Sacred Economics: Chapter 12, Negative-Interest Economics

The following chapter is from Sacred Economics: Money, Gift, and Society in the Age of Transition, available from EVOLVER EDITIONS/North Atlantic Books. Return to the Sacred Economics content page here.

Debt can endure forever; wealth cannot, because its physical dimension is subject to the destructive force of entropy.   —Frederick Soddy

Suppose I have twelve loaves of bread, and you are hungry. I cannot eat so much bread before it goes stale, so I am happy to lend some of it to you. “Here, take these six loaves,” I say, “and when you have bread in the future, you can give me six loaves back again.” I give you six fresh loaves now, and you give me six fresh loaves sometime in the future.

In a world where the things we need and use go bad, sharing comes naturally. The hoarder ends up sitting alone atop a pile of stale bread, rusty tools, and spoiled fruit, and no one wants to help him, for he has helped no one. Money today, however, is not like bread, fruit, or indeed any natural object. It is the lone exception to nature’s law of return, the law of life, death, and rebirth, which says that all things ultimately return to their source. Money does not decay over time, but in its abstraction from physicality, it remains changeless or even grows with time, exponentially, thanks to the power of interest.

We associate money very closely with self. As the word “mine” implies, we see our money almost as an extension of our selves, which is why we feel “ripped off” when it is taken from us. Money, then, violates not only the natural law of return, but the spiritual law of impermanence. Associating something that persists and grows over time with a self that ages, dies, and returns to the soil perpetuates an illusion. Though we all know better, we imagine somehow that by adding wealth we add to ourselves and can gain the imperishability of money. We store it up for old age, as if we could thereby forestall our own decay. What would be the effect of money that, like all other things, decays and returns to its source?

We have attached an exponentially growing money to a self and world that are neither exponential nor even linear, but cyclic. The result, as I have described, is competition, scarcity, and the concentration of wealth. The answer to the question I posed earlier, “What has gone wrong with this beautiful idea called money, which can connect human gifts and human needs?” comes down in large part to interest, to usury. But usury itself is not some isolated phenomenon that could have been different if only we’d made a wiser choice somewhere down the line. It is irrefrangibly bound to our sense of self, the separate self in an objective universe, whose evolution parallels the evolution of money. It is no accident that the first highly monetized society, ancient Greece, was also the birthplace of the modern concept of the individual.

This deep link between money and being is good news because human identity today is undergoing a profound metamorphosis. What kind of money will be consistent with the new self, the connected self, and a world in which we increasingly realize the truth of interconnectedness: that more for you is more for me? Given the determining role of interest, the first alternative currency system to consider is one that structurally eliminates it, or even that bears interest’s opposite. After all, if interest causes competition, scarcity, and polarization, then might not its opposite create cooperation, abundance, and community? And if interest represents the proceeds from the ancient and ongoing robbery of the commons, might not its opposite replenish it?

What would that opposite look like? It would be a money that, like bread, becomes less valuable over time. It would be money, in other words, that decays—money that is subject to a negative interest rate, also known as a demurrage charge. (1)  Decaying currency is one of the central ideas of this book, but before I lay out its history, application, economic theory, and consequences, I would like to say a bit about the term “decay,” which I have been advised to avoid due to its negative connotations.

Why does “decay” seem negative, and “preservation” a virtue? This attitude arises again from the story of Ascent, in which humanity’s destiny is to transcend nature; to triumph over entropy, chaos, and decay; and to establish an ordered realm: scientific, rational, clean, controlled. Complementary to it is a spirituality of separation, in which a nonmaterial, eternal, deathless, divine soul inhabits an impermanent, mortal, profane body. So we have sought to conquer the body, conquer the world, and arrest the processes of decay. Unfortunately, by so doing we also arrest the larger process of which decay is part: renewal, rebirth, recycling, and the spiraling evolution toward more vastly integrated complexity. Thankfully, the stories of Separation and Ascent are drawing to a close. It is time to reclaim the beauty and necessity of decay, both in our thinking and in our economics.

History and Background

Early forms of commodity-money, such as grain, cattle, and the like were certainly subject to decay: grain spoils, cattle age and die, and even farmland reverts to wilderness if left untended. There have also been metallic money systems that approximated the phenomenon of decay by incorporating a kind of built-in negative interest rate. A crude example of such a system was in wide use in the Middle Ages in Europe’s Brakteaten system, in which coins were periodically recalled and then reminted at a discount rate. (2) In England, Saxon kings recoined silver pennies every six years, issuing three for every four taken in, for a depreciation rate of about 4 percent per year. (3) This effectively imposed a penalty on the hoarding of money, encouraging instead its circulation and investment in productive capital. If you had more money than you could use, you would be happy to lend it, even at zero interest, because your coins would decrease in value if you held them too long. Note that the money supply didn’t necessarily shrink as a result of this system, since the lord would presumably inject the difference back into the economy to cover his own expenses. This negative interest on money was thus a kind of a tax.

The pioneering theoretician of negative-interest money was the German-Argentinean businessman Silvio Gesell, who called it “free-money” (Freigeld), a name that I will adopt in his honor. The system he proposed in his 1906 masterwork, The Natural Economic Order, was to use paper currency to which a stamp costing a small fraction of the note’s value had to be affixed periodically. This effectively attached a maintenance cost to monetary wealth. Like any physical commodity, such money “goes bad” (at a rate determined by the value of the stamps required to keep the currency valid). For example, if a dollar bill required a one-cent stamp every month to stay valid, it would depreciate at an annual rate of 12 percent. (4)

Gesell arrived at the idea of demurrage-charged currency from a different direction than I have. He was writing in an era when almost no one questioned the desirability of economic growth, and visionary though he was, Gesell never doubted (as far as I know) the capacity of the earth or technology to accommodate it forever. (5) His primary concern was to remedy the inequitable and unjust distribution of wealth in his time, the unprecedented poverty amidst unprecedented abundance. This he attributed to a huge unfair advantage held by the possessors of money: they possess a “hoardable commodity that is at the same time the money medium.” Other commodities (except possibly land) are not hoardable in the same way that gold or other currency is: they rot, rust, or decay; are subject to theft or obsolescence; incur storage and transport costs; and so on. He wrote,

Gold does not harmonize with the character of our goods. Gold and straw, gold and petrol, gold and guano, gold and bricks, gold and iron, gold and hides! Only a wild fancy, a monstrous hallucination, only the doctrine of “value” can bridge the gulf. Commodities in general, straw, petrol, guano and the rest can be safely exchanged only when everyone is indifferent as to whether he possesses money or goods, and that is possible only if money is afflicted with all the defects inherent in our products. That is obvious. Our goods rot, decay, break, rust, so only if money has equally disagreeable, loss-involving properties can it effect exchange rapidly, securely and cheaply. For such money can never, on any account, be preferred by anyone to goods.

Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron, and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money. (6)

But today, as in Gesell’s time, money is preferred to goods. The ability to withhold the medium of exchange allows money holders to charge interest; they occupy a privileged position compared to holders of real capital (and even more so to those who sell their time, 100 percent of which disappears each day it goes unsold). The result is an increasing polarization of wealth because everyone essentially pays a tribute to the owners of money.

A corollary to Gesell’s point is that it is unfair for us to pay simply for the means to make exchanges. Gesell believed that the simple desire to make an exchange should be enough. If I have something to offer that you need, why should we have to pay for the means to give and receive it? Why should you have to pay for the privilege of receiving a gift? This is one of the ways in which Gesell’s money deserves the moniker “free.” As we shall see, a credit system based on depreciating currency allows zero-interest loans. While we must still repay loans, no longer must we pay for them. In that sense, money becomes free.

Gesell advocated currency decay as a device for decoupling money as a store-of-value from money as a medium of exchange. Money would no longer be preferred to physical capital. The result, he foresaw, would be an end to the artificial scarcity and economic depression that happens when there are plenty of goods to be exchanged but a lack of money by which to exchange them. His proposal would force money to circulate. No longer would the owners of money have an incentive to withhold it from the economy, waiting for scarcity to build up to the point where returns on real capital exceed the rate of interest. This is the second reason for calling it “free-money”: freed from the control of the wealthy, money would circulate freely instead of coagulating in vast, stagnant pools as it does today.

Gesell saw the interest-bearing property of money as a brake on prosperity. As soon as goods become so abundant that returns on capital investment go lower than the minimum rate of interest, the owners of money withhold it from investment. The money to perform transactions disappears from circulation, and the familiar crisis of overcapacity looms, with its paradoxical accompaniment of scarcity of goods for the vast majority of people.

The money system in 1906 was quite different from that of today. Most currencies were still, at least in theory, backed by precious metals, and there was nothing like the vast expansion of credit over the monetary base that we have today. Indeed, Gesell viewed credit as a substitute for money, a way for businesses to conduct transactions in the absence of currency. But today credit and money are nearly identical. Current economic theory sees the use of credit as money as a positive development, in part because it allows the money supply to expand or contract organically in response to the demand for a medium of exchange. However, as we have seen, interest-bearing credit not only responds to, but also compels, the growth of the money economy. Moreover, in its present form it is no less subject to scarcity than was money in Gesell’s time.

Although virtually unknown through the second half of the twentieth century, Gesell’s ideas enjoyed a wide following in the 1920s and 1930s and came to influence prominent economists such as Irving Fisher and John Maynard Keynes. Fisher promoted Gesell’s ideas vigorously in the United States, and Keynes offered uncharacteristic praise, calling him an “unduly neglected prophet” and his work “profoundly original.” (7)  In the turmoil following World War I, Gesell was even appointed Minister of Finance of the ill-fated Bavarian Republic, which lasted less than a year. In the 1920s, a stamp scrip currency—the wara—issued by a friend of Gesell’s, circulated in Germany, but there as elsewhere it took an economic depression to launch it in earnest. Whether in collective life or personal, real change rarely comes in the absence of crisis.

In 1931, a German coal mine operator decided to open his closed mine by paying his workers in wara. Because he also agreed to redeem the scrip for coal, which everyone could use, local merchants and wholesalers were persuaded to accept it. The mining town flourished, and within the year at least a thousand stores across Germany were accepting wara, and banks began accepting wara-denominated deposits. (8) This put the currency on the radar screen. Feeling threatened, the German government tried to have the wara declared illegal by the courts; when that failed, it simply banned it by emergency decree. (9)

The following year, the depressed town of Wörgl, Austria, issued its own stamp scrip inspired by Gesell and the success of the wara. The Wörgl currency was by all accounts a huge success.(10) Roads were paved, bridges built, and back taxes were paid. The unemployment rate plummeted and the economy thrived, attracting the attention of nearby towns. Mayors and officials from all over the world began to visit Wörgl until, as in Germany, the central government abolished the Wörgl currency and the town slipped back into depression.

Both the wara and the Wörgl currency bore a demurrage rate of 1 percent per month. Contemporary accounts attributed to this the very rapid velocity of the currencies’ circulation. Instead of generating interest and growing, accumulation of wealth became a burden, much like possessions are a burden to the nomadic hunter-gatherer. As theorized by Gesell, money afflicted with loss-inducing properties ceased to be preferred over any other commodity as a store of value. It is impossible to prove, however, that the rejuvenating effects of these currencies came from demurrage and not from the increase in the money supply, or from the economically localizing effect of a local currency such as the Wörgl.

Another currency that emerged around this time, and that is still in use today, was the WIR in Switzerland. The currency is issued by a cooperative bank and is backed only by the mutual agreement of its members to accept it for payment. Founded by adherents of Gesell’s theories, the currency originally bore a demurrage charge that was eliminated during the high-growth period after World War II. (11) As I shall explain, negative interest is unnecessary in a very high-growth environment; today, as we approach a steady-state economy and enter a new phase of development, it may be attractive once more.

In the United States many “emergency currencies,” as they were called, were issued in the early 1930s. With the national currency evaporating through an epidemic of bank failures, citizens and local governments created their own. The results were mixed, and very few of them incorporated Gesell’s design, but rather imposed a fee per transaction rather than per week or per month. (12) This has the opposite effect of demurrage because it penalizes circulation rather than hoarding. However, in 1933 at least a hundred cities were preparing to launch stamped currencies of their own, many of the correct, Gesellian, type.(13) Moreover, with the backing of Irving Fisher, a bill was introduced in both the House of Representatives and the Senate that would have issued one billion dollars of stamp scrip nationally. This and many of the proposed state and local currencies would have had a much, much higher demurrage rate—2 percent per week—that essentially would have made the currency self-liquidating in one year. This is an entirely different animal from the Wörgl currency and most modern proposals, but it shows that the basic concept was being seriously considered. Here is an excerpt from the Bankhead-Pettengill amendment to the Costigan-LaFollette unemployment relief bill (S. 5125) of 1933:

The Secretary of the Treasury shall cause to be engraved and printed currency of the United States in the form of stamped money certificates. Said certificates shall be in the denomination of $1 each, and the issue shall be limited to $1,000,000,000. Said certificates shall be of a suitable size to provide space on the backs thereof for affixing postage stamps.… The face of said certificates shall set forth substantially the following: “This certificate is legal tender for $1 for payment of all debts and dues, public and private, customs, duties, and taxes: Provided, That on the date of its transfer there shall be affixed 2-cent postage stamps for all dates prior to such date of transfer, as set forth in the schedule on the back hereof.”

Senate Bill 5125 never came to a vote, and a month later Roosevelt banned all “emergency currencies” by executive decree when he launched the New Deal. According to Bernard Lietaer, the reason he did this was not because the local and state currencies wouldn’t be effective in ending the Depression, but because it would mean a loss of central government power. (14)

Today we are at the brink of a similar crisis and face a similar choice between temporarily shoring up the old world through an intensification of centralized control or letting go of control and stepping into the new. Make no mistake: the consequences of a free-money system would be profound, encompassing economic, social, psychological, and spiritual dimensions. Money is so fundamental, so defining of our civilization, that it would be naive to hope for any authentic civilizational shift that did not involve a fundamental shift in money as well.

Modern Application and Theory

The idea behind free-money, so popular in the early twentieth century, has lain dormant for sixty years. It is resurgent now, as the economic crisis demolishes the sureties of the past half-century and calls forth the thinking that came out of the Great Depression. Part of this is a Keynesian revival, since the monetarist prescription of lowering interest rates and purchasing government securities to stimulate the economy has hit a limit—the “zero bound” beyond which central banks cannot lower interest rates. The standard Keynesian response (based, however, on a partial reading of Keynes) is fiscal stimulus—the replacement of flagging consumer spending with government spending. President Barack Obama’s first economic stimulus was a Keynesian measure, although probably insufficiently vigorous even within that paradigm.

The zero bound problem has gotten some mainstream people thinking about negative interest rates: my research for this chapter uncovered a paper by a Federal Reserve economist (15),  a New York Times article by a Harvard economics professor (16),  and an article in The Economist magazine. (17) When Keynesian stimulus fails (ultimately, for the reason of the depletion of the commons, as I’ve discussed), the far more radical solution of decaying currency may be on the radar screen. Presently, the economy is in mild recovery, and the delusional hope of a return to normal still possible to maintain. But because of the near-depletion of the various forms of common capital, the recovery will probably be anemic, and “normal” will recede into the distance.

The first obvious failure of Keynesian stimulus came in Japan, where massive infrastructure spending starting in the 1990s failed to reignite economic growth there. There is little room in any highly developed economy for further domestic growth. The solution for at least twenty years has been, in effect, to import growth from developing countries by using the monetization of their social and natural commons to prop up our own debt pyramid. This can take several forms: debt slavery, where a nation is forced to convert from subsistence production and self-sufficiency to commodity production to make payments on foreign loans; or dollar hegemony, in which highly productive countries like China have no alternative but to finance U.S. private and public debt (because what else are they going to do with those trade surplus dollars?). Eventually, though, the solution of importing growth must fail too, as developing countries, and the planet as a whole, reach the same limits that developed countries have.

Official economic statistics have hidden the probability that the Western economies have been in a zero-growth phase for at least twenty years. Whatever growth there has been has come largely from such things as real estate bubbles, the prison industry, health care costs, insurance and financial services, educational costs, the weapons industry, and so forth. The more expensive these are, the more the economy is assumed to have grown. In areas where there has been growth, such as the internet, much of this is actually a covert form of importing growth. Internet-based revenue comes mostly from sales and advertising, not from new production. We are more efficiently greasing the wheels of the conveyor belt of goods from China to the West. In any event, developing countries cannot keep the growth machine running forever. The more it slows, the more it will be necessary to get around the zero bound.

While the idea of fixing stamps onto currency seems quaint, recently several prominent economists have proposed modern alternatives. Since most money is electronic anyway, the key measure is some kind of liquidity tax (as proposed by Irving Fisher as early as 1935) or, equivalently, a negative interest rate on deposits in the Federal Reserve. The latter measure was proposed by Willem Buiter, then a professor of economics and now chief economist at Citibank, in a 2003 paper in the Economic Journal and then in the Financial Times in 2009 (see the bibliography). It has also been broached by Harvard economics professor Greg Mankiw and American Economics Association president Robert Hall (18),  and even discussed by Federal Reserve economists.(19) I hope these names make it clear that this is not a crackpot proposal.

Of course, physical currency would need to be subject to the same depreciation rate as reserves, which could be accomplished either through Gesell’s method, by having expiry dates on currency, by replacing it with (or redefining it as) bearer bonds with a negative interest rate, by using cash currency that is distinct from the official unit of account, or by letting the exchange rate between bank reserves and currency fluctuate. (20) Another option would be to ban official physical currency altogether, which could vastly increase the power of government since every electronic transaction could be recorded. Frightening as that is to those (including myself) who are wary of the surveillance state, my response to that concern is, “Too late.” Already today nearly all important transactions are done electronically anyway, with the notable exception of those involving illegal drugs. Cash is also used extensively in the informal economy to help people avoid taxes, a motive that would disappear if taxation were shifted away from incomes and onto resources as I propose.

Moreover, there is no reason why unofficial currencies shouldn’t thrive alongside the official, negative-interest electronic currency. Whether these are electronic or paper depends on the application: probably commercial barter rings and credit-clearing cooperatives would use electronic money while local, community-based currencies might prefer paper. Either way, transactions using these currencies would be outside the purview of the central government. Their community of use would decide what level of record-keeping to exercise over the currency. People who operate completely in a local economy, such as hippies, back-to-the-landers, and other people I love, would lead economic lives invisible to the central authorities. There are, however, other reasons to make all transactions and financial records open, not only to the government, but to everyone. This, indeed, has been proposed more generally as an antidote to the surveillance state—make surveillance technology public and ubiquitous—and it is happening already with the proliferation of video cameras in cell phones, hand-held gaming consoles, and other devices. When the activities of government are just as transparent to the people as the activities of the people are to the government, we will have a truly open society.

I want to emphasize the practicability of the modern negative-interest proposals. While Gesellian stamp-scrip currency seems like an anachronistic pipe dream that would involve massive economic disruption, levying a charge on reserves would require almost no new financial infrastructure. Indeed, it is an extension of where monetary policy has already been headed. The same Federal Reserve, the same central banks, the same basic banking system could remain intact. Of course, profound changes would follow, but they would be evolutionary changes that would spare society the disruption of scrapping the financial system and starting anew. As I wrote in Chapter 5, “Sacred economics is part of a different kind of revolution entirely, a transformation and not a purge.”

Some central banks have already flirted with negative interest. In July 2009 the Riksbank (Sweden’s central bank) went negative, levying a 0.25 percent charge on reserve deposits, a level at which it remained as of February 2010. (21) This is negligibly different from zero, but the justification for lowering the rate that far also applies to lowering it still farther. The Riksbank, Buiter, Mankiw, and other mainstream advocates of negative interest rates see them as a temporary measure to force the banks to restart lending and make cheap credit available until the economy starts growing again, at which point, presumably, interest rates would rise back into positive territory. If, however, we are entering a permanent zero-growth or degrowth economy, negative interest rates could become permanent too.

The proper rate of interest, positive or negative, depends on whether the economy is to grow or shrink. In the old thinking, monetary policy was intended to spur economic growth or to restrain it to a sustainable level. In the new thinking, monetary policy strives to match the base interest rate to the economic growth (or degrowth) rate. Keynes estimated that it should be “roughly equal to the excess of the money-rate of interest over the marginal efficiency of capital corresponding to a rate of new investment compatible with full employment.” This formula would need to be modified if, as I suggest in Chapter 14, we should no longer and can no longer seek full paid employment as a positive social good (this is a necessary consequence of steady-state economics and not so scary in the presence of a social dividend). Essentially, though, what Keynes is suggesting is that the liquidity tax be set at a level to compensate for the excess of interest over the average return on investment in productive capital. In other words, it must be set at a level so that there is no advantage to holding wealth versus using wealth.

Buiter and Mankiw are no liberals, which is significant because their proposals are contrary to the interests of the creditor class that conservatives typically represent. Liberal economists sometimes advocate a near equivalent to demurrage: inflation. Inflation is mathematically very similar in its effects to a depreciating currency in that it encourages the circulation of money, discourages hoarding, and makes it easier to repay debts. Free-money has several important advantages, however. In addition to eliminating classic costs of inflation (menu costs, shoe-leather costs, etc.), it does not impoverish people on a fixed income. Here is a typical pro-inflation argument by Dean Baker of the Center for Economic and Policy Research:

If it is politically impossible to increase the deficit, then monetary policy provides a second potential tool for boosting demand. The Federal Reserve Board can go beyond its quantitative easing program to a policy of explicitly targeting a moderate rate of inflation (e.g., 3–4 percent) thereby making the real rate of interest negative. This would also have the benefit of reducing the huge burden of mortgage debt facing tens of millions of homeowners as a result of the collapse of the housing bubble. (22)

The problem is, in a deflationary environment when banks aren’t lending, how can the Fed create inflation? This is the biggest problem with the inflation solution in a situation of overleveraging and overcapacity. Quantitative easing exchanges a highly liquid asset (base money, reserves) for less liquid assets (e.g., various financial derivatives), but that won’t cause price or wage inflation if the new money doesn’t reach people who will spend it.23 Even if the Fed monetized all debt, public and private, the essential problem would remain. Owing to the zero lower bound, the Fed was powerless to inflate its way out of the debt trap in 2008 and 2009. Here we return to the original motivation for free-money: to get money circulating.

In a negative-interest reserve system, banks would be anxious not to keep reserves. If the negative rate were on the order of 5 to 8 percent (which is what Gesell, Fisher, and other economists thought it should be), then it would even be in banks’ interest to make zero-interest loans, possibly even negative-interest loans. How would they make money, you ask? They would do it essentially the same way they do it today. (24) Deposits would be subject to a negative interest rate, too, only smaller than the reserve interest rate. Banks would take demand deposits at, say, –7 percent interest, or time deposits at perhaps –5 percent or –3 percent, and make loans at –1 percent or 0 percent. (You can see now why cash would need to depreciate as well; otherwise who would deposit it at negative interest?)

Negative interest on reserves is compatible with existing financial infrastructure: the same commercial paper markets, the same interbank money markets, even, if we desire it, the same securitization and derivatives apparatus. All that has changed is the interest rate. Each of these institutions has a higher purpose that lurks within it like a recessive gene, awaiting the time of its expression. This is equally true of that most maligned of institutions, the “heart” of the financial system: the Federal Reserve (and other central banks).

Contrary to orthodox belief, the heart does not pump blood through the system, but rather receives it, listens to it, and sends it back out again. (25) It is an organ of perception. According to what it senses about the blood, the heart produces a vast array of hormones, many of them only recently discovered, that communicate with other parts of the body, just as its own cells are affected by exogenous hormones. This listening, modulating role of the heart offers a very different perspective on the role of a central monetary authority: an organ to listen and respond to the needs of the system, rather than to pump money through it. The Fed is supposed to listen to the pulse of the economy to regulate the money supply in order to maintain interest rates at the appropriate level. (26) The injection of new money into the economy could be done the same way it is today—open market operations—or through government spending of fiat money, depending on which version of commons-use rents are employed. Generally speaking, money lost to demurrage must be injected back into the economy; otherwise the level of reserves would shrink every year, regardless of the need for money to facilitate economic activity. The result would be the same pattern of defaults, scarcity, and concentration of wealth that threatens us today. Therefore, we still need a financial heart that listens to the blood and signals for the creation of more (or less) of it.

The alert reader might object that if currency and bank deposits were subject to negative interest, people would switch to some other medium of exchange that served as a better store of value: gold, for instance, or commercial paper. If you have raised this objection, you are in good company. Writing in praise of Gesell’s ideas, John Maynard Keynes issued the following caveat: “Thus if currency notes were to be deprived of their liquidity-premium by the stamping system, a long series of substitutes would step into their shoes—bank-money, debts at call, foreign money, jewelry and the precious metals generally, and so forth.” (27) This objection can be met on several fronts (nor did Keynes see it as an insuperable obstacle, but merely a “difficulty” that Gesell “did not face”). Bank money would, as described above, be subject to the same depreciation as physical currency. Debts at call require a risk premium that offsets the liquidity premium. (28) Commodities, jewelry, and so forth suffer high carry costs. Most important, however, is that money is ultimately a social agreement that, through legal tender laws, customs, and other forms of consensus, can be consciously chosen and applied. Ultimately, Keynes judged, “The idea behind stamped money is sound.”

As a practical matter, everything in the material and social world has carry costs, as Gesell pointed out with his examples of newspapers, potatoes, and so on. Machinery and equipment break down, require maintenance, and become obsolete. Even the very few substances that don’t suffer oxidation, such as gold and platinum, must be transported, guarded, and insured against theft; precious metal coinage can also be scraped or clipped. That money is an exception to this universal law, the law of return, is part of the broader ideology of human exceptionalism relative to nature. Decaying currency is therefore no mere gimmick: it is an acknowledgment of reality. The ancient Greeks, unconsciously drawing on the qualities of this new thing called money, created a conception of spirit that was similarly above nature’s laws—eternal, abstract, nonmaterial. This division of the world into spirit and matter, and the consequent treatment of the world as if it were not sacred, is coming to an end. Ending along with it is the kind of money that suggested this division in the first place. No longer will money be an exception to the universal law of impermanence.

Keynes’ “difficulty” highlights the importance of not creating artificial stores of wealth that, like money today, violate nature’s laws. One example is property rights on land, which historically were the vehicle for the same concentration of wealth that money has brought us today. Negative interest on currency must accompany Georgist or Gesellian levies on land as well, and indeed on any other source of “economic rents.” The physical commons of land, the genome, the ecosystem, and the electromagnetic spectrum, as well as the cultural commons of ideas, inventions, music, and stories, must be subject to the same carry costs as money, or Keynes’s concern will come true. Thankfully, we have a serendipitous convergence of rightness and logic, that the social obligation entailed by use of the commons doubles as a liquidity tax on any substitute store of value. Fundamentally, whether applied to money or to the commons, the same principle is at stake: we only get to keep it if we use it in a socially productive way. If we merely hold it, we shall lose it.

Not everyone would benefit from free-money, at least in the short run. Like inflation, depreciating currency benefits debtors and harms creditors. Writing about inflation, this commentator sums it up neatly:

The root cause of this desire for very low inflation is a desire on the part of the bond-holding classes to see a real return on risk-free investment and deposits.… It is scandalous that people should be paid a real return for lending cash back to the central bank that prints it.… The need for rich people, lightly taxed, is that they can afford to take risk, and so drive investment and growth in the real economy. If they want part of their portfolio in risk-free deposits, they should not expect it to maintain its relative wealth.(29)

This argument taps into the long tradition of George and Gesell I have drawn upon, which recognizes that people should not be able to profit from the mere fact of ownership. Holders of wealth are its caretakers, its stewards, and if they do not put it to socially beneficial use, then eventually that wealth should flow away to others who will.

Revolutionaries past, recognizing that illegitimacy of most accumulations of wealth, sought to sweep the slate clean through confiscation and redistribution. I advocate a gentler, more gradual approach. One way to look at it is as a tax on holdings of money, ensuring that the only way to maintain wealth is to invest it at risk or, shall we say, to make wise decisions on how to direct the magical flow of human creativity. Certainly, this is an ability that deserves reward, and herein lies an essential missing piece of Marxist theories of value that ignore the entrepreneurial dimension to the allocation of capital.

While the bold yet still mainstream economists I’ve mentioned see negative interest as a temporary measure to promote lending and escape a deflationary liquidity trap, its true significance runs much deeper. A liquidity trap is not a temporary aberration caused by a bubble collapse; it is an ever-present default state originating in the declining marginal efficiency of capital (30), itself a result of technological improvement and competition. As Keynes pointed out,

As the stock of the assets, which begin by having a marginal efficiency at least equal to the rate of interest, is increased, their marginal efficiency (for reasons, sufficiently obvious, already given) tends to fall. Thus a point will come at which it no longer pays to produce them, unless the rate of interest falls pari passu. When there is no asset of which the marginal efficiency reaches the rate of interest, the further production of capital-assets will come to a standstill. (31)

As I have argued already, this eventuality has been delayed for a long time as technology and imperialism have transferred goods and services from the commons into the money economy. As the commons is exhausted, however, the need to remove the interest rate barrier intensifies. Presciently, Keynes opines, “Thus those reformers, who look for a remedy by creating artificial carrying-costs for money through the device of requiring legal-tender currency to be periodically stamped at a prescribed cost in order to retain its quality as money, or in analogous ways, have been on the right track; and the practical value of their proposals deserves consideration.” (32) Such a measure (and the modern equivalent I’ve discussed) would allow capital investment with a negative marginal efficiency—in other words, banks would willingly lend money to enterprises that make a zero or slightly less than zero return on investment.

Given that the root cause of our economic crisis is the inevitable slowing of growth, and given that we are transitioning to an ecological, steady-state economy, decaying currency proposals offer more than a temporary fix for a stagnant economy; they promise a sustainable, long-term foundation for a permanently nongrowing economy. Historically, economic contraction or stagnant growth has meant human misery: economic polarization, a sharpening of the divide between the haves and the have-nots. Free-money prevents this from happening by providing a way for money to circulate without needing to be driven by growth-dependent lending.

Combined with the other changes in this book, free-money will have profound effects on human economy and psychology. We have gotten so used to the world of usury-money that we mistake many of its effects for basic laws of economics or human nature. As I shall describe, a money system embodying a new sense of self and a new story of the people—the connected self living in cocreative partnership with Earth—will have very different effects. The intuitions developed over centuries will be true no longer. No longer will greed, scarcity, the quantification and commoditization of all things, the “time preference” for immediate consumption, the discounting of the future for the sake of the present, the fundamental opposition between financial interest and the common good, or the equation of security with accumulation be axiomatic.

The Debt Crisis: Opportunity for Transition

A golden opportunity to transition to negative-interest money may be nigh in the form of the “debt bomb” that nearly brought down the global economy in 2008. Consisting of high levels of sovereign debt, mortgage debt, credit card debt, student loans, and other debts that can never be repaid, the debt bomb was never defused but just delayed. New loans were issued to enable borrowers to repay old ones, but of course unless the borrowers increase their income, which will only happen with economic growth, this only pushes the problem into the future and makes it worse. At some point, default is inevitable. Is there a way out?

There is. The answer lies in a modern-day version of the Solonic economic reform 2,600 years ago: debt forgiveness and reform of the conventions of money and property. At some point, it will be necessary to face reality: the debts will never be repaid. Either they can be kept in place anyway, and debtor individuals and nations kept in perpetual servitude, or they can be released and the slate wiped clean. The problem with the latter choice is that because savings and debt are two aspects of a whole, innocent savers and investors would be instantly wiped out, and the entire financial system would collapse. A sudden collapse would result in widespread social unrest, war, revolution, starvation, and so forth. In order to prevent this, an intermediate alternative is to reduce the debt gradually.

The 2008 financial crisis offered a clue as to how this might happen as part of the transition to a negative-interest economy. When crisis threatened major financial institutions with insolvency, the response by the Federal Reserve was to monetize bad debts, which means that it bought them—exchanging toxic financial instruments for cash. It continues to monetize government debt (which is also unlikely ever to be repaid) through the quantitative easing program. At some point, to avoid total collapse, similar measures will be required in the future on an even broader scale.

The problem is that all this money goes to creditors, not debtors. Debtors do not become any more able to pay; nor do the creditors become any more willing to lend. The Fed’s action drew intense criticism because it in effect gave predatory financial institutions cold hard cash in exchange for the junk investments they had irresponsibly created and traded, whose market value was probably only pennies on the dollar. They received face value for them, and then, adding insult to injury, invested the cash in risk-free bonds, paid it as executive bonuses, or bought up smaller institutions. Meanwhile, none of the underlying debt was forgiven the debtors. The program therefore did nothing to ameliorate the polarization of wealth.

What would happen if debt were monetized into free-money? Then, although creditors would not lose their money overnight as they do with defaults or systemic financial collapse, the bailout wouldn’t further enrich them either, because they would receive a depreciating asset. As for the debtors, the monetary authority could reduce or annul their debts by any amount it thought appropriate (which would likely be determined through a political process). This might involve reducing the interest rate to zero or even reducing the principal. So, for example, interest on student loans could be reduced to zero, mortgage principal cut to prebubble levels, and third-world sovereign debt forgiven entirely.

While it is true that this monetization of debt could vastly increase the monetary base, because the money would be subject to demurrage, it would naturally shrink back again over time. The monetary authority could also shrink it more quickly by selling the restructured debt on the open market.

Without negative interest or debt forgiveness described herein, Fed bailouts amount to “free money” (and not free-money) for the people who already have the most of it. If the big banks and financiers are permitted to keep their lucre, at least in exchange they should accept a system tilted against further accumulation. Yes, the financial interests stand to lose, albeit gradually, from this proposal, but what is the alternative? The increasing polarization of wealth is not sustainable.

The opportunity we had in 2008 will repeat itself, because the debt crisis won’t go away (without miraculously high economic growth). Each time, the solution has been yet more debt, which is shifted from individuals and corporations to nations, and back again, always growing. For example, when Ireland’s banks were on the verge of failure in 2010, the government bailed them out, transferring the problem onto its own balance sheet and engendering a sovereign debt crisis. To avert catastrophe, the IMF and ECB gave Ireland new loans at 6 percent interest to pay the old. Unless the Irish economy grows by more than 6 percent a year (impossible given the harsh austerity measures upon which the loans were conditioned), the problem will reappear in a few years and be even worse. We are merely kicking the problem into the future.

The bondholders don’t want to take a loss. They want more and more for themselves.(33) In the long run, it is mathematically impossible to redeem that wish. It can be sustained only as long as the rest of society is willing to accept worsening conditions: more austerity, more poverty, and more income devoted to servicing debt.

At some point, we as a society will say, “Enough!” A bailout will still be necessary, for the consequences of a sudden system-wide default would be catastrophic. But when it happens—and it could happen simultaneously in many debt categories—let us face the truth. The concentration of wealth, and the usury behind it, must end. We may have no choice but to rescue the wealthy, for each part of the global economy is connected to all the others, but let that rescue come at a price: the gradual freeing of society from debt.

Thinking for the Future

Amid all the technical details of money and finance, let us not lose sight of the heart of this endeavor: to restore money to its true purpose as a connector of gifts and needs and as a magical talisman that coordinates human creativity toward a common end. It feels strange to say that money is a key part of the more beautiful world my heart tells me is possible, because money has long been repellant to me as an obvious cause of so much ruin and evil.

However, our repugnance toward money is based on what money has been, not on what it could be. Negative-interest money, backed by things that are sacred, in an ecological economy, turns the intuitions of the Age of Usury on their head. It is utterly revolutionary, fundamentally altering the human experience. This transformation reverberates across all levels, from outer to inner, from the economic to the spiritual.

In Chapter 9, “The Story of Value,” I explained how the current social agreement on money creation is, “Thou shalt issue money only to those who will earn even more of it,” which ultimately comes down to participating in the expansion of the realm of goods and services. Society’s energy is directed toward that which will expand the realm of money and property, the human realm, the owned realm. It is part of the Ascent of Humanity to dominion over nature. Lowering interest rates below the zero lower bound makes investments possible that have a zero or negative return on capital. Does this idea sound counterintuitive to you? Does it seem to contradict the whole concept of an “investment”? It is counterintuitive, but only because our intuitions have been so conditioned by a centuries-long culture of growth that we can barely conceive the possibility of another function of money, or of a business model not dependent on profit. (Of course we have nonprofit organizations, but these are fundamentally distinct from for-profit businesses. This is a distinction that will fade.)

Here is an example to bring home how weirdly counterintuitive this is. Imagine you go to a bank and say, “I’d like to borrow money for my business. Here is my business plan. See, if you lend me $1,000,000, I will earn $900,000 in four years’ time. So I’d like you to lend me $1,000,000 at negative interest, and I’ll pay you back $900,000 in installments over four years.”

“We love your business plan,” says the bank. “Here is your money.” Why do they agree? Because that $1,000,000 dollars, if left as cash, would depreciate at an even higher rate, say 7 percent, so that after four years only about $740,000 would be left. It is to the bank’s benefit to make the loan described above.

Another way to understand the dynamics of decaying currency is that, like inflation, it reverses the discounting of future cash flows. In The Ascent of Humanity I offer the following example:

Whereas interest promotes the discounting of future cash flows, demurrage encourages long-term thinking. In present-day accounting, a forest generating $1 million dollars a year sustainably forever is more valuable if clear-cut for an immediate profit of $50 million. (The “net present value” of the sustainable forest calculated at a discount rate of 5 percent is only $20 million.) This discounting of the future results in the infamously short-sighted behavior of corporations that sacrifice (even their own) long-term well-being for the short-term results of the fiscal quarter. Such behavior is perfectly rational in an interest-based economy, but in a demurrage system, pure self-interest would dictate that the forest be preserved. No longer would greed motivate the robbing of the future for the benefit of the present. As the exponential discounting of future cash flows implies the “cashing in” of the entire earth, this feature of demurrage is highly attractive.

Imagine you are the President of the World and receive the following offer from aliens: “Supreme Leader, a sustainable gross world product (GWP) is $10 trillion a year. We would like to make you an offer: $600 trillion for the entire earth. True, we plan to extract all of its resources, destroy the topsoil, poison the oceans, turn the forests into deserts, and use it as a radioactive waste dump. But think of it—$600 trillion! You’ll all be rich!” Of course you would say no, but collectively today we are essentially saying yes to this offer. We are carrying out the aliens’ plan to a tee, making over the next ten years perhaps $600 trillion (current GWP is $60 trillion a year). Through a million little choices every day, we are cashing in the earth.

And this is all quite economic. At prevailing rates, $600 trillion generates annual income of at least $20 trillion. In Ascent I quoted several prominent economists who argue that since agriculture amounts to only 3 percent of GDP, global warming or a 50-percent drop in agricultural output wouldn’t matter much. At most, GDP (the total “goodness” level, remember) would drop by only 1.5 percent. It seems absurd, but within the logical construct of usury it is quite rational. In a 1997 article in Nature ecological economist Robert Costanza valued the global ecosystem at $33 trillion, only 20 percent higher than GWP that year. He meant well, hoping to provide an economic reason (and not just a moral reason) to preserve the planet, but according to the same logic, the logic of “value,” it would be in our interest not to preserve it if we received a better offer.

Furthermore, don’t you find it dispiriting to resort to the argument that we should preserve the ecosystem because of all the money we’ll save? This argument buys into the basic assumption that causes so much trouble to begin with: that money is an appropriate standard of value; that all things can and should be measured and quantified; that we can best make choices by adding up numbers.

“Sustainability” has been a buzzword for so long now that it has almost become a cliché. Yet despite the fact that everyone approves of it, sustainability has been fighting a losing battle against profit. Forests are dying, lakes are drying up, deserts are spreading, and rain forests continue to fall to clear-cutting—the pace has hardly slowed despite four decades of environmentalists’ best efforts. At every turn they must fight the money power, which helplessly seeks short-term profit even at the expense of its own long-term survival. As Lenin wrote in a somewhat different context, “The capitalists will sell us the rope with which we will hang them.” The myopia of capital stems, at a deep level, from interest, which necessitates the discounting of future cash flows.

With interest rates below zero, the opposite thinking prevails. Imagine again that you are President of the World. Now the aliens’ offer isn’t looking so attractive. At negative interest, in fact, no amount of money would be enough to cash in the earth, because money in the future is actually more valuable than the same quantity of money in the present, and its future value increases exponentially with time. You would say to the aliens, “We’re not selling the earth at any price.”

Isn’t that what we should be saying today, when the economy insists on putting a price on the ecological basis of civilization and life itself? Isn’t that what we should be saying today as well to any exchange of the infinitely precious for a finite sum of money? It is time, I think, to stop “cashing in” beauty, life, health, and our children’s future.

I realize my example of cashing in the earth is far-fetched and that one could construct an economic argument challenging it. My point is that negative interest fundamentally alters what kind of behavior is “economic.” Activities that bring benefits thirty, fifty, or a hundred years hence—indeed, that bring benefits to the seventh generation—acquire an economic motivation as opposed to today, when only an idealistic person would do such a thing. With negative interest and depreciating currency, no longer will our ideals do battle against our economic self-interest.

Consider a practical example. Suppose you are considering whether to install solar panels to power your business. The initial cost is, say, $100,000, and it will bring you savings of $1,000 a year. Currently, it would be uneconomic to install them, as the net present value of $1,000 a year is much less than $100,000 (even at very low interest). But if interest is zero or negative, the decision becomes economic. Today people are already making such decisions even though they are uneconomic, because the truth in our hearts contradicts economic logic. In our hearts we know that the ideology that equates money with the good is wrong. We need to bring money and goodness back into their promised alignment.

One more example: suppose you own a forest. Either you can obliterate it by selling it for clear-cutting and quarrying, for an immediate profit of $1 million, or you can log it sustainably for $10,000 a year in perpetuity. Well, interest on $1 million is at least double that sustainable logging income—you might as well cash it in. But if interest rates are negative, that logic no longer holds.

The internalization of external costs works synergistically with decaying currency to make money a force for good. The former aligns private interest with public interest; the latter promotes long-term thinking over short-term thinking. Although both are improvements on the current system, neither by itself will guarantee a sustainable world. Together, they align economic decisions with the long-term interests of society and the planet.

Of course, there are times when long-term thinking isn’t appropriate. We have many needs that we prefer to fulfill now rather than in the future. If we are starving, we would rather have one meal today than a hundred a year from now. The Austrian School of economics especially, but more generally neoclassical economics as well, extrapolates from such examples to claim that it is human nature to want to consume as much as possible right now. In their view, interest is a kind of compensation for deferring consumption, a reward for delayed gratification. In other words, you, dear reader, would love to maximize your utility by spending all your money right now, but are induced not to because you know that you’ll be able to have even more later, thanks to interest. This is known in economics as the time preference postulate. Time preference—our supposed preference for immediate consumption—is crucial to the discounted utility model developed by Paul Samuelson in the 1930s that lies at the foundation of most mainstream economic theory today. It is also crucial to many modern “refutations” of Keynes. Moreover, in the lone mathematical economics paper I discovered addressing demurrage-based currencies, the time preference postulate was the key variable in constructing a (specious) demonstration that such currency harms the public welfare.(34)

The Keynesian logic I have deployed minimizes time preference. Keynes did not dismiss it altogether but said that human beings naturally tend to spend a smaller proportion of their income as their income rises. It seems quite obvious that if you are starving, you will spend all your income immediately on food; if you have enough money to meet all your urgent needs, you may spend some of the surplus on books, perhaps, or entertainment; when those desires have been fulfilled, maybe you’ll buy a Rolls-Royce. But the greater your income, the less urgency there is to spend it. Keynes believed therefore that people have a propensity to save without needing an incentive (interest) to defer consumption. Indeed, he thought that this propensity to save can be destructive when it leads to concentration of wealth. That is why he was sympathetic to low or even negative interest rates.

In reading some of the literature from the late 1930s and 1940s, I was struck by the intensity and thinly disguised emotionality of the criticism directed at Keynes by establishment economists. (35) This sort of contumely is typical of any debate when the orthodox establishment intuits that a new theory challenges the core defining precepts of its field. Keynes’s theory presents at least two very deep challenges. First, his idea of a natural tendency to save essentially claims that money itself is subject to diminishing marginal utility—the more I have of it, the less useful each additional dollar is to me. (36) This seems obvious to me, but it is apparently not so obvious to classical economists, who make a linear equation between money and the utility of the individual and society. In fact, they define it that way and state the base assumption that human beings seek to maximize self-interest by maximizing money.

If we reject the linear equation of money and utility (i.e., “the good”), we also reject the dearly held ideology that we can maximize the common good by maximizing economic growth. We deny as well the utilitarian argument for wealth-maximizing capitalism, opening the door to ideas that emphasize equitable distribution of wealth instead. Mathematically, if money is subject to diminishing marginal utility, the optimal distribution of money is: as equitably as possible. Offering a justification for the redistribution of wealth away from the rich, Keynesian thought is, quite naturally, anathema for the ideologues of the rich.

But Keynes’s view of liquidity preference implies an even deeper challenge than that. Consider again the opposite view, exemplified by the classical economists and Austrian School advocates, that people are by nature profligate. As the nineteenth-century economist N. W. Senior put it, “to abstain from the enjoyment which is in our power, or to seek distant rather than immediate results, are among the most painful exertions of the human will.” (37) Here is a more recent example, by a follower of von Mises:

No supply of loanable funds could exist without previous savings, that is, without abstention from some possible consumption of present goods (an excess of current production over current consumption).… There would be no interest or time-preference rate. Or rather, the interest rate would be infinitely high, which, anywhere outside of the Garden of Eden, would be tantamount to leading a merely animal existence, that is, of eking out a primitive subsistence by facing reality with nothing but one’s bare hands and only a desire for instant gratification. (38)

Interest, then, is a reward for thrift, for self-restraint. In this view we find an echo of some of the deep, hidden ideologies underlying our civilization; for example, that human progress both spiritual and material comes through winning a war against nature: natural forces on the outside, and desire, pleasure, and the animal drives on the inside. Abstemiousness becomes a high virtue; without it, this ideology goes, we would be no better than animals. We would not have ascended into a separate and better human realm, removed from nature. Karl Marx put it thus:

The cult of money has its asceticism, its self-denial, its self-sacrifice—economy and frugality, contempt for mundane, temporal, and fleeting pleasures; the chase after the eternal treasure. Hence the connection between English Puritanism, or also Dutch Protestantism, and money-making. (39)

This mentality pervades our culture. You must delay gratification. You must restrain your desires with the thought of future rewards. Pain now is gain later. Do your homework for the grade. Go to work for the salary. Do the workout to be healthy. Go on a diet to be thin. Devote your life to something that pays well, even if it isn’t your passion, so that you can have an enjoyable retirement. In all of these things we apply a regime of threat and incentive designed to overcome our laziness, our selfishness. Interest becomes a motivator in the war against the self, the overcoming of our wanton improvidence.

But is this really human nature? Is it really our nature to consume and over-consume without thought for other people, other beings, or our own future? No. The ancient Greeks, not given to overly charitable views of human nature, had it right. As Aristophanes said, in all things—bread, wine, sex, and so on—there is satiety. Our needs are limited, and when we have fulfilled them, we turn to other things and are moved to generosity. “But of money, there is no satiety.” It is not the propensity to consume that bears no limit; to the contrary, limitless desire arises with money. After attaining a surfeit of consumables, people covet money itself, not what it can buy, and this desire has no limit. Neoclassical economics (and the Austrian School) has it backwards, and Gesell and Keynes were right to seek to strip money of at least some of its unique features that make desire for it limitless. Keynes was aware—indeed he explicitly stated—that the dominance of liquidity preference over time preference was a foundational assumption of his theory: a “psychological law,” as he called it.

Of course, for some people—food addicts, sex addicts, alcohol addicts—there is indeed no satiety in those things Aristophanes listed. Does this prove that human beings are greedy after all? Actually, the example of addiction illuminates what is wrong with money. Addiction happens when we use something as a substitute for what we really want or need—food, for example, as a substitute for connection; sex as a substitute for emotional intimacy; and so on. Money as universal end becomes a substitute for many other things, including those very things that the money economy has destroyed: community, connection to place, connection to nature, leisure, and more.

When we speak of the “liquidity” of money, we mean simply that we can readily exchange it for anything else we want. Now in a money economy, we can actually exchange any commodity for any other commodity, just not so readily, via the medium of exchange (money). Why then, should we prefer money to other commodities? Excepting cases in which we have a need that must be met swiftly, which indeed justify keeping on hand modest amounts of the medium of exchange, the only reason to prefer money is that it does not suffer loss in storage. The imperishability of money makes it not only a universal means, but a universal end as well. By making money impermanent, we preserve it as means but not as end and in so doing inspire a conception of wealth radically different from anything we have known.

More for Me Is More for You

With the introduction of free-money, money has been reduced to the rank of umbrellas; friends and acquaintances assist each other mutually as a matter of course with loans of money. No one keeps, or can keep, reserves of money, since money is under compulsion to circulate. But just because no one can form reserves of money, no reserves are needed. For the circulation of money is regular and uninterrupted. —Silvio Gesell

The equivalent in modern economics of “universal means” and “universal end” are “medium of exchange” and “store of value.” One way to understand the effect of negative interest is that it splits these two functions. This is a profound shift. Most economists consider medium of exchange and store of value to be defining functions of money. But combining these two functions into a single object begs trouble because a medium of exchange needs to circulate to be useful, while a store of value is kept (stored) away from circulation. This contradiction has, for centuries or more, created a tension between the wealth of the individual and the wealth of society.

The tension between the wealth of the individual and the wealth of society reflects the atomistic conception of the self that has risen to dominance in our time. A money system that resolves this tension therefore promises profound consequences for human consciousness. In Chapter 1, I wrote, “Whereas money today embodies the principle, ‘More for me is less for you,’ in a gift economy, more for you is also more for me, because those who have give to those who need. Gifts cement the mystical realization of participation in something greater than oneself, which is yet not separate from oneself. The axioms of rational self-interest change because the self has expanded to include something of the other.” Can we imbue money with the same property as the gift?

In an economy based on free-money, wealth means something quite different from what it means today and in fact takes on much the same character that it had in primitive, gift-based societies. In hunter-gatherer societies, which were generally nomadic, possessions were a literal burden. The “carry cost” that everything except money bears today was quite real. In sedentary agricultural societies as well, possessions such as cattle and stores of grain, while sought after, did not give the same degree of security as being embedded in a rich web of social relationships of giving and receiving. Grain can rot and cattle can die, but if you have been generous with your wealth to the community, you have little to fear.

Free-money reintroduces the economic mind-set of a hunter-gatherer. In today’s system, it is much better to have a thousand dollars than it is for ten people to owe you a hundred dollars. In a negative-interest system, unless you need to spend the money right now, the opposite is true. Since money decays with time, if I have money I’m not using, I am happy to lend it to you, just as if I had more bread than I could eat. If I need some in the future, I can call in my obligations or create new ones with anyone within my network who has more money than he or she immediately needs. Similarly, when a primitive hunter killed a large animal, he or she would give away most of the meat according to kinship status, personal affection, and need. As with decaying money, it was much better to have lots of people “owe you one” than it was to have a big pile of rotting meat, or even of dried jerky that had to be transported or secured. Why would you even want to, when your community is as generous to you as you are to it? Security came from sharing. The good luck of your neighbor was your own good luck as well. If you came across an unexpected large source of wealth, you threw a huge party. As a member of the Pirahã tribe explained it when questioned about food storage, “I store meat in the belly of my brother.”(40) Or consider the !Kung concept of wealth explored in this exchange between anthropologist Richard Lee and a !Kung man, !Xoma: I asked !Xoma,

“What makes a man a //kaiha [rich man]—if he has many bags of //kai [beads and other valuables] in his hut?”

“Holding //kai does not make you a //kaiha,” replied !Xoma. “It is when someone makes many goods travel around that we might call him //kaiha.”

What !Xoma seemed to be saying was that it wasn’t the number of your goods that constituted your wealth; it was the number of your friends. The wealthy person was measured by the frequency of his or her transactions and not by the inventory of goods on hand. (41)

Wealth in a free-money system evolves into something akin to the model of the Pacific Northwest or Melanesia, in which a leader “acts as a shunting station for goods flowing reciprocally between his own and other like groups of society.”(42) Status was not associated with the accumulation of money or possessions, but rather with a huge responsibility for generosity. Can you imagine a society where the greatest prestige, power, and leadership accord to those with the greatest inclination and capacity to give?

Such was the situation in archaic societies. Status came through generosity, and generosity created gratitude and obligation. To be a lord or king, you had to hold sumptuous feasts and give lavish gifts to peers and underlings. We have an especially clear example of this in the Nibelungen, the great German saga of the high middle ages that draws on source material from much earlier. When Kriemhild, widow of the great hero Siegfried, starts lavishly giving away the hoard she inherited from him, the king feels so threatened that he has her murdered and the treasure dumped into the Rhine (where it remains to this day!). The king’s authority was sustained by gifts, and that authority was undermined when someone else started giving greater gifts than he.

The zero-interest loans in a free-money economy are analogous to the gifts of yore. While such loans may appear to violate the gift principle that the reciprocal gift not be specified in advance, they are gifts: gifts not of money but of the use of money. In ancient times, the obligations and expectations generated by gifts were socially determined. The same is true here: the social determination takes the form of contracts, agreements, laws, and so forth. Underlying these specific forms, the dynamic is equivalent: those who have more than they need give it to others. It is just that simple, an expression of the innate generosity of the human being I described in Chapter 1. All that is needed is a money system that encourages, rather than deters, that generosity. No miraculous change in human nature is necessary. As I describe it in The Ascent of Humanity,

Whereas security in an interest-based system comes from accumulating money, in a demurrage system it comes from having productive channels through which to direct it—that is, to become a nexus of the flow of wealth and not a point for its accumulation. In other words, it puts the focus on relationships, not on “having.” It accords with a different sense of self, affirmed not by enclosing more and more of the world within the confines of me and mine, but by developing and deepening relationships with others. It encourages reciprocation, sharing, and the rapid circulation of wealth.

Sometimes people ask whether negative-interest currency, like inflation, wouldn’t stimulate even greater consumption. In economics terms, this would happen only if the demurrage rate were too high, leading to a preference of goods over money as a store of value. (43) The two should be equal. But let’s investigate this issue a bit more deeply. When I describe a currency of abundance, people protest, “But we do live in a world of scarcity. Natural resources are finite, and we have used them nearly all up. The problem is that we have treated them as if they were unlimited.” Accordingly, one might think that an attitude and currency of abundance is the last thing we need.

In answer to this concern, consider first whether our currency of scarcity has actually limited our consumption of scarce resources. It has not. The scarcity of money has aggravated their conversion into money. It is an attitude of scarcity, not of abundance, that has led to the depletion of our natural commons. Competition and the accumulation of more than one needs are the natural response to a perceived scarcity of resources. The obscene overconsumption and waste of our society arise from our poverty: the deficit of being that afflicts the discrete and separate self, the scarcity of money in an interest-based system, the poverty of relationship that comes from the severance of our ties to community and to nature, the relentless pressure to do anything, anything at all, to make a living. In contrast, the natural response to an atmosphere of abundance is generosity and sharing. This includes sharing within the human realm and beyond it as well. Whence our frenetic race to convert nature into commodities that don’t even meet real needs, if not from insecurity?

Think about it. Is it from an attitude of scarcity or abundance that someone buys fifty pairs of shoes? Is it the secure person or the insecure person who buys a third sports car and a 10,000-square-foot house? Whence this urge to own, to dominate, to control? It comes from a lonely, destitute self in a hostile, ungiving world.

Free-money embodies the spiritual teachings of abundance, interconnectedness, and impermanence. These teachings, however, present a truth that is in conflict with the world we have created through our beliefs, in particular that set of beliefs that composes the story of money. It is time to get used to a new world, in which we no longer try to get rich by keeping, by hoarding, by having. It is a world in which we are rich by giving. The New Age “prosperity programming” teachers I criticized in Chapter 6 are actually announcing an important truth. We do indeed need to take on an attitude of abundance and to create a world that embodies it.

My dear reader, think about it: is it really who you are to say, “I will lend you money—but only if you give me even more in return”? When we need money to live, is that not a formula for slavery? Significantly, the forgiveness of debts for which Solon was famous was prompted in part by the indebted servitude of a growing proportion of the population. Today, young people feel enslaved to their college loans, householders to their mortgages, and entire Third World nations to their foreign debt. Interest is slavery. And since the condition of slavery demeans the slaveholder as much as the slave, in our hearts we want none of it.

If you lend money to someone, is it really who you are to hold that obligation over her head, forever and ever? Interest on a loan amounts to that: it is a pressure to pay it back. It is the threat, “If you don’t pay me back, this is going to grow and grow.” A zero-interest or negative-interest loan bears with it a certain freedom. It lacks that threat of life-long debt slavery. (44) I find negative interest to be quite natural. If I loan money to a friend, and she doesn’t pay me back, eventually I want to say, “Forget about it—I don’t want to hold this over your head forever.” I don’t want to hold on to old things, old debts. A negative-interest money system reinforces this salutary tendency, native to all of us, to let go, release the past, and move on.

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1. Demurrage originally referred to a storage cost for goods, for example in addition to freight shipping costs. This term naturally applies to decaying currency because it applies to the use of money as a “store” of value. The goods for which it could be exchanged have upkeep costs, carry costs, and storage costs; therefore so should the money. The disadvantage of this term is that it is unfamiliar to most people and awkward. Depreciating currency captures the idea that the value of the money declines with time. Unfortunately, the term is easily misunderstood to mean a depreciation in the purchasing power of the currency itself, rather than in the value of each token unit of it. Usually, depreciation refers to the value of a currency in relation to other currencies. “Negative interest” conveys the basic idea very effectively, especially in describing the system as a whole. It can create confusion, however, since interest usually applies to lending money and not to money itself. I will use these various terms interchangeably in this book, along with Silvio Gesell’s term, “free-money.”S

2. Kennedy, Margrit. Interest and Inflation-Free Money, Seva International, 1995. p. 40.

3. Zarlenga, Stephen. Lost Science of Money, NV. American Monetary Institute. 2002; p. 253.

4. Without the stamps, it would effectively be worth 88 cents.

5. Only a few of Gesell’s writings have been translated into English. I would be interested to know whether he touches upon any ecological themes in his voluminous German writings.

6. Gesell, Silvio. The Natural Economic Order, Translated by Philip Pye. Berlin: NEO-Verlag. 1906. chapter 4.1.

7. Keynes discusses Gesell in Chapter 23 of his classic General Theory of Money, Employment, and Interest. He finds his reasoning sound but incomplete, saying that it “just failed to reach down to the essence of the matter.” I will deal with his main criticism, that Gesell neglects to consider the liquidity premium of other forms of money, in a later section.

8. This is according to contemporary news accounts (e.g., Cohrssen, “Wara”).

9. Fisher, Irving. Stamp Scrip, New York, Adelphi. 1933. chapter 4.

10. Thomas Greco cites three contemporary accounts that appear in the 1934 journal Annals of Collective Economy: Alexander von Muralt, “The Wörgl Experiment with Depreciating Money”; M. Claude Bourdet, “A French View of the Wörgl Experiment: A New Economic Mecca”; and Michael Unterguggenberger, “The End Results of the Wörgl Experiment.” Greco disputes the contention that the currency’s success is attributable to demurrage.

11. Wüthrich, W. “Alternatives to Globalization: Cooperative Principle and Complementary Currency” Translated by Philip Beard. Current Issues (Zeit-Fragen), August 9, 2004.

12. Champ, Bruce. “Stamp Scrip: Money People Paid to Use” Federal Reserve Bank of Cleveland Reseach Paper,  April 1, 2008.

13. Fisher, Irving. Stamp Scrip, New York, Adelphi. 1933 chapter 5.

14. Lietaer, Bernard.  The Future of Money, Post Falls, ID. Century. pp. 156–160.

15. Champ, Bruce. “Stamp Scrip: Money People Paid to Use” Federal Reserve Bank of Cleveland Reseach Paper,  April 1, 2008.

16. Mankiw, N. Gregory. “It May Be Time for the Fed to Go NegativeNew York Times 4/18/2009.

17. Author Unknown, “Depreciating Currencies: The Money-Go-Round,” The Economist, January 22, 2009.

18. Hall, Robert and Susan Woodward, “The Fed Needs to Make a Policy Statement.” Vox April 13, 2009.

19. Koenig, Evan and Jim Dolmas, “Monetary Policy in a Zero-Interest Economy.” Southwest Economy, issue 4, July/August 2003. The Dallas Federal Reserve.

20. The latter two options are discussed by Buiter, Willem “Negative Interest Rates: When are They Coming to Central Bank Near You?Financial Times Online 5/7/2009

21. Data from the Riksbank’s official website,

22. Baker, Dean. “No Way Out: Roadblocks on the Way to Recovery.Counterpunch.  2/5/2010.

23. Actually, it can cause price inflation due to a speculative bid-up of commodity prices in the absence of productive investment opportunities.

24. Some of my more knowledgeable readers will no doubt protest that it is a misconception that banks make money off interest rate spreads. When banks make a loan, they say, they do not lend out depositors’ money but rather create new money—credit—by a simple accounting entry. Unfortunately, this too is a distortion of the ontogeny of money. I explain this further in the Appendix: Quantum Money and the Reserve Question. The upshot for present purposes is that negative-interest banking would be fundamentally similar in many important respects to banking today (at least before the “casino economy” took over).

25. Most physiologic descriptions of the heart liken it to a pump, but the heart does not provide the propulsive force for blood circulation at all. It would be impossible for a 300-gram organ to pump a viscous fluid through thousands of miles of small blood vessels. In fact, embryonic circulation begins before a functioning heart is even present, possessing its own endogenous momentum sustained by its relationship to the entire circulatory system and indeed the entire body. The heart temporarily halts the flow, which expands the atrium before being released into the ventricle. It is more similar to a hydraulic ram than a pump, with the addition of a twisting function to maintain the blood’s spiraling motion.

26. As a matter of fact, the Fed already attempts to exercise this listening, modulating function. Meredith Walker, a former Fed economist, describes how much of her work to prepare for Open Market Committee meetings involved communicating with myriad businesses and financial institutions, in effect listening to the pulse of the economy. Monetary policy was a natural response to this listening, except when political interference stymied the natural response and tilted the Fed toward more of a controlling role, similar to a pump.

27. Keynes, J. Maynard. The General Theory of Employment, Interest, and Money. New York. Harcourt, Brace, and Howe. 1936: Book 4, chapter 23, section 4.

28. Besides, in this system, interest rates on highly liquid debts-at-call would tend toward the demurrage rate.

29. Anonymous comment on….

30. The marginal efficiency of capital refers to the expected return on each dollar of new investment.

31. Keynes, J. Maynard. The General Theory of Employment, Interest, and Money. New York. Harcourt, Brace, and Howe. 1936: chapter 17, section 2.

32. Ibid., sec. 3.

33. When interest exceeds economic growth, they are indeed claiming a larger and larger proportion of society’s wealth for themselves—and at no risk, thanks to the bailouts.

34. Rösl, Gerhard. “Regional Currencies in Germany: Local Competition for the Euro?” Deutsche Bundesbank Series 1: Economic Studies, no. 43. (2006).

35. See, for example, Holden, G.R.  “Mr. Keynes’ Consumption Function and the Time Preference Postulate.” Quarterly Journal of Economics. 52, no. 2;  (1938): pp. 281-296. This paper illustrates the ideological principles that are at stake, phrased therein as “psychological laws.”

36. Diminishing marginal utility is often illustrated by fertilizer application. The first ton doubles yield; the next ton increases yield by 10 percent; the next by only 1 percent, and so on. This is a very general principle. Why shouldn’t it apply to money too?

37. Senior, N.W. Outline of the Science of Political Economy (1836), quoted in Handon, Jon D. and David Yosifon, “The Situational Character: A Critical Realist Perspective on the Human Animal”  Georgetown Law Journal, 93:1: p. 76. One cannot help notice the implication that a painful exertion of the will is an admirable virtue.

38. Hoppe, Hans-Hermann. “The Misesian Case against Keynes” in Dissent on Keynes: A Critical Appraisal of Keynesian Economics, ed. March Skousen. Santa Barbara, CA: Praeger, 1992. My emphasis added.

39. Marx, Karl. Grundrisse, New York. Penguin Classics. p. 230.

40. Everett, Daniel L. “Cultural Constraints on Grammar and Cognition in Pirahã. Another Look at the Design Features of Human Language.” Current Anthropology 46: 4, 2005.

41. Lee, Richard. The Dobe !Kung, New York. Holt, Rinehart, and Winston, 1984. p. 101.

42. Sahlins, Marshall. Stone Age Economics, New York, Routledge. p. 209.

43. If the demurrage rate were too high, speculative capital investments could also happen, resulting in overcapacity, inflation, and a boom-bust cycle. The Fed or central bank would need to exercise the same functions it (supposedly) does today, quelling economic overheating by raising interest rates (bringing the demurrage rate closer to zero). There may even be times in the future when it is appropriate for interest rates to climb back into positive territory. Such a time would be a high rate of economic growth. That way the risk-free interest rate would be less than the economic growth rate, obviating the concentration of wealth that interest usually causes. However, I think that such a scenario is unlikely when growth is no longer subsidized by the unsustainable drawdown of natural resources, and when the reclamation of social capital has shrunk the realm of paid services.

44. This doesn’t mean that creditors couldn’t seize collateral or have courts enforce collection judgments against debtors for failure to make payments by the due date. It would mean, however, that the longer they waited, the less they could collect.


  1. Bimal

    Charles. An economy that meets our needs as people is wonderful, radical and necessary. Thank you for your writing. I am only part way through but did not see clearly how in the absence of money as a store of wealth, hoarding other stores of value such as gold or land would be discouraged. Are those things rented or leased from the commonwealth? Is there a certain amount that can be owned rent free such as a small holding or wedding jewellery?

    • charles

      Money could still store wealth, it is just that in the presence of a small decay rate, it would not be a better store of wealth than anything else. It would have an upkeep cost like everything else. Gold, for example, needs to be protected against theft. Land is an exception, hence the need for Georgist land taxes that parallel negative interest on money.

  2. Brandon

    “is it really who you are to say, “I will lend you money—but only if you give me even more in return”? When we need money to live, is that not a formula for slavery?”

    That is such a great point. And the one about holding it over someone’s head. I lent my sister $2700 about ten years ago, and after a while, when she’d paid me back some of it, I forgot what she still owed, since at that point it’d been years. I said (and have said, multiple times) to forget about it, I don’t even care anymore… and I really don’t, she’s family and that’s what we do for each other. I figure, hell, if I can’t even remember what you owe, obviously I’m doing fine without it; truth is, the money has ceased to exist for me. The way you put those words here at the end of your chapter hit home, because it really is how I feel. I don’t want my sister to be my slave, I’m not going to hold this over her (she chooses to hold it over herself, insisting on paying be back bit by bit). And it’s a cool thought that this could, in a way though not exactly perhaps, apply to society as a whole, with things like demurrage.

  3. Well said.

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