Various Thoughts about and
Objections to Money Reform

“If the democratic government really wants to actively intervene, then it has to begin with the insight that there is no other choice at all but to radically change our political thinking and acting. And last but not least, there are increasing indications that we have to reconsider our monetary and interest systems because their ‘reciprocity deficits’ and their effects of exponentially destroying the symmetry become more and more obvious.”

Prof. Dr. Jürgen Borchert1

Does man have to change?

When the talk is about exploitation and violence, about destruction to the environment and wars, very often, as a solution to the problem the demand is raised that man should change. This demand is certainly justified in certain individual cases and also desirable, but as regards the total of mankind, it is unrealistic. And it is also arrogant to think that one knows in which direction other people or mankind in general should progress.

Communism, too, dreamt of another man, without success, despite 70 years of re-education in the USSR. And the Christian churches did not achieve their goal in 2000 years. On the contrary, if the present churches and Christians are measured against those of the first century, a moral-ethical degeneration in the practical behaviour of believers as well as the church can be detected. A change can, however, come about when man increases his awareness through information and knowledge. Experience teaches us that inconsideration and violence in human societies dwindle the sooner, the more just the structures in a society become.

Conversely, recklessness and violence increase with deteriorating economic and social conditions. So if men in many countries become more aggressive and violent and shoot at each other, that is not necessarily the consequence of a moral brutalization of people. It is rather always the consequence of worsening regulatory conditions, of unemployment, of impoverishment and social downturn, particularly so when these developments stand face to face with increasing wealth on the other side. That is why problem solving should always examine whether the problems are due to human misdemeanour or due to failed structures.

If accidents occur with high frequency at a crossing, it can be due to an increase in reckless driving or a flaw in the control of traffic lights. Without doubt, in the first case action must be taken against people and they must be warned to pay attention and be considerate. If a technical fault is present in the control system, then it is simpler and more effective to repair the traffic lights. This means that every fault requires its own appropriate correction. In his ‘Grundsätze der Wirtschaftspolitik’ (Principles of Economic Policy) Walter Eucken conveys this idea with similar words:

“Improving the ethics of people does not eliminate the harms of the system… The general pattern of things should be such that it enables people to live according to ethical principles.”

It is also wrong to accuse people of self-interest for problems in the economy, since in a truly free market economy, each can only then realize his self-interest if his actions are useful to another at the same time. Proudhon has called this reciprocity, on which every market is based, a prerequisite for fairness. In a similar way that Christianity, while referring to coexistence, refers to self-love as the measure of charity. (“Love thy neighbor as thyself”), we should also, with reference to economic life, accept self-interest as the measure of altruism.

Will speculation be checked
with money reform?

Similarly, the misdemeanours of people cannot be blamed for speculation excesses that are increasing throughout the world. They are rather the consequence of a flaw in the monetary structure, which leads to an ever-increasing surplus income and wealth accumulation in the hands of a minority in the world. Besides, they are the consequence of a misunderstood concept of liberal money and capital commerce. These reserves and concentrations of wealth would indeed grow slower than before with falling interest rates. On the other hand, it is to be feared that with sinking interest rates, even more surplus-billionaires would try to make profits from speculative investments.

This misuse of the liberal capital commerce can be checked in a simple way. a volume-related charge could be imposed on every transaction, the level of which exceeds the short-term profit opportunity. More specifically, if the transfer of a sum of money, for example 1000 Dollars, brings in a profit of 12% per annum (=120 Dollars), then a charge of ten Dollars (that is one per cent) would bring the transfer into the profit no earlier than after 30 days. Even a charge of one Dollar (that is a thousandth, in relation to the sum being transferred!) would convert all transactions of three days duration into losses. For long-term investors, such a charge would not be a reason to refrain from investing their money, as it would become more and more insignificant with the duration of the investment.

By imposing such a speculation tax on all money-related transactions, the investors would be encouraged towards long-term commitments, which, as per the law of the market, exert pressure on the level of interest rates. And as money retention also carries a charge, the possibility of forcing the borrower to pay higher interest through a withdrawal of money from the market is removed.

The Nobel Prize winner, James Tobin, from the US suggested these transaction charges to slow down speculation excesses a long time ago. According to his estimates, the revenues resulting from them, even at very low rates, would be sufficient to remove the distress in the world to a large extent, a side effect that should be an additional reason to bring in such a tax.

The assertion, that can be heard over and over again, that such a transaction tax would be realizable only with the participation of all market places and exchanges in the world, including tax and investor havens from Lichtenstein to the Bahamas, is not conclusive. If the large industrial nations unanimously prohibit the banks within their borders from transacting with these offshore-centres and tax havens as a punishable offense, they would dry up in quite a short time.

Is a flight into gold and other material assets
to be anticipated?

In textbooks on political economy, a speculative transfer of financial investments into gold, jewellery, works of art, antiques or anything similar is brought forward as an objection to money reform. Even Keynes was subject to this error in reasoning in his above mentioned masterwork. In reality, the acquisition or savings in the form of such durable commodities is without any negative consequences for the economy. Here, in the secondary cycle, only an exchange of commodities that have been already bought once takes place, during which an available commodity changes hands for money. The quantity of money and commodities available in the primary cycle remain unaffected by it. These objects of value are just as ill suited as payment substitutes as they are for extorting interest from others.

As a matter of fact, such a flight of surplus money into works of art would be quite welcome, as they would certainly also benefit the artists still living. Besides, it would ensure that “money in cash boxes without demand would flow into cash boxes with demand” (Dieter Suhr) and thus directly into the economic cycle, instead of – as is otherwise the case – through additional interest charged credits.

Will there be flight into real estate?

In contrast to a flight of money into gold, art and antiques, a flight into land property would be problematic. For real estate as a non-reproducible commodity is associated with interest revenues, also called ground rent. And as all existences and economies depend on land, a commodity from nature, a speculative purchase of real estate would drive prices, and by it also ground rent charges, sky high. Therefore, during the introduction of a money circulation safeguarding system, a land reform must be put into effect fairly quickly and real estate speculation must also be made impossible.

The necessity for the reform of land law results also from the fact that land – just as light, air and water – is a gift of nature and not a commodity produced by man. Every human being has an equal claim to this non-reproducible commodity, which becomes scarcer with the number of people in the world and thus more valuable. The still current Roman ownership laws regarding land and resources have to be re-transformed into the right of use in view of the scarcity, through which, either directly or indirectly, all will participate to the same extent in the yields from land. Only with such a land reform, which allocates equal right to everyone on earth, would peace be assured in the world.

Such a communal law regarding land is still valid in many regions of the world and it also was the rule in Europe until the Middle Ages. This means that land may – as was the case in those days – be allocated only on a long-term tenure and use or hereditary lease contracts. The resulting rents again belong to all people to an equal extent. Actually this claim must extend to all people living on the earth, not to those who happen to live in the particular location and thus effortlessly become the beneficiaries. Private land ownership is, in principle, as absurd as private ownership of air or water, even if we have become used to it over the centuries.

What has to be done with regard to land?

There are a number of practical models and approaches to implement such a land reform. The “Seminar für freiheitliche Ordnung” (Seminar for Liberal Order) that is located in Bad Boll and mentioned in the appendix of this book has worked out a series of articles and standard contracts with regard to this.

A first practical step in the correct direction would be a categorical ban on the sale of any area of land which is still in the possession of communities or government. This land may, in future, only be taken on lease or according to the planning and building law. Besides this, the remaining options of purchase by the communities have to be made the rule.

The elimination of the existing land-related injustices is also possible without repurchase, namely through a land taxation, the level of which corresponds to the existing ground rent. This taxation is already present in many countries, but includes, factually unjustified – as the land property tax in Germany – very often the buildings, too. Through a concentration of this tax on land, the speculative land hoarding and construction gaps would decline and pressure on prices would result, whereby necessary repurchase by the communities would be made easy.

A few examples might make clear to what extent communities, and with them people, would profit from such a reform. If the city fathers in Zürich had not sold off but only leased, for example, the region of the former Wall Anlagen in the 19th century, the total public expenditure of the city could have been defrayed by these revenues! Similar losses for the citizens are incurred today in connection with public infrastructure facilities. Thus, for example, in connection with the construction of the new airport in Munich, the farmers between Munich and Erding have – according to estimates of Wolfram Engels, economist and publisher of the magazine “Wirtschaftswoche” – become richer without effort by a good 30 billion DM. And the land price increase in Berlin, triggered by being declared the new capital and the announcement of the relocation of the seat of government, were estimated at an amount equal to the total costs of the move including all the newly planned constructions! While today people affected by depreciation as a result of public measures often receive compensation, the increased values that are triggered by it, on the other hand, flow, to a large extent, into the pockets of a possessing minority instead of to the general public.

What about capital flight with
declining interest rates?

If someone sets up a production unit in another country and continues production there, this can be called, without doubt, a “capital flight”. Not only has the other country made a gain through the real capital placed there, but also through the production linked to it. These real gains correspond to an even greater loss in the country of origin. If, however, someone brings a suitcase full of money into another country and locks it up, it has the same negative effects as hoarding within the country. If, on the contrary, he wants to start something in the foreign country with the money, then he must, first of all, exchange it for the currency valid there. That means if, for example, somebody from the Euro-zone would like to spend or invest his savings in the USA, then he needs an exchange partner who gives him Dollars for his Euros. It does not matter whether the exchange takes place between two people or through the bank, whether in cash or through a bank transfer – only an exchange takes place. And just as the European can only spend or invest the Dollars that he got in the USA, the American has to do the same with the Euros obtained in Euro-countries. Thus, only the right of disposal of money has been exchanged each time, which – in contrast to the production unit mentioned at the beginning – remains in the economic zone to which it belongs. And if the American uses the exchanged Euros for purchases or investments instead of interest yielding savings deposits, then the money enters directly, and without a detour via interest charged credits, into the cycle.

There is thus no “capital flight” in the domain of money that can lead to losses within the country. No discussion arises at all when someone carries his money in a suitcase to Luxembourg or a similar tax haven in order to evade taxation on his money. Deposited there once again, his deposit is available as a credit potential for the Euro economy just as it was before the withdrawal from his account in the country of origin. And the money thus transferred is back once again at a branch of the central bank after a delay of, at most, two days, often still wrapped with the original band with which they were issued. What is lost to us is only the circumvented tax payment.

Money flight into tax havens leads thus to changes in the amount of money just as little as it does to the exchange processes between currencies. Such exchanges can, at most, lead to corresponding increases in the exchange rate through the increased demand for foreign exchange. Exchange rate increase for the coveted currency slows down the excess demand once again. Lopsided situations can result only then, when the rate of exchange is no longer subject to normal market forces and is abusively overrun by bouts of speculation.

Does circulation safeguarding lead
to a growth-euphoria?

Often it is feared that a decline in interest rates by such cash circulation ensuring measures leads to more consumption and thus to growth. Consumption (=spending) can be done by a person only within the range of his income. These incomes do not increase due to the falling interest rates, but are only shifted. For example, if the rent of an apartment is lowered because of a halved mortgage rate by about 200 Euros, or Dollars, then the tenant has more money at his disposal, the landlord that much less. Because workers (entrepreneurs, employees) have more purchasing power at their disposal with falling interest rates, they need less credit. And because interest yields credited to money holders are diminished, forced indebtedness also decreases.

Since with lower interest rates workers have to work less for third parties, they can indeed consume more. They can, however, also reduce their working hours to the extent they had to earn the interest included in rent and all other prices, while still preserving their usual standard of living. That means that capital no longer determines the amount of output to be produced through enforced growth, but workers decide it themselves.

“Only on the basis of uninterrupted money circulation can an uninterrupted cyclic economy be established, in which, not the destructive principle of exponential growth but the principle of dynamic balance is prevalent.”

These are the words of Eckhard Grimmel, a commercial geographer teaching in Hamburg, in his book “Kreisläufe und Kreislauf­störungen der Erde” (Cycles and Cyclic Disturbances on Earth), published in 1993.

The assumption, too, that during falling interest rates a huge demand for credit would result, is an error. As we can see in Japan, even with the lowest interest rates there is no increased investment activity just as the market does not allow for an anticipation of any further sales opportunities.

Is the Euro a solution?

When something does not work on a small scale, a larger scale alone can hardly produce better results. This is also true for the expansion of a currency into a larger area of operation or the combination of many currencies. If “sick” and “healthy” currencies are packed together, the danger of infection arises, as in the case of rotting apples mixed with sound ones.

In the Maastricht Treaty, the basis for gathering all the individual European currencies into a monetary union, criteria have been put down in order to avoid such a negative infection as far as possible. This concerns not only the growth of the rates of inflation and of interest, but also the economic growth and the national debts, the extent or developments of which are to be balanced somehow. However, during the amalgamation of the first eleven countries, these criteria had been interpreted very generously. This is particularly true for the national debts, which actually should not exceed 60 per cent of the gross domestic product, but which lie, for example in Italy and Belgium at almost double that value. Only the stars can foretell when and how these countries are to arrive at the prescribed rate. Adherence to these criteria may be still more uncertain in view of the integration of additional countries, especially those from Eastern Europe. Thus, the Euro is not the union of equally stable currencies but rather of more or less strong and weak ones. Taking the model of the German Bundesbank for the European Central Bank is no guarantee of stability as the inflation rates in Germany during the past 50 years have shown.

Even though the ‘convoy’ of the eleven countries moved in a fairly close sequence since the nominal introduction of the Euro at the beginning of 1999, that does not say much about the future development. In particular, it does not say much about the comparability of economic outputs that are backing the common currency. Even countries with weak economic capabilities could have had a relatively stable currency up till now. And they could have trade relations with other countries without difficulties and achieve full employment as long as the exchange rates agree with the conditions in those countries or compensate for the differences. But if a common currency is imposed on countries with different economic capabilities and different social structures, then financial equalization payments can hardly be avoided in the long run. Even if not directly comparable, some of these difficulties could be seen during the introduction of the DM in the new East German states.

The introduction of the Euro certainly has its positive side that is not restricted to the avoided currency exchange costs on cross border travel. In relation to the monetary problems presented in this book, the introduction of the Euro does not, however, represent any progress. Rather, it will be more difficult to loosen up the structures of our currency systems that have become stiff and implement a reform process, unless the regions in Europe are given greater freedom, for example, also with regard to regional payment systems.

Are the maintenance costs of money
and inflation comparable?

Often, to the proposal for a fundamental monetary reform of our currencies, the objection is raised that a maintenance tax or a user fee of, say, five per cent for money, is in effect nothing but inflation in small doses to the same extent; both of them would put money into motion. The latter is right, of course. But there are still essential differences in both these circulation ensuring measures, not only in their impacts but also in the following points.

  • Maintenance costs of money are applicable only to demand money, cash.
    Inflation affects the many times larger monetary assets.

  • Maintenance costs of money drive surplus money into banks and increase the credit potential.
    Inflation drives surplus money into consumption or false investments and heats up economic growth.

  • Maintenance costs of money stabilize the purchasing power of money and thus price levels.
    Inflation causes, in contrast, constant price-alterations and irritations in the structure of all money related matters, especially of all calculations and settlements.

  • Maintenance costs of money not only enable stability of the purchasing power, but they also push the interest rates little by little towards zero.
    Inflation, on the other hand, drives the interest rates upwards, with all their negative consequences.

  • Maintenance costs of money flow from the cash boxes of the money holder into that of the state and thus to the general public.
    The many times higher inflation and interest charges have to be borne by the general public and benefit a minority.

  • Maintenance costs of money can be scheduled at a fixed rate and levied.
    In contrast, inflation can neither be calculated nor set at a fixed rate.

Certainly one can largely offset the negative consequences of inflation through an indexed increasing of all prices, wages, taxes, deposits and payables. But these measures require an enormous amount of work which, in practice, can only be coordinated and controlled with difficulty, if at all. As experience shows, such an indexing has a tendency towards an inflationary self-acceleration. In contrast, imposing carrying costs on money, affects only two relatively small quantities, namely cash and consequently demand deposits. Besides, these variables are easy to control and the practical handling of the levy – measured against the expenditures involved in inflation adjustments – is substantially simpler.

—————-

1 Social Judge, in: “Sozialstaat unter Druck” (Welfare State under Pressure), Zeitschrift für Sozialreform

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