An Answer to the Present World Financial Crisis

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Felix Fuders •A global financial system without interest... Estudios Internacionales 166 (2010) - ISSN 0716-0240 • 45-56 Instituto de Estudios Internacionales - Universidad de Chile

Alternative concepts for a global financial system – an answer to the present world financial crisis

Conceptos alternativos para una sistema financiero global –una respuesta para la presente crisis financiera

Felix Fuders*

Abstract

Neither interest-capitalism nor communism are natural economic forms, that is, they do not match human nature, but rather are forced by government, meaning that both are destined to fail. Communism leads to laziness and neo-liberalism to greed. In a healthy, that is, natural economic system, neither a planned economy nor interest exist, both of which lead to constrain freedom. With communism, people are enslaved through the forced labour inherent in a planned economy; in an interest- based economy, people are enslaved through the burden of interest, which multiplies exponentially and eventually makes it impossible for an economy to supply households sufficiently, since the exponentially multiplying interest must be earned and paid for.

Key words: capitalism, communism, interests, freedom.

Resumen

Ni el capitalismo basado en la obtención de intereses ni el comunismo son formas económicas naturales, esto es, no son propios de la naturaleza

* Profesor, Instituto de Economía (FACEA), Universidad Austral de Chile. Recibido el 28 de enero de 2010; aceptado el 14 de julio de 2010.

45 Estudios Internacionales 166 (2010) • Universidad de Chile humana sino que son impuestos por el gobierno, lo que significa que ambos están destinados al fracaso. El comunismo conduce al ocio y el neoliberalismo a la codicia. En un sistema económico sano, vale decir natural, no existen una economía planificada ni la obtención de intereses, ambos cuales llevan a limitar la libertad. El comunismo esclaviza debido al trabajo obligatorio que impone una economía planificada; el capitalismo basado en la obtención de intereses esclaviza a través de la carga de los intereses que se multiplican de manera exponencial y con el tiempo impiden que la economía pueda proveer suficiente apoyo a las familias, debido a que estos intereses deben ser ganados y pagados.

Palabras claves: capitalism, comunismo, intereses, libertad.

46 Felix Fuders •A global financial system without interest...

Forced growth - the logic otherwise might notice that the money behind interest supply is growing considerably more quickly than the productivity of the An economy based on interest de- world economy4. This is also the reason stroys itself at set intervals. This is not why all industrialised nations, as well as difficult to understand, since financial those wishing to become so, are striving assets double themselves in accordance for economic growth5. Production must with interest rates through interest and increase every year in order to pay for compound-interest in approximately 10 the interest. The increase in production – 15 years. Even the fastest calculator is measured in relation to the previous in the world some day will no longer year’s level. be able to keep up with the resulting interest burden for lack of zeroes1. This is the logic of an exponential-function2. 4 The dollar money supply M3 is developing Still less can an economic system ever exponentially, see: en.wikipedia.org/wiki/ Money_supply; http://www.economagic. achieve a great enough economic per- com/em-cgi/cha...xe/fedstl/m3sl. For the formance to satisfy the demand for moderate evolution of the growth of world interest. Here we find the cause of the productivity see: International Monetary rapidly and ever more rapidly growing Fund, World Economic Outlook – Finan- cial Systems and Economic Cycles, Wash- money supply which then led necessar- ington 2006, p. 1. The productivity of the ily to the stock- and real estate-bubbles, economy actually shrank at last, see. and to the resulting financial crisis. The OECD, Economic Outlook, Paris, Vol. US Federal Reserve has not been mak- 2008/2, No. 84, p. 6, 12, 15. It was high- lighted that the growth of the quantity of ing the money supply M3 public since goods in the world in the last 30 years, 2006, and for a good reason3. People increased only four times, while the monetary side has increased forty-fold, cf. Eberhard Hamer, Der Welt-Geldbetrug, 1 To illustrate the problem the so-called in: Zeit-Fragen 2004, No. 45, p. 1; id./Eike Joseph’s penny is suitable. If Jesus had Hamer, Was passiert, wenn der Crash inherited merely a penny from Joseph, and kommt?, 6th ed., 2005, p. 32. if this penny had been deposited in a bank 5 Margit Kennedy, Geld ohne Zinsen und with a 5% interest rate, the investment in Inflation, p. 159; Karl Albrecht Schacht- 1990 would have amounted to 123 billion schneider, Verfassungsrecht der Europä- globes of pure fine gold, seeGünter Han- ischen Union, to appear in print., § 14, I. nich, Börsencrash und Welt-Wirtschaft- 3 e); Wilhelm Hankel, Währungspolitik, skrise – Der Weg in den Dritten Weltkrieg, Geldwertstabilisierung, Währungsintegra- 4th ed., 2005, p. 15. tion und Sparerschutz, 2d ed. 1972, p. 2 That money growth due to the compound- 71ff., 103ff.; Helmut Creutz, Das Geld- ing effect follows an exponential function syndrom. Wege zu einer krisenfreien also turns out in Margit Kennedy, Geld Marktwirtschaft, 1993; Günter Hannich, ohne Zinsen und Inflation – Ein Tausch- Sprengstoff Geld: wie das Kapitalsystem mittel, das jedem dient, 1990, p. 22 f. unsere Welt zerstört, 2d. ed. 1999, p. 45 3 See www.federalreserve.gov/Releases/h6/ ff.; Werner Lachmann, Volkswirtschafts- discm3.htm. lehre 1, 4th ed. 2003, p. 184 ff.

47 Estudios Internacionales 166 (2010) • Universidad de Chile

The problem is that demand and other words: interest on one side neces- production cannot be increased arbi- sarily leads to debt on the other, since trarily – there simply aren’t enough there is no interest without debt. The resources. It is also not understand- interest- induced self-increasing money able why more should continually supply therefore automatically leads to be produced although a high level of higher total indebtedness7. prosperity has already been achieved. Extravagance, predetermined breaking points in products, disposable products, High credit risks, casino «scrapping incentives» and – again mentality, inflation: very up-to-date – even the invention of secondary phenomena of the diseases6, are symptomatic of the prob- interest economy lem in the system. The economy tries compulsively to maintain economic The continually, ever accelerating growth. When percentile economic increase of money in circulation can, growth falls behind the rate of inter- at some point, no longer be covered est, the State must finally make up the by productivity, which cannot grow difference by going into debt. This is continually, since there is no endless a reason for the high and ever more growth in nature. This leads necessarily rapidly increasing level of national debt to inflation, although only partially at among industrialised nations. Or in first, i.e. in investment markets. Price bubbles in stock and real estate markets corroborate this impressively8. This 6 cf. Lynne McTaggart, What Doctors self-multiplying money seeks forms of Don‘t Tell You: The Truth About the Dan- gers of Modern Medicine, 2005; Vernon investment. Responsibility for financial Coleman, How to Stop your doctor killing bubbles thus lies neither with irrespon- you, 2003; Jörg Blech, Die Krankheitser- sible bank traders who do not properly finder – Wie wir zu Patienten gemacht werden, 2005; Torsten Engelbrecht/Claus Köhnlein, Virus-Wahn: Vogelgrippe 7 cf. Günter Hannich, Börsencrash und (H5N1), SARS, BSE, Hepatitis C, AIDS Welt-Wirtschaftskrise, p. 21 f. Also already – Wie die Medizin-Industrie ständig Aristoteles, who recognized that the mac- Seuchen erfindet und auf Kosten der Allge- roeconomic interest revenue accurately meinheit Milliarden-Profite macht, 3rd ed. reflects the interest cost of debt, see:Ulrich 2006; Michael Leitner, Mythos HIV – Eine van Suntum, Die unsichtbare Hand – Öko- Kritische Analyse der AIDS-Hysterie, nomisches Denken gestern und heute, 3rd 2000; Stefan Lanka/Hans-Ulrich Niemitz/ ed. 2005, p. 73 f. Veronika Widmer/Karl Krafeld, Die Vo- 8 The price bubbles have been denominated gelgrippe – Der Krieg der USA gegen die a „partial« inflation; cf. Karl Albrecht Menschheit, 2006; Veronika Widmer/ Schachtschneider, Armes Europa – armes Stefan Lanka/Susanne Brix, Der Masern- Deutschland: Wird Europa eine Oligarchie Betrug, 2006; Kurt Blüchel, Heilen verbo- der Unternehmens- und Parteiführer? – ten – töten erlaubt. Die organisierte Gedanken zur Grundrechtsproblematik der Kriminalität im Gesundheitswesen, 2003. EU, in: Zeit-Fragen, 1999, No. 62, p. 1.

48 Felix Fuders •A global financial system without interest... evaluate credit risks nor with the often ing money. This is what history books criticised casino-like games played by teach us. In reality, however, in 1923 the banks in the markets; it results rather German State was compelled to print from pressures to invest capital for a money not only because of reparations high return. The all too easily acquired from the Treaty of Versailles, but also loans, casino-like gambling and the because the interest-burden of national lack of bank supervision, however, are and war debts climbed endlessly. The suggested in the media and literature as US Federal Reserve as well as the ECB the cause of the financial crisis9. Very find themselves in a similar dilemma likely it is desired to keep the major- today and have already begun printing ity ignorant regarding the causes of money11. However nowadays this is the coming financial crash in order to more elegantly called «buying back of make a facilitate subsequent post-crash national bonds»12. re-establishment of an interest-based system. Money doesn’t work, but people do Hyperinflation: possible again Beside the fact that an interest-based financial system is self-destructive13, One can therefore expect little it is also the reason that the gap be- public resistance, as egregious errors in tween rich and poor, and in the end the system would, most people might also the gap between rich and poor think, naturally be excluded this time10. countries14, continues to expand, as In the same way, most people are vir- has been proven15. People within inter- tually convinced that hyperinflation est capitalism can be therefore divided like that of 1923 in Germany would into two groups: those who work and now be impossible, because the State so are genuinely productive, and those would not make the mistake of print- 11 Similar interpretation offers Holger Stelt- 9 cf. Paul Krugman, The return of depres- zner, Auf dem Londoner Gipfel, F.A.Z. v. sion economics and the crisis of 2008, 02.04.2009, p. 1. 2008; Robert J. Shiller, The subprime 12 cf. www.n-tv.de/1093635.html; cf. also solution: How today’s global financial Markus Frühauf, Die Verstaatlichung des crisis happened, and what to do about it, Anleihemarktes, F.A.Z. v. 02.04.2009, p. 9. 2008; Ulrich Schäfer, Der Crash des Ka- 13 Also Karl Marx, Das Kapital. Kritik der pitalismus, 2008; Holger Steltzner, Auf politischen Ökonomie, Bd. III, 3rd ed. dem Londoner Gipfel, F.A.Z. v. 02.04.2009, 1911, p. 191ff. p. 1. 14 cf. Margit Kennedy, Geld ohne Zinsen 10 References mentioned in the previous und Inflation, p. 85 ff. footnote contain suggestions for how we 15 Günter Hannich, Börsencrash und Welt- might avoid the mistakes in the future. The Wirtschaftskrise, p. 59 f.; Margit Kennedy, real cause, interest rate, is not discussed. Geld ohne Zinsen und Inflation, p. 28 ff.

49 Estudios Internacionales 166 (2010) • Universidad de Chile who live off of that work and whose from interest. Money was invented to power continually grows16. Thus, the facilitate the exchange of goods and recipient of social welfare is no more therefore must flow. On the other hand, taking advantage of others than the the hoarding of money, which leads to one living off interest. That is because a recession of economic performance, money does not actually work, as banks can only be prevented by offering the propaganda would often have us be- money holder an incentive to lend it, lieve. It is rather the people who must which we call interest. But high inter- yield the interest amounts. The success est rates also lead to recession. In turn, of the competitive economy ought only fear of a crisis encourages hoarding, to be contingent upon the capabilities which makes even higher interest rates of human beings. Neither money nor necessary. A self-feeding process arises guaranteed privileges, but rather effi- which is probably a considerable cause ciency, power, love and wisdom should of business fluctuations. This means be praised by people for their successes, that even within the time-frame in as German-Argentine economist Silvio which the system has not yet collapsed, Gesell pointed out17. business fluctuations are strongly linked to interest in connection to people’s psychological situation18. Interest-driven money hoarding and fluctuation in business activity Unnecessary production and wars for the sake of paying Regardless of the fact that interest- interest based economic systems eventually create so much book money that the Interest is probably also a powerful resulting money-bubble some day must factor behind environmental pollution burst, in other words, that economic and overstraining. In addition to forced performance can never cover the ex- economic growth, which necessarily ponentially increasing money supply accompanies an overstraining of the resulting from interest, the smaller environment19, there is another envi- business fluctuations might also result ronmentally damaging effect. Normally, there would only be as much produced 16 According to Silvio Gesell society divides as is actually consumed. The perish- into beasts of burden and retirees, cf. Silvio ability and technical obsolescence of Gesell, Die natürliche Wirtschaftsordnung, 9th ed. Lauf 1949, p. 27. Translation into English by Philip Pye, The Natural Eco- 18 Silvio Gesell, Die natürliche Wirtschafts- nomic Order, London 1958. ordnung, 9th ed. 1949, p. 199 ff. 17 Similarily Silvio Gesell, Die natürliche 19 Margit Kennedy, Geld ohne Zinsen und Wirtschaftsordnung, 4th ed. Bern 1938, p. Inflation, p. 160; Günter Hannich, Bör- VIII. sencrash und Welt-Wirtschaftskrise, p. 61.

50 Felix Fuders •A global financial system without interest... products naturally keep surpluses in Money thus loses its unnatural posi- check. As long as it is higher than inflation in relation to specific products, tion, interest makes job performance as it is now perishable, just as goods retainable. If one were to put money are. The owner of the funds can now into an account with no interest, it no longer demand interest for lending would slowly lose value due to infla- his money22, exploit the scarcity-value tion, just as products lose value through of capital as formulated by John May- deterioration or technical obsolescence. nard Keynes23. Such money is natural But interest that makes up for inflation money because it devalues just as real permits hoarding of the value produced. goods do. Therefore pressure on money Furthermore, it has been comprehensi- supply will increase, which should lead bly demonstrated that many wars are to interest rates approaching zero24. apparently connected with the interest Creditors even lend money freely, since economy20. The interest burden of the borrowers promise to repay the full State is to be paid for with captured amount and creditors are exempted capital and resources. The most recent from paying the tax stamp25. That wars in Iraq and Afghanistan appear to means: by liberating money from its support this view. On the other hand, inexorable character26 from its unnatu- war is the most effective method to ral and special position in relation to destroy values, which in turn allows goods, the likewise unnatural interest new economic growth and thus, paying rate should also disappear27. Famous interest. Also, since war is expensive, it economists John Maynard Keynes and leads to governments of nations at war Irving Fisher considered this idea as a increasing their national debt. possible solution for the Great Depres-

Silvio Gesell, Irving Fisher and John Maynard Keynes 22 Silvio Gesell, Die natürliche Wirtschafts- ordnung, p. 205, 344. 23 John Maynard Keynes, Allgemeine Theorie Most of this was already recognised der Beschäftigung, des Zinses und des by Silvio Gesell 100 years ago, who Geldes, p. 317. proposed the so called free money; 24 Silvio Gesell, Die natürliche Wirtschafts- that is, money free of interest21. Tax ordnung, p. 239, 242, 252 f., 264 f., 270, 273, 284, 329, 342, 344 f. stamps which are to be fixed on bank 25 Silvio Gesell, Die natürliche Wirtschafts- notes at specified intervals are to pro- ordnung, p. 264 f. vide an incentive not to hoard money. 26 Silvio Gesell, Die natürliche Wirtschafts- ordnung, p. 238. 27 That interest is contrary to the laws of 20 Günter Hannich, Börsencrash und Welt- nature, also turns out Wolfgang Berger, Wirtschaftskrise, p. 207ff. Die Finanzmarktkrise, in: Hintergrund 21 cf. Silvio Gesell, Die natürliche Wirt- 1/2009, p. 9; also already in Aristotle, schaftsordnung, p. 235ff. Politics, 1st Book, 1258b.

51 Estudios Internacionales 166 (2010) • Universidad de Chile sion of the 1930s28. The former was Alternatives to Silvio convinced that «the future will learn Gesell’s free money more from the spirit of Gesell than from that of Marx»29. Later, at the Bretton The question is however, if the Woods conference, Keynes proposed cumbersome free money system, or an international currency of that type proposed electronic banknotes which called Bancor. Irving Fisher considered devalue over time32, are necessary at all. himself only a modest apostle of Silvio Were there no interest, money stored Gesell30 and even wrote a book on the in accounts would automatically de- concept of free money31. value through inflation33. Even if one questioned whether there would be 34 28 John Maynard Keynes, Allgemeine Theorie inflation in case interest did not exist, der Beschäftigung, des Zinses und des Geldes, p. 298 ff.; Irving Fisher, Booms opinion the main cause of deflation is debt, and Depressions, 1933, p. 226 ff.; Irving without recognizing interest rate as a Fisher, Stamp Scrip, 1933, Kap. I. major cause of indebtedness (cf. Irving 29 John Maynard Keynes, Allgemeine Theorie Fisher, The Debt Deflation Theory of der Beschäftigung, des Zinses und des Great Depressions, in: Econometrica Vol. Geldes, p. 300. Gesell‘s remarks, however, 1 No. 4 (1933), insb. p. 344; id., Booms Keynes thought to be incorrect, because ans Depressions, p. 8 ff. ). Gesell had not recognized household’s 32 Wolfgang Berger, Die Finanzmarktkrise preference for liquidity (p. 301). This is not – Ergebnis einer Fehlkonstruktion, die wir true. Rather it is just the liquidity preference korrigieren können, in: Hintergrund which generates the special position of 1/2009, p. 13–16. money in comparison to goods, the starting 33 Natural inflation arises from the fact that point for Gesell’s deliberations. To abandon production is approaching a saturation these special circumstances and to make state in which just as many new products the hoarding of money as unattractive as are produced as old ones become obsolete, the hoarding of goods, is the sense of Ges- due to abrasion or technical aging. Every ell’s stamped money. Conversely, it seems new product, however, leads to a real that Keynes did not recognize the reason economic profit, which increases money for the existence of household’s preference supply. Natural inflation is an incentive to for liquidity: the monopoly of money over invest money and not hoard, as in the goods (cf. p. 163 ff.). exchange economy goods may also not be 30 Irving Fisher, Feste Währung – Illusion kept forever. Natural inflation is much und Wirklichkeit, 1947, Preface of publis- lower than the present one and does not her, p. 6. bring along exponential increase of 31 Irving Fisher, Stamp Scrip, 1933. It should money supply. Whether or not there exists be noted that Irving Fisher took over the such a natural inflation, however, is not idea of a Free Money from Silvio Gesell, proven. The relationship between interest as he had seen hoarding as a problem of rate and inflation is discussed controver- deflation. Interest rate and the fact that sially; cf. Friedrich A. Lutz, Zins und Infla- interest rate as non-hoarding prime gener- tion, in: Walter Eucken Institut, Vorträge ates from the possibility to hoard money, und Aufsätze, No. 42, Tübingen 1973, p. is not explicitly discussed (and even ex- 10. plicitly rejected in: Irving Fisher, Feste 34 Margit Kennedy, Geld ohne Zinsen und Währung, p. 117 Fn. 56). Rather, in his Inflation, p. 31 ff.

52 Felix Fuders •A global financial system without interest... banks would need to require a deposit which in theory would induce interest fee, because if they cannot earn money rates to tend towards zero, a ban on through interest, fees would need to interest the other way round should be their source of income. Money de- lead to carrying costs in the form of posited in a bank would therefore lose deposit fees. Apart from Silvio Gesells value in a system without interest, even such custodian fees provide free money, assuming that in such a system there an incentive to lend money voluntarily would be no inflation. Since it is unsafe and free of charge, to avoid drop of to hoard greater amounts of money at purchasing power. home, people would be compelled to either freely lend their money or place it in productive investments. If interests Negative Central Bank were forbidden, lending money illegally interest rates might be the on the black market would neither be best alternative an option. The debtor would have no obligation to fulfil his promise to pay Negative interest rates were being interest, since the lender would not be considered by Willem Buiter of the 36 able to take legal action. As is the case London School of Economics and also in Silvio Gesell’s solution, hoarding recently by Harvard Professor Gregory 37 money in bank accounts would be just Mankiw . For the first time ever in the as unprofitable as hoarding capital as- history of Central Banks, the Swed- sets. In order to ensure the circulation of money, it would also be worth con- 36 Willem H. Buiter, Overcoming the Zero sidering government regulation of bank Bound: Gesell vs. Eisler - Discussion of fees, similar to the way central banks Mitsuhiro Fukao.s «The Effects of Gesell set the prime rate today. Progressions (Currency) Taxes in Promoting Japan.s would also be a possibility, so that the Economic Recovery», in: International Economics and Economic Policy, Vol. 2, fee rises in accordance with how much No. 2-3, 2005, p. 189-200; id./Nikolaos more money, or how much longer the Panigirtzoglou, Overcoming the Zero money is out of circulation. In order to Bound on Nominal Interest Rates with protect small investors’ money from de- Negative Interest on Currency - Gesell’s Solution, in: Economic Journal, Vol. 113, valuation, accounts might be exempted No. 490, 2003, p. 723-746; id., Negative of deposit fees up to a certain amount. Interest Rates: Three ways to overcome While Silvio Gesell’s free money the zero lower bound, Paper presented at would impose carrying costs, as John the Center for Financial Studies, Goethe 35 University, Frankfurt on 6th May 2009; Maynard Keynes called the tax stamps , id./Nikolaos Panigirtzoglou, Liquidity Traps - Gesell’s Solution, in: Bank of Eng- land (ed.), Working Paper v. 31.05.1999. 35 John Maynard Keynes, Allgemeine Theorie 37 Gregory Mankiw, It may be time for the der Beschäftigung, des Zinses und des Fed to go negative, in: New York Times v. Geldes, p. 300 f. 19.04.2009.

53 Estudios Internacionales 166 (2010) • Universidad de Chile ish Central Bank introduced negative originally named after: an institution prime rates in June 200938. Negative in which people deposit their money interest rates might be also an alterna- because it is safer there than at home. At tive to Silvio Gesell’s free money. They the same time, it would be an agent for would mean that commercial banks obtaining free loans who would charge had to pay a fee for their deposits with a commissioner’s fee. If credit is free of the Central Bank, instead of receiving interest, the economy’s money supply interest. Loans from the Central Bank cannot further be separated from the to commercial banks would be free development of the economy’s produc- of charge. If prime rates are negative tivity. Thus, the danger of a collapse of enough, loans from commercial banks the financial system would be reduced to their clients would also be free, or significantly. nearly free, of interest (banks might, however, charge a commission). This means that in the same way as in Silvio Return on productive Gesell’s free money system, the pres- investment instead sure on money supply could lead to of unnatural self- interest rates falling to near zero. On multiplication of fiat money the other hand, banks would not be able to pay interest on saving deposits, The fact that economic science la- while a deposit fee would probably not bels all types of earnings as interest39, be possible either because otherwise no must not lead to a confusion of returns one would deposit money at a bank, driven out of productive investments but banks would still want to broker with loan interest. The latter gener- credits. Should the demand for credit ates interest independently from the be low a deposit fee alone might be development of economic production, conceivable. Then, many would prob- and thus originates an unnatural self- ably prefer to hoard smaller amounts aggrandisement of money supply40. of money at home, which should have no adverse effect on the economy since 39 Even Silvio Gesell himself called produc- this would only happen if demand for tion gains as interests, vgl. Silvio Gesell, Die natürliche Wirtschaftsordnung, z. B. credit is respectively low. Here we find p. 204. the difference to Silvio Gesell’s solution, 40 In the Koran, Muhammad condemned this where money hoarded at home pays the equalization of productive gains with lend- hoarding tax. A bank would become ing rates. He was sure that those who would do such an equalization will be what it used to be and what it was punished, 2.275. Also the Bible prohibits interests; cf. Exodus 22,24; Leviticus 25,36-37; Deuteronomy 23,20 and 24,10; 38 See website of Swedish Central Bank: Ezekiel 18,13 und 22,12; Luke 6,35; http://www.riksbank.com/templates/Page. Psalm 15,5; Probverbs 28,8. Already Ar- aspx?id=32559. istotle found money reproducing money

54 Felix Fuders •A global financial system without interest...

But in an interest-free system there is no money bubbles. However, in an also the possibility of obtaining profit, economic system with a continually investing money productively. That increasing money-supply, people are, is, in an interest-free economy, capital as already shown, forced to cover this can also be invested profitably, and so money through production. World- yield a return. This return, however, is wide production has already fallen based on real economic output, that is far behind the exponentially growing to say, value has been produced. The money-supply43. Even companies not same applies, for example, to the case financed through foreign capital are of companies selling products with date not free from being forced to achieve a of payment and asking a higher price to return as high as interest on borrowed cover the payment risk, a business con- capital. Otherwise, opportunity costs duct which of course would be equally make maintaining production appear possible in an economic system without pointless. This is probably why some interest. Economists understand dates groups earn huge parts of their annual of payment as a form of credit whereby profits through financial investments the mark-up represents the interest in rather than the production of goods. this view41 – an interpretation which leads to the above mentioned confusion. However, a mark-up is a return Investment incentive with a productive background and not through participation in a form of interest. The higher price re- real economic profits flects the costs of lending the product and not the money, until payment. In It is worth asking how companies this case, it is money not earned with in an economic system in which loan money. interest does not exist (whether this Accordingly, in an interest-free is through implementation of Silvio economy, where only productive earn- Gesell’s solution or the prohibition of ings exist, there are no spin-offs of the interest rates or negative Central Bank financial markets in relation to the interest rates) can be sufficiently sup- productive economy42 and therefore plied with investment capital. A bank

to be an unnatural phenomenon; cf. Aris- 43 Eberhard Hamer, Der Welt-Geldbetrug, totle, Politics, 1st Book, 1258b. Zeit-Fragen 2004 No. 45, S 1; id./Eike 41 cf. Manfred Borchert, Geld und Kredit: Hamer, Was passiert, wenn der Crash Einführung in die Geldtheorie und Geldpo- kommt?, 6th ed. 2005, p. 32; Interna- litik, 8th ed. 2003, S. 33; Jochen Drukarczyk, tional Monetary Fund, World Economic Finanzierung, 9th ed. 2003, S. 480; Jürgen Outlook – Financial Systems and Eco- Stiefl, Finanzmanagement, 2005, S. 60 nomic Cycles, Washington 2006, p. 1. 42 Eberhard Hamer/Eike Hamer, Was pas- World productivity shrank at last, cf. siert, wenn der Crash kommt?, 6th ed. OECD, Economic Outlook, Paris, Vol. 2005, p. 19, 32. 2008/2, No. 84, p. 6, 12, 15.

55 Estudios Internacionales 166 (2010) • Universidad de Chile will probably not want to participate time. The fund invests the moneys for in corporate risks in exchange of a an equally fixed period of time in the more commissioner’s fee. If there is no equity capital of the connected com- interest covering up risks, there is less panies. Such funds would also have a incentive to make capital available for risk-reduction function for the small risky productive investments. But, as investor. Incidentally, with the loss of mentioned earlier, nothing prevents the interest burden, companies would making a profitable investment, i.e. an either generate higher profits or lower investment in corporate equity capital. their prices, bringing profit to either Just as loan agreements have a set run- the investor or the consumer. Interest ning time today, so can participation revenues now pocketed by banks would in equity capital be established for thus accrue to households44. a set period of time in order to give the entrepreneur planning reliability. What is paid back is not the amount Summary paid in, but rather the amount match- In summary, it can be said with ing the proportion of net equity. The certainty that an economy built on investor is thus naturally participating interest has no choice but to collapse. in the company’s risk, just as with any Furthermore, interest is at fault for the other participation in equity capital. overstraining of our environment, the Possible positive return matches the raping of resources and for the wid- corporation´s real economic profit. ening gap between rich and poor. An When equity capital participation is the economic system should be a genuinely sole form of gaining a positive return free market economy, namely free of in- on investment, money in circulation terest. Negative Central Banks’ interest cannot become decoupled from the rates seem to come close to the idea of productivity of the political economy. free money proposed by Silvio Gesell, provided they are negative enough to Funds for small investors ensure that interest rates of loans to clients from commercial banks tend To also give small investors the pos- towards zero. In contrast to free money, sibility of participating in the equity the latter has a far greater chance of capital of corporations on one hand, becoming implemented due to a lower and to give small and medium-sized level of resistance on the part of stake companies the chance to find finan- holders. ciers on the other, guilds, (chambers of industry, trade, crafts, etc.) for 44 This is no small sum. It was shown that example, could act as mediators and prices compound 30-50% of interest, cf. drive funds in which small investors Margit Kennedy, Geld ohne Zinsen und invest their money for a set period of Inflation, p. 25 ff.