A Brief Synopsis of Natural Economic Order by Silvio Gesell

A brief synopsis of Natural Economic Order by Silvio Gesell

In spite of the holy promise of all people to banish war, once and for all, in spite of the cry of millions "Never a war again," in spite of all the hopes for a better future, I have this to say: If the present monetary system, based on compound interest, remains in operation, I dare to predict today that it will take less than 25 years before a new and even worse war. I can foresee the coming development clearly. The present degree of technological advancement will quickly result in a record performance of industry. The build-up of capital will be rapid in spite of the enormous war losses, and its over-supply will lower the interest rate. Money will then be hoarded. Economic activity will diminish and an increasing number of unemployed will roam the streets... within the discontented masses, wild, revolutionary ideas will arise, and the poisonous plant called "Super-Nationalism" will proliferate. No country will understand the other, and the end can only be war again. --Silvio Gesell, Letter to Zeitung am Mittag, Berlin 1918

1 Foreword: It is important to keep in mind that no amount of legislature can fix societal ills unless it is directed at the very root of the problem. “Get tough on crime” attitudes never worked exactly because they sought to placate the masses, not eliminate crime. Certainly, it is easy to see that it’s not lenient judges who cause law breaking. Murder, for example, has been illegal since the beginning of our civilization 12,000 years ago, yet they are even more common today than they were in the past. Obviously, just because you make something illegal it doesn’t mean it will go away. So banning unearned income is not the way to go. The underlying cause of its existence has to be uncovered, brought into the light, and squashed with a hammer of justice. Will you like the truth? No, you will hate it. It will make you very uncomfortable, especially if you benefit (or believe that you benefit) from the existing system. Eventually I hope to convince you that money should be nothing but a medium of exchange. It should not be a store of value, and it most certainly, should not be Capital. For money, brought forth into the light by nothing but money, is a bastard child divorced from production. And when money is divorced from production, disaster is sure to strike. So please, keep an open mind, examine the facts and analysis laid before you, and if you fail to find logical counter-arguments, please accept it as the truth. For that is what this is, truth in all her naked glory. --K.D.A, 2005

Definitions: Unearned Income (from real capital) = money collected as Rent in excess of depreciation and reasonable wage for services provided Unearned Income (from capital) = Interest on loans, Dividends, etc

Product of Labor (PoL) = actual wares that are produced Yield of Labor (YoL) = money received from conveying PoL to marketplace Proceeds of Labor (RoL) = YoL minus (cost of natural resources + depreciation + rent + interest)

Supply = wares being conveyed to marketplace for purpose of being sold Demand = money being offered in exchanges for wares (do not confuse with desire, I desire a nice house, clean air and water, a dog and some livestock, add 3 wives. I can demand, however, only what the contents of my wallet allow)

Capitalist = person/entity who receives unearned income (see above) Speculator = person/entity who buys wares to re-sell for profit Labor = Everyone who has to live on Proceeds of Labor*

*Note: This has nothing to do with amount of money one earns or how high is one’s position. If a CEO has 0 stock and collects 0$ in dividends, he is a laborer, being compensated for his time with a salary just like any laborer. It should also be noted that mixes are not only possible but also are fairly common. If the same CEO also receives income from dividends, a tenement-house which he built for himself misusing company funds and from selling shares of his company which he allocates to himself below market price, he is a laborer, a capitalist and a speculator, as well as a thief.

2 Introduction: Purpose of Money If everyone produced everything his family consumed, there would be no need for trade and no need for money. Thus, money exists due to division of labor and if we accept division of labor, we also have to accept the necessity of trade. Trade could be conducted as barter or through a medium of exchange (money). Barter is cumbersome and fails more often than it succeeds. Its major problem is double coincidence of wants; that is, two people have to agree on what to exchange and how much they should exchange, hence the need for a medium of exchange (money). It should be realized by my dear reader, that purpose of money is not to be procured and put in a bank, but to facilitate the exchange of wares between many different parties. If you sell your wares and hold the money, the transaction is not really complete. Transaction is complete, once you spend that money to buy somebody else’s wares. Let’s say you grow onions, and at the end of the season receive 100$ for your produce. Instead of spending it, you decide to hold it. This means there is 100$ less in circulation and that means that a potato farmer near you may not be able to sell his produce at all (this does not happen in modern systems as money is always over-abundant and can be further created on demand). The system as a whole may simply not have enough money in circulation to accommodate that trade. Now imagine that you decided to buy some potatoes, tools, and a nice shawl for your wife…etc. You return 100$ back into circulation so it can be used as medium of exchange again. From here:

You do not sell and buy things for money, you trade wares you produce for wares produced by others using money as a medium. (P0)

This is very important! We need to realize that you don’t sell things to the “market” nor do you buy from the same source. We trade some of our production for other people’s production using money as a medium. We need to get out of our system belief that you can sell things to “market” without a discernable buyer. Using money for any other purpose than medium of exchange is disastrous.

Part I: Whetting the stone, and if needed, putting the nose to it

Problems of today’s society are rooted in the nature of currency we use. The problem lies in the unfair advantage money (demand) has over supply (wares). Wares, put simply depreciate with time. Some rapidly, some more slowly, but in general this holds true. Quality of unbought head of lettuce, for example, inevitably decreases as it wilts and rots and so the price has to adjust. This is not so with money. One hundred dollars today is one hundred dollars tomorrow (I’ll deal with inflation later). From here, we have Premise 1:

Wares loose in quality and consequently in price over time, the money does not. (P1)

From P1 it can be clearly seen that producers are compelled to sell their wares as quickly as possible, while purchasers are not under any compulsion (arguably pangs of hunger and bite of frost are compelling enough, but we have long moved away from times when people produced only enough for food and clothing).

Here I need to address the fact that not all of currency is in circulation. Considerable amount sits on the sidelines collecting interest. Money only leaves its refuge when the expected return of the enterprise is greater than the interest. That is, a Speculator will withdraw 1000$ on which he was collecting 3% interest ONLY IF he can squeeze more out of that 1000$ by buying and selling. The same goes for borrowing. A would-be

3 Capitalist would only borrow 1000$ at 3% interest to build a tenement house, factory or ship if that tenement house, factory or ship could yield more. This is important enough to be Premise 2:

Money only enters circulation when yield on Real Capital or Speculative profit exceeds interest (P2)

At any given time there exists a producer/consumer price equilibrium. If producers produce 1000 apples and consumers are willing to offer 1000$ for purchase of those apples, dollar/apple ratio settles at 1, that is you pay 1$ for one apple (oversimplification but a needed one). This is all fine and dandy, absolutely the way it should be, and then enters the Speculator.

Since money does not rot, tarnish or disintegrate, while the wares do, the Speculator can delay the transaction indefinitely putting the Producer at disadvantage. Producer’s future is quite uncertain, if he does not sell his apples today, what if by tomorrow morning they develop visible bruises and customer will only agree to pay 0.90$? Or apples go out of style and demand drops and he can’t sell any at all? Meanwhile Speculator is merrily snipping 4% interest on his money in savings account. So he comes to the Producer and says “I know the price on the market is 1$/apple, but who knows if you can sell them tomorrow, or ever. I’ll give you 0.95$/apple, and think fast, because the longer you think, the more your wares deteriorate.” So Producer scratches his head and decides that 0.95$ today is better than possible 1$ tomorrow or a possible zero and takes the money.

The only reason the speculator can get away with this is because his money does not depreciate like a ware, and so anyone would be happy to exchange a ware for it. The producer is under a compulsion to dump his ware quickly, before it becomes worthless. So, out of desperation, he is willing to accept less than $1 for an apple that is clearly worth $1 right now.

This seems perfectly normal and natural to us, because we grew up with this, but it is NOT. Here a man snipped 5% off the production just because he happened to have more money than he needed. A man who contributed 0 effort to production cycle gets 5% of proceeds (Note: it can be argued that Speculator does provide a service of trafficking the wares from manufacturing place to the consumer. Moreover, that since he needs a shop to sell the wares to general public, he does incur some expenses for which he must be compensated. We wholeheartedly agree, but it can’t be a % income. And, if Free-Money reform is ever introduced, Speculative income will dwindle to expenses + reasonable wage. That is a Speculator will become purely a Distributor, which is just another type of laborer. He will be fairly compensated for his contribution, but he will no longer be able to use his extra cash to snip a percentage.). Problem is not limited to speculators as even regular consumer holds the power to, using use Gesell’s term, embarrass the producer. Today producers have to bend over backwards to convince people to part with their pretty notes. Even a regular man can force the price of a good below the equilibrium level by threatening to withdraw from negotiations.

This tribute exacted by money from wares is called BASIC INTEREST. (P3)

Basic interest has historically always been 3-5%. Of course as long as there is profit to be made above the interest rate, people will borrow and borrow and borrow until the loan-interest (almost) matches the basic-interest. In that way, some of the speculative profit is transferred to the Capitalist.

Part II: Little detour on road to Economic Enlightenment, or components of loan-interest

“But wait!” You scream in anger. “I remember interest rates of 17%!” So while Gesell waits until near the end of his book I think I better address this near beginning before my dear reader tears me shreds.

Loan-interest = basic-interest + risk-premium + hausse-premium

Hausse-premium is the banker’s share of speculative profit due to rising prices. If prices are rising 10% a year, then speculative profit becomes 3-5% + 10% = 13-15%. So speculators will be willing to borrow at increased interest rates (up to 9.(9)% in this case in theory) “But wait! It is the Central Bank (CB) that controls the interest rates!” This is falsity of causality. CB’s don’t act, they react. Rising prices (inflation) forces them to raise the interest rates. Read any classical economist: to combat inflation interest rates must be raised. There is another way to look at it, however, and that is CB’s are still bankers, and when prices rise, they want their share of hausse-premium just like the rest. Or if you wish, speculative borrowing, due to rising prices, increases demand for loans, so their price, the interest, must rise. “But wait! Japan’s interest rates are near 0%! According to your formula loan-interest cannot fall below 3%!” Well, 0% inflation is not the bottom. Negative inflation is possible (deflation). Interest rates below basic interest signify deflation. In case of Japan: 3% + (-3%) + risk-premium = 0% + risk-premium. Anyway, stop looking at prime rates and start looking at real interest rates. Even when prime rate in USA was 1%, the lowest mortgage offer I could get was 6.375% with a perfect credit history.

Part III: Six more weeks of winter, or I will only come out when it’s above 7%

Scarcity enables landlords to charge rent (above the amount of depreciation + fair wage) on tenement- houses, factories (Means of Production or MoP) and ships (Means of Transportation or MoT). Scarcity is not natural, but an artificially induced market condition. It is enforced by the following:

Loan-interest and Rent-Yield always strive to equality. In static environment they are equal. (P4)

Proof: Let us first examine the case where Rent-yield exceeds loan-interest. For sake of simplicity 1000$ tenement-house yields 5% or 50$ while 1000$ loan costs 4% or 40$. In this case would-be capitalists will borrow and build tenement-houses until people/housing (yield of Real Capital is subject to rules of Supply and Demand) ratio shifts until only 4% can be beaten out of tenants. Nobody will borrow at 4% to build 4% yielding RC. Equality is restored.

Let’s look at the opposite case; Rent-Yield is below loan-interest. This signifies over-abundance of RC (as a consequence of drastic population reduction due to plague for example). All construction stops, and slowly, as population grows the Rent-Yield will creep its way up to the loan-interest. Equality is (eventually) restored.

So, rise in demand for housing causes fervorent construction, which continues until the Rent-Yield is driven back to loan-interest. Once at that level, even though scarcity of RC still exists, no additional construction will take place. Hence, artificial state of scarcity is enforced onto RC by existence of loan-interest.

Basic interest impedes demand’s ability to drive production, causing artificial scarcity. (P5)

Let us examine now how modern currency system impacts commerce. Let’s say that prices are rising. If prices are rising, amount of speculation in the system increases. That is, amount of money tied into buying-reselling- for-profit will increase. If you can buy an apple for 1$ today, and sell it tomorrow for 1.20$, you will take all the money out of the savings account and buy-and-sell apples! If prices continue to rise, more and more money becomes engaged in speculation, pushing prices even higher and higher. Money rushes like an avalanche to things that are growing in price. So when there is already an excess of money, more money enters circulation.

Let’s consider a case when the reverse is true: prices are falling. If prices are falling, speculators are no longer assured even of BASIC INTEREST, so they withdraw their money from circulation. If you can buy an apple today for 1$ and sell it tomorrow for only 0.80$ you will take your money and put it in a bank to collect interest. As money withdraws from the market, due to speculative profit being gone, prices fall even further due to shrunken money circulation. Worse yet, regular consumers will try to hold out as long as possible before spending their money as well. So when there is already deficit of money, more money retreats out of circulation

Increasing prices means money circulates, business flourishes, new RC is built and state collects more taxes (inflation due to over-issuance of money will be discussed later). Falling prices means lack of liquidity, stagnation of industry and shrinking production or deflation.

If you read the chapter carefully, you see why state-economists scoff at inflation, and treat deflation as virulent plague. To summarize:

Money rushes to circulation when it is already overabundant, and withdraws when it is already scarce. (P6)

P6 is extraordinarily important!!! It is the nature of money that enables bankers to cause cycles of Boom and Bust. We are so accustomed to cycles of explosive growth that are followed by cycles of contraction, that it never occurs to us that they are artificially induced in order to transform money/credit (ink on paper) to RC.

Part IV: Exchanging Troubles for Tribbles is a fair trade, Captain.

It should be pointed out that exchange of Capital (money) for Real Capital is not skewed in either direction. Neither form of capital has advantage over the other since both will yield the same amount. The depreciation of the RC is extracted in the form of rent, so the owner is not under the same compulsion as a seller of a ware. Hence Money and RC are both equally Capital.

Part V: Free-Money, or I have nothing to offer but blood, toil, tears and sweat.

I’d like to re-iterate here that the root of the problem is BASIC INTEREST, the ability of money to demand tribute from wares due to its indestructibility, and therefore over-desirability. Loan-interest and Rent are only consequences. To eliminate the problem it is BASIC INTEREST that we should seek to eliminate. This would be a good place to give Pierre-Joseph Proudhon an honorable mention. He was a brilliant economist who discovered the root of the problem decades before Silvio Gesell (due to an unfair advantage of being born earlier). He derived the wrong conclusion, however, as he thought wares had to be elevated to the status of money. To that end he formed Exchange Banks, which failed. People incorrectly assumed that since

6 his solution failed, his underlying theory of interest was wrong, so the truth remained buried until S. Gesell dragged it out into the light some decades later.

It is our contention that the very nature of the currency has to be changed if we are to eliminate the basic interest. Simply put, if wares tarnish, rot and mold let the money do the same! Purchaser has to be put under the same compulsion as the seller.

To that end we propose that every bill issued depreciate at the rate of 0.1% per week for total 5.2% annual depreciation. Technically, this would be achieved by dividing the back of a note in 52 sections. Each week a stamp that was 0.1% of the note’s value would have to be affixed for the note to remain legal tender. At the end of the year, each note is exchanged for a fresh one. Stamps themselves could be used instead of loose change. Velocity of circulation will go sky-high, as nobody will want to be stuck with a depreciating asset. (There is another alternative that I should mention for completeness. There would be 10 distinct types of notes in circulation. Once a month on a random day, one of these types would be withdrawn from circulation and replaced by another type but only at 95%. That is, you can exchange a dollar that is being recalled for 0.95$ or you can keep a colored piece of paper that ceases to be legal tender. This could be accomplished by printing large numbers across bill’s face)

What this will accomplish:

1) Loans Since lending money will be no different than lending wares, people will quite a bit more willing to lend money. Lent money, like wares, would not depreciate. If you lend a neighbor a sack of good potatoes in the spring, you expect a sack of good potatoes in the fall. It will be the same with money. If you lend 100$, you receive 100$ back. Even without interest, people will want to deposit money in the banks to avoid the depreciation. Banks will have too much money to loan it all out. Based on supply and demand, loan interest will have to fall to 0%. (Plus I envision cooperative societies springing up providing competition to the banks)

As consequence of this, furious construction of Real Capital will begin (See Part III) and will continue until Real Capital ceases to be Capital. That is, until you can only extract depreciation + reasonable wage for services provided (if any services are provided at all)

2) Savings “Argggg!” You scream, “How am I supposed to save for old age?” Simply, I say, build a tenement house. You place 1000$ upfront and then extract depreciation (let’s say 2% annually). You convert your stagnant cistern to a nice healthy spring. You avoid paying depreciation of money, people get a house to live in, and money returns quickly to circulation. Everybody is happy! You can also build MoP and MoT if you want a quicker flowing spring of money (Gesell estimates that ships depreciate 10% annually). “But wait! I’m too poor to afford a whole house/factory/ship!” Then get together with 100 others like you and pool your money! Cooperative societies are a good idea, be it for borrowing money, or building a house. Break out of your silly individualist ruts, I say! Get to know your neighbors and band with those who have common interests. Anyway, there will still be savings-banks and savings-accounts (see below)

3) Commerce People will actually seek to pre-pay their purchases. They will seek to arrange regular deliveries and pay in advance. This will be of enormous benefit for everybody. Industry will receive very good constant cash flow. People themselves will be estimating their own consumption instead of merchants, thus the overall efficiency of guessing will go up. Long-term orders will enable industry to retool well ahead of time. Merchant will only need to exhibit samples to the customers, and then arrange for deliveries. No storage costs means lower prices. Instead of stagnant pools of material goods all over the land, continuous rivers will flow on the roads, railroads, shipping lines and aircraft routes!

4) Capitalists and Speculators Well, this 2% of the population is a clear loser. They will gain absolutely nothing from this reform except maybe their immortal soul, and a clearer path to enlightenment. This section of the population, put simply, is parasites. They produce no real wealth, yet they consume it in quantities that make kings of old look like spendthrift misers. Eventually, they will wither and disappear, and not a moment too soon.

I would like to drive home the point that all these things will happen not because they will be forbidden or restricted. A few times when artificial caps were put on rents, results were disastrous. It is the uninterrupted fervorent construction that will inevitably follow, that will wipe the artificially induced lack of RC.

It will still be possible to be a full-time landlord, but only a working kind (that is a kind that fixes lights, unclogs drains, paints over cracks…etc).

Also, please note a special situation of people renting rooms in vacation zones. Zones that have agreeable climate year around need no special mention. Rent will be equal to depreciation (for time of occupation) + reasonable wage for maintenance. Zones that have influx of tourists for 3 months only, would have to extract 12 months’ depreciation in those 3 months; hence rent would appear to be higher than in year- round vacation spots. In any case, my personal belief is that in the case of luxuries like these, people can work things out themselves, and laws of supply and demand will help them along.

Part VI: Changes since Gesell’s time

S. Gesell was a brilliant economist of his time. He was NOT a pompous theoretician that sits in an armchair with a pipe, approximating the world in his mind. He spent a long time being a merchant in Argentina. He observed Boom/Bust cycles. He observed usury. He studied and unearthed the crux of the problem – Unearned Income. He studied and unearthed the cause of Unearned Income – Basic Interest – and devised a method for its elimination. He was a real man who lived in a real world, who saw real abuses, and real social injustices that our currency system facilitates. But even he could not foresee the situation I am about to describe. I absolutely believe that if he came to life today, and took a good look around (Namely FRB and DBC), he would have an infarction, a seizure and a stroke.

8 Fractional Reserve Banking (FRB) Fractional Reserve Banking is a system where Banks, collectively, can lend out more money that they have on savings-deposits. At a reserve rate of 10% Banks can lend out 9$ for every 1$ that comes in. Example: 100$ is deposited in Bank A, 10$ is kept and 90$ is lent out. It is spent and is eventually deposited in Bank B. Bank B keeps 9$ and lends 81$ out, which eventually ends up in Bank C, which keeps 8.1$ and lends out 71.1$...etc. If you did the arithmetic infinitely, you would see that $900 would be lent out because of the initial $100 deposit. (And remember, that extra $800 would require interest. Keep that in mind when you read P7 below.)

Obviously this system has to go. There are many great pieces written on evils of FRB so I won’t re-iterate anything here. Reserve rate should be raised to 50%, and for every 1$ in, only 1$ will be lent out.

100 Dollars in Banking system of 50% reserve rate

Lent out Kept in Reserve Percentage ------$50.000 ------$50.000 $25.000 50.00% $25.000 $12.500 25.00% $12.500 $6.250 12.50% $6.250 $3.125 6.25% $3.125 $1.563 3.13% $1.563 $0.781 1.56% $0.781 $0.391 0.78% $0.391 $0.195 0.39% $0.195 $0.098 0.20% $0.098 $0.049 0.10% $0.049 $0.024 0.05% $0.024 $0.012 0.02% $0.012 $0.006 0.01% $0.006 $0.003 0.01% $0.003 $0.002 0.00% $0.002 $0.001 0.00% $0.001 $0.000 0.00% $100.000 $100.000 100.00%

Debt-Backed Currency (DBC) This is the worst evil of modern era – worse than Hitler’s, Stalin’s and Eisenhower’s concentration camps combined. It has caused immeasurable suffering, and as I am writing these words, I fear that the worst is yet to come. Medium of exchange comes into existence with interest already attached to it. That is, if a bank lends out 100$ it expects 105$ at the end of the year. This is true for all banks, as you already knew, but I bet you never stopped to consider what that means for economy as a whole. Let’s reduce the problem to its simplest terms: imagine a pure barter system to which money has been all of a sudden introduced. Let’s say 100$ was emitted by the banks at 5% interest. At the end

9 of the year, economy, as a whole owes to the banks 105$...even though there is only 100$ total! There is simply not enough money in existence to repay the debt. This is not a far-fetched example; this is today’s reality! If all the money in circulation were pooled, there would NOT be enough to re-pay all the debts. Thus

If compound interest is attached to medium of exchange, Money circulating is always less than Money owed (P7)

National debts, under the current system, can NEVER be repaid. Ever. Really. Despite popular belief, the government does not print money, it prints Bonds (with interest attached already), and it gives those bonds to Central Banks (privately owned) for newly printed currency. In order for one man to pay his principle + interest, he has to out-compete another man. In this system, in order for majority to stay solvent, some have to go belly up (financially speaking). This system will have to go. Money will be state-issued. Emissions will be controlled by the Central Bureau of Statistics, a state agency. Local communities are free to issue their own currencies so long as it carries at least as much demurrage as the state currency or the fee for conversion is greater or equal to annual demurrage. I, personally, believe local currencies will no longer be needed, as Gesellian currency will always flow to where it is needed most, and out of where it is not needed.

Note: Some would say that the mere elimination of FRB and DBC would cause a drastic improvement all by itself. I wholeheartedly agree, but I know that as long as Unearned Income is collected, the capitalist class will devise ways to re-instate them. Unearned Income gives a tremendous amount of power to a very small minority of people. They will exercise it to mold the system even more to their advantage.

Credit Cards Money created on demand with no reserves, and little regard for financial stability of the bearer, has to go. There will be no Credit Cards. If it seems severe, consider this: most Americans who use Credit Cards for credit, end up in debt up to the eyeballs. As I am typing this, Congress is getting ready to slam a cast-iron lid on Bankruptcy, closing the only way for people to avoid becoming the bank’s indentured servants forever. Credit Cards go!

Banking, Saving-Accounts, loans Saving-Accounts will be treated as loans. Eventually interest rate will fall to 0%, so they will receive 0% interest. But they also will receive 0% demurrage. What happens when, as I envision, banks will no longer be able to lend out all the money they receive? Well then, if bank lends out only 80%, then 80% of the money in the Savings Accounts will suffer no demurrage, and 20% will. Loans, eventually, will be given out at 0% interest, and interest will be replaced with administrative fees and a fee for usage [if needed]. Administrative fees would be the same, regardless of the size of the loan (essentially to pay for depreciation of buildings + wages). Example: if a bank incurs depreciation of 100$/year and pays wages of 900$/year, but makes out 1000 loans/year, then administrative fee would be $1 per loan. Modern realities of Bank-Money should be considered, and a need for two separate accounts has been raised. We already have those two accounts: Checking and Savings. Checking account will incur the demurrage while savings account will not. There could be simple rules that would prevent people

10 from shuffling money back and forth, like limiting number of transfers to 5 per month (which today’s banks do already anyway)

Inflation Affectionately dubbed “a hidden tax”. It could be argued that inflation is a form of demurrage similar enough to what S. Gesell proposed. It is, however, a hidden loss, that only forces the fiscally savvy to spend. People can’t react to something that they don’t realize exists. And if you look at the last 60 years (due to inflation), Western economies did boom. Unfortunately, hidden demurrage has had little effect on the Joes and Janes who merrily carried their money to the banks. And bankers, due to FRB and DBC were able to find the best store of value possible: people and their future incomes. Furthermore, inflation hits poor the hardest and affluent the least as they find ways to buy inflation-resistant assets (such as land).

Common Arguments:

People will hoard non-perishable commodities to circumvent the system.

Yes, but while precious metals/stones are inflation-resistant they remain a commodity, that is they will remain subject to laws of supply and demand. If everybody rushes to buy gold after the reform, the price will go to 6000$/ounce or even higher. When frenzy dies down it will go back to the normal supply/demand level of 400$/ounce. Good luck “storing” 6000$ “value” in an ounce of substance that will only fetch 400$ under normal market conditions! If you need further convincing, think back to dot com bubble. CSCO, for example, plummeted from 80$/share to 10$/share once the frenzied buying stopped. Same thing will happen with precious metals/stones. Anybody who decides to be smart and “hoard” gold, will find himself spending 20 000$ just to be holding 400$ worth of commodities 2 years later.

But 400$ of gold today is the same amount of gold a year from now.

Yes, but the price will fluctuate. Go to kitco.com and check historical charts. Gold has no guaranteed purchasing power. Money does. You want to gamble? Fine. You’ll learn the hard way. A year later the same ounce of gold that you bought at 400$ may only be sold for 300$ or actually increase and fetch 500$. 100$ bill is not a gamble, a year from now it will still be exactly 100$.

People won’t save if they don’t get interest.

Interest was forbidden for much of middle ages by the Pope, yet people hoarded massive amounts of gold. Saving is in our nature. People will save.

People will keep currency as souvenirs

Fine, if you kept 100$ to glue it to your wall, you just made 100$ gift to the state. This is nothing a decent statistician can’t account for.

Worgl Experiment was inconclusive. Any local currency would have had same effect.

The effects of Worgl experiment may be inconclusive, yes. There was lack of liquidity in the town and any infusion of currency would have helped (with or without demurrage). What’s not inconclusive is that despite the grand success that local currency was (or rather because of it) Austria’s Central Bank moved in and shut a tight lid on the whole operation. Other local currencies, like Ithica hour, exist to this day. It is only demurraged currency that Central Bankers perceive as a threat.

You are stuck in 19th century. We don’t need to accelerate velocity of circulation…it doesn’t matter…we have over-abundance of liquidity if anything…modern financial tools compensate…

You missed the whole point. Purpose of the reform is not to accelerate velocity of circulation. You confuse a mean for an end. The defining purpose is to eliminate Unearned Income. Unearned income is money divorced from production, a bastard child. It should not be allowed to exist.

Afterward: Hopefully you can see as clearly as I do, that the current monetary system is incompatible with Egalitarian economic ideals, to which the Western world claims to subscribe. The system that is in place has existed for the past 12,000 years, and while it enormously enriches 2% of population, it throws everybody else into jaws of poverty. It is pure evil that has to be wiped out by a stern and unwavering hand. It won’t be easy; people will fight every step of the way. Not just Capitalists and Speculators, but regular John Smiths and Jane Johnsons will march against the idea of Free-Money. After all, gaining 1.79$ per year on savings account is a tangible thing, and Free-Money is just an abstract idea.

Part VII: Privately collected Land-Rent, or how to charge for usage of something that’s not even yours

Let me start off by dispelling a common myth: You can’t actually own land. You can’t put it in your pocket and take it with you wherever you go. You can’t put it on the mantle and point to it while entertaining guests: “look, I own it!” What is understood as “ownership” is nothing but state’s permission for (exclusive) usage. For a fee, the state will grant you the (exclusive) right of usage to a piece of land. What this means is that the state will defend your right to (exclusive) usage, by force of arms, if necessary. In reality, land belongs to no one. Nation-States claim chunks of earth and maintain borders by force of arms. It is violence, or the prospect of violence that preserves status quo; thus, right to exclusive usage of land (REUL) stems from violence. If someone trespasses on your land, you call police and they remove the intruder (local defense). If another State threatens your land, your own State’s army comes to protect it (global defense). While seemingly similar, the two situations are not the same. In the first, the state intervenes to preserve your REUL. In second, the state intervenes to preserve its own REUL on a global scale. State always maintains REUL on global scale, while granting REUL on local scale. What’s more, local REUL can always be withdrawn, as global REUL overwrites it. Read any “ownership” legislature. Land, even in private hands, remains part of the State in which it is located. If that weren’t the case, USA could have just bought parts of Mexico it is currently occupying, instead of heaving to spill blood over it. Even in Western Democracies, land can be, and is taken away to facilitate state projects. (roads, railroads, bridges, tunnels, factories, dams…etc)

Having that out of the way, let us consider a hypothetical case: let’s say a landlord has 2 plots of land of equal area, which he rents out for agriculture. Plot 1 happens to be more fertile than Plot 2 and yields two times as much with the same amount of work and same amount of fertilizer. Or expressed differently, cost per unit is ½ on Plot 1 relative to Plot 2. So let’s say Plot 1 produces 100 sacks of potato and Plot 2 produces 50 for the same cost of 100$ in labor and fertilizer. That means production cost per sack for Plot one is 1$ and for Plot 2 is 2$. It seems logical that Farmer on Plot 1 should be able to sell his produce twice as cheap as the farmer on Plot 2, right? Wrong. It just so happens that the Landlord is quite aware of the difference in the fertility and is charging twice the rent for the plot that is twice as fertile. This holds true for all Resource Gathering Operations (RGO): the more productive the land, the higher the rent. It is similar with Industrial Centers (IC) and Centers of Commerce (CoC), though deciding factors are roads, human resources and proximity to a CENTER. The CENTER could be a nation’s capital, a shipping port, a major railroad hub, a scientific/artistic Mecca…etc. What above paragraph means for population in general, is that wares reach market place carrying the same production-cost tag. That tag is dictated by the worst plot of land, in the most remote location. A coal mine just outside of Moscow saves quite a bundle on transportation costs as compared to one in a remote town in the Ural Mountains. Whatever it saves, however, is claimed by Landlord as rent. But it’s not an insidious plot, by an evil Landlord association. It is the laws of Supply and Demand at work here, as people are willing to pay higher rent for more productive lands and/or lands closer to the CENTER.

Whatever the difference is between a more accessible and productive location and the most inaccessible and unproductive one, is always absorbed by land-rent. Even further, any increase in productivity due to technological advancement is also always eaten up by land-rent.

Land-Rent equalizes wares’ cost of production to the cost of production of same wares in the most remote and least productive location (P8)

Part VIII: Free-Land, or what you should never mention out loud

Gesell uses word “nationalized” for his proposal (which I imagine unsettles a lot of people), but since land is always nationalized (remains part of the nation it is in), I prefer the term “de-privatize”.

So all land should be de-privatized. Landowners will be given government securities in exchange for their REUL contracts. Securities are given in a way to compensate the income, not the price. For example, if a particular piece of land yields 1000$ annually, then it can be replaced with: 50,000$ of securities @ 2% interest 25,000$ of securities @ 4% interest 10,000$ of securities @ 10% interest

As you can see, it would be most beneficial to enact this reform when interest rates are high. The state would still collect rent and use it to pay the interest on the securities. (in theory netting 0$) If Free-Money reform is enacted along side with Free-Land reform, the interest rate will eventually fall to 0% so rent-money will be used for paying off securities. Even if not, some tax revenue could be put to the same use. Once all the securities are paid off, the land-rent will be distributed to women on the per-child basis. It is women who create (increased) demand for land by giving birth, and it is only fitting that it should be women

13 who receive it. More pragmatically, if women are assured of their offspring’s survival, the gold-digging phenomenon will dwindle to virtual non-existence. Women will no longer be obsessed with a rich husband, forgoing all other attributes (in today’s world, a man could be an 82 year old leper with a glass eye and wooden leg, and still have beautiful blondes hanging on each arm if he has money). So the process of natural eugenics will have room to develop: women will choose to marry men for inherent physiological, mental and spiritual attributes, not inherited fortunes. The re-distribution scheme is not integral to this proposal, any method could be used as long as it distributes all the money back to population and it does so with mathematical fairness. It could be distributed to all adults for example, each adult’s share being total/number of adults. Some would argue that people living in harsher areas should receive a greater portion, to which I say: once we open that door even a crack, we are inviting abuse. “But wait! How is that any different? I will still have to pay for things as if they were produced in a far off land on hard-scrabble!” Well yes you will pay same price in the market place, but the difference will be made up by the land-rent distributed to women. Instead of being concentrated in a few hands, land-rent will be given back to everybody. What you actually pay will still be subject to laws of Supply and Demand.

A great change in the way REUL will be transferred. It will be done in an open auction, and people will bid the rent they are willing to pay on a particular piece. This is an enormous change, and a vast improvement. Today, you can’t possibly start an RGO without a vast amount of up-front cost of purchasing land. After Free- Land reform, any man could go to any place in his country and see what farms are up for auction. He could then find one to his liking, estimate what income he could squeeze out of it and then bid on how much rent he is willing to pay.

Remember, you will bid amount of rent you are willing to pay for land. No upfront cost.

Serfdom would be impossible to enforce under those conditions. I cannot possibly overstress the importance of removing up-front cost for getting REUL. A man sick of the city climate can try his luck as a farmer without having to save $500,000 or take out a crippling loan for that amount. A farmer can leave his farm and go to the city and bid on a vacant lot, build a house on it and sell it.

“But wait! There is a lot more to RGOs than growing produce!” Quite right you are, there are quarries, and mines, and timber harvesting and…etc. I don’t see how they are any different, really. The same principle could be easily applied. Enterprising men could estimate the labor costs, richness of the veins, infrastructure…etc and bid on the rent of a mine. Or, as is my sincerest wish, associations could be formed that would undertake the process of bidding through an elected official. If Free-Land is enacted along with Free-Money, 0% loans will make new explorations and RGO development a doable enterprise. Let’s say a geologist takes a loan to start practicing his trade. He buys some equipment and goes someplace to search. Let’s say he found coal. So he goes to local association of coal miners and says: “I found a coal vein that I estimate at such and such. I will give you the information for this much.” Individual Free-Enterprise today is a pipe dream, attainable by only a select few. Despite persisting myths, Individual Free-Enterprise is being systematically snuffed out today in favor of Corporate-Enterprise. It has to stop.

14 Afterward in words of Silvio Gesell: “Truth is as sluggish as a crocodile in the mud of the eternal Nile. It does not wreck of time; time measured by the span of human life means nothing to it, since it is everlasting. But truth has an agent which, mortal like man, is always hurried. For this agent, time is money; it is ever busy and excited, and its name is error. Error cannot afford to lie low and let the ages pass. It is constantly giving and receiving hard knocks. It is in the way of everyone and everyone is in its way. It is the true stumbling block.”

. Confused? Questions? Comments? Angry Remarks? Email me at [email protected].