supply
   
   
2. figure 2) – equations for superneutralisation – step two and three – fixation of share and determination of exchange rates
   
   
3. figure 3) equations for the superneutralisation of the Euro zone
   
   
4. figure 4) consideration of inner European trading imbalances
   
   
5. figure 5) effect of reconciliation on the monetary time beam
   
   
6. figure 6) the non-neutrality of interest based money
   
   
7. figure 7) effect of money supply on price creation
   
   
8. figure 8) implementation shock and monetary time beam of a low interest national currency

financial crisis explained by the theory of Freigeld

available as PDF file download here

Introduction

The translation of Freigeld is money of freedom. It characterizes the opportunity to improve our monetary system in the sense that the capital has to serve humans, different to the current period, where we might get the feeling that humans have to serve capital. The theory of Freigeld was primary described by Silvio Gesell¹⁾, a German-Argentina salesman and economist. Besides the pathos which prevails in this expression of the early 20^th century it can be seen as a measure to analyze current events at the financial markets from a different perspective.

Different perspectives enrich economic science as it is the nature of this science to explore relations - relations between supply and demand, salesman and purchaser, creditor and debtor, individuals and society. The theory of Freigeld is not a perspective of equilibrium of supply and demand. It is a viewpoint onto the side and behavior of money and not on the side and behavior of the real economy for goods and services. It is a macroeconomic viewpoint of aggregated values and not of particular ownership structures. It includes the aspect of time. These alternative perspectives allow to introduce terms like boundaries of growth, inequality and crisis, which makes it more simple to characterize the processes and dependences of the recent crisis.

The nature and creation of money ²⁾

Money plays an important role in our daily life. It is an accomplishment of the society which renders division of labour feasible and is therewith absolutely essential for modern life.

• It is a mean of payment and makes direct exchange of goods unnecessary.
• It is a medium of exchange and allows for the setting of prices and the comparison of values of different goods
• It is conditionally a store of value and permits to do the exchange later at a more favourable time.

These functions are the benefit of money in a more global or macroeconomic view. Therein comprises the value of money for the society.

In a particular or microeconomic view it is a negotiation between the actors, to accept money as a counter value for goods and services. Someone selling goods or services can be sure to get the possibility to exchange the obtained money back into goods or services of his own needs or wishes. But in this particular view money can also be seen as a claim. The provider or seller offers goods or services to the society and will receive the right to exchange it into goods or services of comparable value from the society. To be a claim includes also commodities like gold or other goods which were traded like money in the early times of money.

The value of money in this particular or microeconomic view is a claim.

Distinct explanation of one item is a typical approach of economical science. For example, to describe the value of money as a commodity or a claim, is a typical economical consideration. Different perspectives or rather different delimitation of the economical system, like particular or global view, lead to different characterizations, not inevitably to contradictions, but inevitably to divergent interpretations, which are all particular accurate. But it means also, that the economical debate would gain more value, if the perspective or delimitation of economical structures would be taken into account more often.

If we consider money as a claim, then we can also consider bank notes as a kind of promissory notes. It is not inevitably necessary that the tangible value of these notes must be equal to the numbers, which are printed onto these notes. Cashless payments are intangible numbers in the computer network of the bank system. And as most amounts of payment in most countries will be done cashless, we could assert that money is almost intangible.

 But we should not deceive ourselves. Money will still be considered as commodity and real asset which is in narrowest woven to reality by the function to be a claim. It crucially influences nearly all decisions of our life at all levels.

If money is narrow, it must be borrowed at the bank. The modern system of banks and central banks coordinate supply and demand of money, by keeping savings in circulation and regulating the demand for new money through loans.

Banks are able to create new money by fractional reserve banking if the need for money is higher then the lendable savings.

Figure 1 – fractional reserve banking;

The finitely growth of money if reserve level is constant

Parts of the savings must be kept as reserves, while the other parts can be lend. The lend money flows back into the bank system and increases the primary amount of savings. This is a very short description of an abstract macro economically model of money creation. It is something, which cannot be recognized as fractional reserve banking in the continually and particular transactions between banks and central banks. If the primary reserves would be kept constant, the growth of money would lead to a limited increase.

The relation between reserves and savings is the leverage. The higher the legal reserves the lower the leverage the smaller the clearance for credits and money creation.

From a micro economic view or rather a view of private sector debts disappear when the last rate is paid. From a macro economic view or rather to recognize money as a scheme the process of borrow and lend keeps money in circulation. It is a scene without beginning and end. Debts will never disappear. They are an inevitable component of our monetary scheme.

But money creation is not a circuit cycle it is a growing helix ³⁾

Figure 2 – the helix of monetary growth

Looking again from the macroeconomic or aggregated perspective means that not only the lend money also interest rates must be paid back. This increase of money stock will be accomplished by fractional reserve banking. It is also an abstract model of something which cannot be perceived in the daily business of transactions.

Caused by the backflow of interest rates, the demand of money is always higher than the available and lendable savings. The accredited economic science describes this with the tenet that money is always a narrow good. It leads to the so called helix of monetary growth.

monetary time beam and criticism of interest

Unwinding the helix of monetary growth leads to the monetary time beam. It is an important model of explanation in the theory of “Freigeld”.

Figure 3 – monetary time beam

Money supply grows exponential in an interest based monetary system due to compound interest. In times of non crisis most of the capital will be lend so that the total debts will grow equivalent to the money assets and as well exponential way as a mirror image.

The side of debts or liabilities will be also called side of productivity, because debtors must be productive to be able to acquit their debts. After all, this coercion to refund these incurred liabilities is the intrinsic nature of money. The surplus or backflow of interest, seen aggregated in the helix of money growth leads to a continuous demand for new money and continual increase of money supply.

It also leads to a permanent growth of gross domestic product, which can be drawn in the monetary time beam on the side of assets. Irrespective of drawing the nominal or real GDP emphasizes the different shape between GDP and money supply and shows that there is no straight correlation between these two curves, especially if the bigger part of the GDP of an economy is based on production of real goods and services and not on financial transactions. But must it show this correlation, if we consider the model of a closed economy? How to link the world of money with the real economy of goods and services is still an enduring contention in economic science. But two aspects are probably certain.

It is self-evident that money is linked with tangible goods and services trough the price. It is the function of money to be a unit of account. Whereas the accruement of pricing is very well developed as the central object of the model of equilibrium in economic science.

The second aspect of connecting money with the real economy is that money assets will be backed by receivables and collaterals and the continual demand of debtors for new money keeps money always narrow, which corresponds with the economic theorem that money is always a narrow good. It keeps money in circulation and ensures the value of money.

As already mentioned, economy is a system of perspectives. If the request consists of a sustainable and long term monetary system and not of the necessity to earn a maximum of return of invested capital, then some critical points in an interest based system become obvious.

The critical point is not that the system grows in an exponential way. If money is neutral, not only money and prices, also income grows in equal manner. Purchasing power and the distribution of welfare would keep constant for everybody. The possible consequence of increasing prices would mean, that it would also lead to increasing numbers and in time the decimals would have to be shifted to follow a currency reform. 

The critical points are caused by interest compound and described by interest criticism respectively theory of “Freigeld” which list three main items.

·         mass gravity behaviour of interest based money.

Interest compound is the most powerful means to collect money. It is self-evident, the more a creditor will lend the higher the return will be.

Figure 4 – growth of accounts with different level of starting accounts

Financial investors will have millions or billions at one disposal. The little saver will receive much less money for savings at probably lower interest rates and in contrast to the big money holder he will be forced to consume parts or the complete returns and savings. Usually the little saver will not be able to keep his savings long enough to become a rich money holder.

Economy is a system of antagonism, meaning that the investments or savings need the counterpart of debtors. As the savings increase also the debts will increase. Subsequently not only the savings of little savers will not grow also the debts distribute themselves into the society and grow like the big investments. It is an automatism caused by the mathematical legality of interest compound.

Figure 5 – time dependent movement of money capital caused by interest compound

Without counter measures it leads inevitably to strong inequality of wealth. European history is a succession of wars, civil wars and revolutions. Investigation of causes for these outbreaks of violence would always lead to causal chains where at the beginning can be found receivables, liabilities, someone who want to have or doesn’t want to repay something or will be excluded from wealth or even from the means to survive will be found.

It is self-evident that a concentration of money capital will subsequently lead to an accelerated concentration of productive capital. Business cycles shift more and more from local to global dimensions and local business cycles will be eliminated. These changes can be observed very well in current time. From a perspective of entrepreneurs is the concentration of productive equipment is driven by cost reduction based on automation. The increase of productivity based on technological progress replaces handwork, which leads to an oversupply of manpower. This oversupply brings down the income of workers and makes workers increasingly unnecessary. Nobody wants to miss the technical progress but social progress cannot follow in the way that unemployment is an increasing phenomenon of modern times and global dimensions. Unemployment or low incomes exclude from wealth and can be seen as a modern form of exploitation, which likewise accelerates the concentration of wealth. 

·         Coercion of growth

As already mentioned and seen from a perspective of aggregates, the demand for credits respectively new money is always higher then the available and lendable savings. This leads to a never ending demand for new credits and a never ending growth of the monetary helix. The debtors must be productive to get earnings to redeem the receivables. This transmits the coercion of growth to the tangible real economy. If money is neutral it changes only the prices but not the productivity. Productivity remains on a constant level. But if money is not neutral productivity must increase.

Rich money owners must spend only a small part of their money for consumption. Parts of the money remain in the speculative space. Speculative space means the trading of proprietary rights with less to no impact onto the demand of tangible goods and services. In the times of the theory of “Freigeld” it was called “hoarding of money”. This speculative money is not disposable for demand in the real economy and narrows the possibility of earnings for the side of debtors. Debtors must increase their efforts to redeem the receivables. If debtors don’t want get insolvent they are coerced to increase their supply, because a decline of demand leads inevitably to insolvencies. It corresponds with the experience of companies, if they don’t grow in a long term view, they can’t survive. As more money flees in the speculative space as less is money neutral. The less money is neutral as more necessary becomes the growth of economy.

·         Coercion of capitalization  

To earn profit now is better than to get the same profit in the future, because in the meantime the earned money will generate additional profit through interests. This leads to a rather short term thinking and trading, as we can observe it obviously on the behaviour of financial markets. The focus shifts from the utility of real goods and services rather to the extent of accounts. Thereby it strongly influences economical and subsequently also political decisions and assist the coercion to growth in the way to accelerate all kind of business and transactions.

From the viewpoint of a peaceful respectively sustainable society interest is a strong burden. From the viewpoint of return on investments it is a sainthood or sanctuary. It is almost impossible to question interest, because interest possesses absolute compliance in most societies. On the other hand it would be a missed opportunity to bypass thoughts on the issue of interest. One method of resolution the effect of reconciliation which will be given in the interaction of the FOREX and a protected and neutralised currency area, described in the essay model of a neutralised currency and exchange system for central banks¹⁾ can be seen. It allows a transaction between interest based and interest free national currencies, as it would be especially helpful for heavily indebted poor countries.

The nature of financial crisis

We can assume that problems can occur on the right end of the monetary time beam as we have seen in the recent financial crisis. The continuous growth will lead inevitably to boundaries. Boundaries in the financial system are reached, if debtors can’t follow any longer the claims of the creditors.

If the system would aspire to avoid crises, we would have a self-regulating monetary system which always gets into equilibrium between supply and demand, means the interest rate should move towards zero if we reach boundaries of growth. It would be the shift into a monetary system of “Freigeld”. However the shift of aggregated interest rates to zero for non banks cannot be observed in real life!

The targets of the financial markets are not to reach always equilibrium between supply and demand. The targets are to get the maximum of return on investment. It is the philosophy of the market, the philosophy of the so called “homo economicus”. These two elements, equilibrium of supply and demand and the maximum return on investment are not contradistinctions but they are also no complements on another.

Corporations of the private sector which are only active in the financial markets, not producing goods or services but only trading money and non tangible assets doing at last nothing else than lend and borrow money. The returns will be created by the spread between the interest rates of the borrowed and the lent capital. As these companies manage most parts of world money, as also referring to the monetary helix of growth, they do nothing else than creating new money and debts. Maybe they do it unconsciously, but the trading processes of the recent financial crisis and current Euro crisis show that the financial markets are very creative in finding ever and again new ways to use the means of leveraging for money creation out of public control, strongly supported by the possibilities of off-shore financial places. Spoken in a more abstract sense, they constrain the shift of the boundaries of growth to higher values and increase thus the pressure onto the aggregated side of debtors. We had to learn that the financial markets use their capital in order to dominate public and political opinions and thus they will be enabled to influence decisions of the society strongly. But at last reality of boundaries cannot be outfoxed.

 

The economy of money is only indirectly connected with the tangible economy by prices and credits. Thus the demand for money might grow differently to the demand for goods and services. The philosophy of homo economicus, the perspective of individuals to invest in the best returns is rational and social consensus. But both aspects together override the effect or theory that economy always aspires equilibrium. Accordingly the growth of money stock will be determined by the coercion to refund the debts including the surplus of interest, but trade in the real economy is determined by supply and demand. It does not allow for a direct correlation between the demands of money and tangible economy.

Productivity on debtors side respectively the coercion to earn money in a saturated economy is mainly determined by demand and available purchasing power. Money in real business is more likely to run short, since it always is a narrow good. Indeed there is money enough on the market, but it is unequally distributed. It cannot find its way to the demand in real economy, because it remains in the speculative space of financial markets as a result of its concentration. On the contrary, in a long term consideration this concentration leads to a movement of the boundaries to lower levels. Boundaries will be reached, if debtors can’t follow the claims of the creditors any longer. To exceed boundaries means to have a strong increase of insolvencies on the aggregated side of debtor. Accommodation of loans might come to a halt. Subsequently it further narrows money supply and will aggravate the pressure onto the aggregated side of debtor. A downhill helix of insolvencies arises. Bottom is reached if most of the insolvencies are transacted. Part of the debtors must move into poverty. These are lost as supporters of economical demand which subsequently leads to this shift of boundaries to lower levels. We call this a crisis.

Figure 6 – effect of deflationary crisis onto the curves of the monetary time beam

Gross domestic product decreases and money supply comes to a halt, because creditors fear to lose their investments. This should be visible on the monetary time beam as a movement into a horizontal line on the side of assets. It might lead to violence, if these events threaten the existence of a large proportion of society. Many wars, civil wars and revolutions in world history testify that this happens again and again. But in contrary to former times, due to modern weapons, we have the capability to redevelop back into a civilisation of stone ages. Thus it should be advised to take care of our monetary system in a more human sense.

Figure 7 – money supply M3 of currency US Dollar from 1900 to 2006

Figure 7 shows money supply of aggregate M3 of the US Dollar. The drawn line shows the real money supply of the US Dollar. The dotted line shows a hypothetic exponential curve with 7% growth per year. It is astonishing how the growth of US-Dollar corresponds to the exponential curve. This line is interrupted by horizontal steps in times of crisis, like great depression 1929 followed by world war 2, US Recession of 1990/91 and Dot Com crisis in 2000. The record stops in March 2006, so we have to switch onto the EURO

Figure 8 – money supply of currency EURO from 1998 to 2010

Figure 8 shows the money supply of aggregate M3 of the Euro currency. Again the drawn line shows the recorded money supply and the dotted line a hypothetic exponential curve with 7% growth per year. Also the currency Euro grows equally to an exponential curve and becomes a horizontal line as the recent crisis in 2008 started.

Both figures shows, that money supply growths astonishingly like an exponential curve, meaning the growth is strongly forced by something like an aggregated interest rate. This aggregated interest rate respectively return on investment, is somewhere around 7% per year for developed and saturated countries like USA and countries of Western Europe. It seems to be the maximum gain which can be taken out of developed economies without causing a quick breakdown of these economies. But the horizontal steps in these curves confirm that this monetary system is not fully stable and might lead to bigger events on the right side of the monetary time beam. At times of deflationary crisis the curve of money supply shifts into a horizontal line, which means that the growth of money supply stagnates. This is comprehensive because creditors stop to lend money as a result of unsafe times. If creditors don’t lend money, they can’t earn money by interest and the growth of money supply must shift close to zero. Contrary to the statement of many orthodox economists, low interest rates do not inevitably lead to a higher demand of money respectively growth of money supply. It seems to be that this tenet is not applicable during deflationary crisis like the last one.

Definition of deflation as above described means that the growth of money supply does not benefit purchasing power of a large proportion of society as a result of capital concentration. The more people must move into poverty the more purchasing power decreases. Decreasing purchasing power also means decreasing demand and decreasing demands leads to decreasing prices. We can assume deflationary tendencies in a long term consideration, if inflation of prices increases slower than money supply grows.

In an economy with an interest based legal tender the optimum of stability is achieved, if inflation grows equal to money supply. In this case it can be assumed that money will become neutral.

Hyperinflation occurs if money creation is bypassed by credit creation on a much higher level of growth as it take place by common credit creation in the private sector of the considered economy. For example if central banks start to directly finance new public indebtedness on a level which is continually much higher than the growth of money supply.

Unique is the superneutralised currency and exchange system of ANNA which is free of inflation and deflation⁴⁾.

Aggregated total debts as the reflection of money supply

Total debts consist of public debts and debts of the private sector. The private sector is distinguished in debts of enterprises and debts of private persons. All money with interest must be lent to get returns. The return must be paid back by the debtors, which have to work for it, described with the idiom “money must work”. Thus the growth of money supply and the growth of debts are directly connected. As money supply grows in an exponential shape also the aggregate of total debts must follow inevitably this growth and shape.

In this context, public debts have an exceptional position. Since centuries it is common practice that maturing liabilities will be replaced through new indebtedness. This leads to a visible exponential growth of public debts. This is contrary to debts of the private sector where the debts of individuals accrue and disappear. It deceives, because the aggregated debts of the private sector grow also like public debts.

The current mainstream paradoxically discusses only public debts. Theoretically it is possible to separate public debts from the total debts in order to reduce particular public debts. But if society wants to have a growth of capital assets and growth of money supply is unsolvably connected with the growth of debts, parts of the public debts must be taken over by private sector.

In an interest based monetary system we don’t have the choice to reduce the aggregate of total debt, but we have the choice between public sector and private sector to generate the debts. Depending on the grade of public evolution, rather for a highly sophisticated and democratically controlled administration than for a corrupt administration of undemocratic character, the public sector will try to return all revenues of taxes and indebtedness into public services which support the efforts to keep the social classes in equilibrium of prosperity.

From the perspective of a highly sophisticated public administration indebtedness is in the sphere of an interest based monetary system an important part of public revenues. A reduction of public debts leads to a reduction of public services. Consequently two options are given, to renounce on parts of the public services or private sector must take these parts over. But certainly the private sector will only take over in cases of profitability. Thus unprofitable services must be done by voluntary work and charity as it is common for informal or non profit oriented economical systems. For example non profit oriented behaviour ensures survival of large parts of population in strongly underdeveloped economies. Underdeveloped economies can also be seen as an equivalent for underdeveloped public administrations.   

The financial markets are keen on the profits which can be generated as a result of the shift from public to private debts, but public should be aware that these debts must also be refunded if they shift to structures of private ownership. This refunding happens through payment of the particular use of now private services.

One advantage of refinancing public mutual liabilities by new indebtedness on the financial markets is that these are investments of money holders into their own returns. Advantages for the investors are that they spend their money in save bonds. Thus they invest directly and will use indirectly the benefits of a functional respectively better public infrastructure. Advantage for the public is beneath the better public infrastructure that parts of the speculative money move temporarily back into the circulation of the real economy.

It is neutral in costs for the public, if growth of new indebtedness is equal or higher than the aggregated interest rates for the payable public debts. Contrary to this, if public debts will be reduced it is a shift of debts into the private sector which after all must also be paid back, only the distribution of payments is different and probably more inequitable.  

If the refinancing of new indebtedness includes besides the aggregated interest rates of the payable public debts also the inflation rates then the public revenues are neutral for money circulation. The growth of new public indebtedness will be close or equal to the growth of money supply. A temporary increase of new public indebtedness above the increase of money supply should be possible without dangers for the stability of the value of money, but a continuous increase of indebtedness would inevitably lead to hyperinflation.

Figure 9 - public debts of Germany from 1968 to 2010.

The German words for debt and to be guilty are very close in their meaning. Germany had very bad experience with the hyperinflation 1924, as well as with the great depression 1929, whereas the public meaning does not distinguish sharply between the two events and their causes. Sometimes this period will be considered as a time of hyperinflation. Thus inflation is strongly feared. Preferably the causes of inflation will be explained as an unthrifty receiving of public debts. So it is common for nearly all German politicians also from the very start after world war 2 to promise the reduction of public indebtedness. Thus it is improbable that the German public and government tend to accept irresponsible issuance of treasury bonds. From this perspective and considering the growth of German public debts form the very start of the records in picture 9 all German governments would have been failed. But if we also consider the dotted line which is a hypothetical curve of 7% growth with a step in the period of reunion and assuming that it complies with the average growth of money supply at this period, German public debts grew correctly along the neutral line where the debts and money supply grows comparable. Accordingly the costs for debts were neutral and the revenues constant.

German parliament has put a law (Artikel 109, Absatz 3, Grundgesetz) into the basic constitution, called debt retardant which in sense is a commitment to reduce new indebtedness to zero. It can be doubted that Germany will fulfil this commitment without causing big trouble in German economy and society.

Figure 10 - zero new public debts, curve of public debts shift into horizontal line

In figure 10 is shown what would happen if German government abandon neutral debt curve in accordance to the “debt brake”. As already described a gap arises on the side of debts on the monetary time beam, which must be closed by privatization. We can assume as an experience of the last financial crisis that in a long term consideration the private sector is not able to keep equilibrium of payment stable between creditors and debtors. The public sector must support the private sector to avoid a chain reaction of insolvencies. Furthermore the public sector must substitute the dwindling demand of private sector and interbank transactions. For this private money is needed which subsequently leads to new indebtedness. It derives two possibilities. Either the public sector can try to keep the neutral debt line with the results of high indebtedness or it can try to avoid new public indebtedness on the expense of losing parts of public welfare at least on the same level of indebtedness.

The cause of declining business activities in private sector can be seen in a decline of money circulation as a result of declining trust in market solvency. It interrupts the continuity of lend and borrow money which is the foundation of market solvency.

Figure 11 – anticyclical support of business activities

The anticyclical support of business activities by public administration in the way to increase public demand and to provide money for interbank transactions can be seen as an initiation trial to reanimate the circulation of money respectively credits in a deflationary crisis. In an environment of deregulated not indomitable financial markets it seems the only supporting measure which can help to keep the system fairly stable. If reanimation of financial transactions fail it leads to deletion of parts of economical and social order. Usually this is marked as an outstanding historical event.

Conclusion

The future always allows all opportunities and will be more than ever before affected by human behaviour. Outstanding historical events might be insurrections, revolutions, civil wars, wars or even a next world war. Modern technologies lead to new weapons which endanger human society in a more global scale.

Figure 12 – usual events on the right end of the monetary time beam

Thus it is obviously that it would be extremely lucrative for all to spend some thoughts onto the consideration of our current monetary system and to reconsider the interrelation between each other in a way to reduce the behaviour of self interest and competition and instead consider the others even more as partners and friends.

It is lucrative for all to enhance efforts to refine our current monetary system in a sense to serve human life, to domesticate capitalism. 

One approach to reach this target is the idea of a neutralised currency and exchange system, a superneutralised global reference currency ANNA⁴⁾ surrounded by complementary currencies of different tasks⁵⁾. This design would lead to the effect of reconciliation which balances discrepancies in monetary transactions and prosperity between currency areas. One further advantage of this approach is that it can be implemented parallel to the current FOREX. It allows the implementation of a preliminary currency area in a small scale to develop this deductive approach in advance through experience without disturbing the big business⁵⁾. It succeeds if this currency area based on this superneutralised global reference currency ANNA grows.

Nevertheless, the stabilisation of our monetary system in a more human sense does not solve all problems, but it is an important foundation that we can domesticate capitalism, to lead world society to a new substantial progress. 

Appendix

version 17. march 2012

Download this essay: https://de.slideshare.net/SehrGlobal/financial-crisis-explained-by-the-fheory-of-freigeld

1. Silvio Gesell (*1862 +1930): Die Natürliche Wirtschaftsordnung durch Freiland und Freigeld, (published by Gauke, Kiel SBN: 978-3-87998-421-3) http://userpage.fu-berlin.de/~roehrigw/gesell/nwo/
   Werner Onken: Silvio Gesell und die Natürliche Wirtschaftsordnung. Eine Einführung in Leben und Werk, ISBN 3-87998-439-5
   Margrit Kennedy: Interest and Inflation Free Money
   (Published by Seva International; ISBN 0-9643025-0-0;) or
   http://userpage.fu-berlin.de/~roehrigw/kennedy/english/chap1.htm
   
   
2. Geoffrey Ingham: The Nature of Money
   (published by Polity Press, Cambridge; ISBN 0-7456-0996-1)
   
   
3. Hans Christoph Binswanger. Die Wachstumsspirale
   (published by Metropolis-Verlag; ISBN 978-3-89518-783-4)
   
   
4. goto: model of a neutralised currency and exchange system for central banks – essay part I introduction
   
   
5. goto: model of a protected currency area for developing countries – essay part II application
   
   
6. reference list of figures
   
   
1. Figure 2 – the helix of monetary growth
   (published by Arbeitsgruppe gerechte Wirtschaftsordnung /AG_GWO)
   http://ag-gwo.de
   
2. Figure 7 – money supply M3 of currency US Dollar from 1900 to 2006
   datas of money supply M3 via http://www.nowandfutures.com/articles/20060426M3b,_repos_&_Fed_watching.html onto source http://research.stlouisfed.org/fred2/series/WM2NS/
   
3. Figure 8 – money supply of currency EURO from 1998 to 2010
   data of money supply on source: http://sdw.ecb.europa.eu/browse.do?node=2120793
   
4. Figure 9 - public debts of Germany from 1968 to 2010
   background picture respectively curve of public debt data for Germany: www.Staatsverschuldung.de.

7. list of own created figures

1. figure 1 - fractional reserve banking; The finitely growth of money if reserve level is constant
2. Figure 3 – monetary time beam
   
3. Figure 4 – growth of accounts with different level of starting accounts
   
4. Figure 5 – time dependent movement of money capital caused by interest compound
5. Figure 6 – effect of deflationary crisis onto the curves of the monetary time beam
   
6. Figure 10 - zero new public debts, curve of public debts shift into horizontal line
7. Figure 11 – anticyclical support of business activities
8. Figure 12 – usual events on the right end of the monetary time beam

Acknowledgment

Many thanks for proofreading to Julia