Sacred Economics: Money, Gift, and Society in the Age of Transition (30 page)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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