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.