Neutral Money

Interest-free money proposal, at http://userpage.fu-berlin.de/~roehrigw/suhr/nngengl.html

This is a full-scale, fairly technical analysis of traditional money and its flaws, and the point by point argument and explanation of a neutral money system, that has no interest charge.

The author is Dieter Suhr, and it was written in 1990.

Excerpt

Three objections against neutral money are refuted in the conclusion of this work:

6.1. Saving without Interest

One of these familiar objections is: "Who is going to save if he does not earn interest anymore?"

The answer is simple: everybody who cares minimally for his future has the incentive to distribute his life-time income optimally in a way so that he can maintain his expected standard of living also in times when he is no longer gainfully employed. If, however, these careful individuals receive interest rewards for postponing consumption, then they are motivated and induced to consume less in the present and more in the future than is actually optimal according to their own "real" preference schedules, not to speak of the others who have to finance that increment of future income by being forced to consume less at that time. "Interest" does not push forward production by rewarding "saving"; rather it counteracts present activities because it rewards the present inactivity of the "saver" and, at the same time, punishes the entrepreneur with costs for his transaction and, thus, for his production activities. Moreover, all investments which are modestly profitable "in real terms" but which do not render returns that match the value of money's yield are blocked because of too high pecuniary transaction costs called "interest for financial capital".

Borrowers who no longer give away money to meet their interest liabilites will use it for other purposes. They can "save" it and buy claims to future money. They can spend it on present or future goods. Since individuals who take out loans usually need that money for goods, they will predominantly use their saved interest to purchase goods. Consumers will demand more consumptive and producers will demand more productive goods than today. On the other hand, wealth holders who do no longer earn interest can spend less money. They will reduce their demand either for real goods or for assets. Since lenders typically dispose of dispensable money they will still intend to "save": more real goods would render to them shrinking marginal utility but burden them with rising marginal cost. Therefore it can be quite profitable for them to avoid the cost of additional riches by holding costfree bonds, even if the bonds yield not interest.

6.2. Enough "Capital" without Interest

Another objection, closely related to the first, is: "There will be a lack of financial capital and, hence, less productivity if capital does not earn interest any longer."

As has just been said, "capital" stands for returns on loan money which do not increase but disturb and decrease the efficiency of money as the transaction catalyst in our economy. (The same is true for "capital" in so far as this term stands for returns on real goods which are let out or leased or used by others in even other ways: the active users will not be able to bring to life these goods' efficiency unless they finance returns that, roughly speaking, correspond to the interest which they would have to pay if they bought the goods instead of being allowed in other ways to use the goods of the others.)

It is part of the "resistance in our minds" that we believe in the "productivity of capital" whereas, in fact, this alleged productivity of financial or other "capital" exhausts itself in incentives for abstaining from real activities on the supply side and in punishments for engaging in activities on the demand side of "capital". Hence "financial capital" is virtually nothing but, first, the term which is given to the embodiment of a conceptual self-deceit and, second, the term for the ideological legitimation of present money's inefficiency and of the social injustice springing from it. We suffer from a fatal capitalistic delusion which lets counterproductive "capital" be considered something productive!

6.3. Pricing and Allocation without Interest

Another objection is: "When credit incurs no interest costs, then individuals can acquire infinite amounts of money. This is absurd and shows the absurdity of the idea of neutral money. Interest is, and must always be, the price which allocates financial resources." The answers, again, are simple, though I admit that it might require some exercise in elementary economics to understand them:

If the present demand for transactions is no longer constrained for needy borrowers by interest costs, then the prices to be paid in the course of these transactions respond more adequately to the real present demand of these transactors. And, correspondingly, if the present demand for transactions is no longer subsidized for wealthy lenders by interest income, then, once more, the real needs of both lenders and borrowers are more adequately reflected in the spot prices, and this holds true, in particular, regarding the present prices of future goods. Hence, instead of the price of money falsifying the price of goods, making them cheaper for the rich and more expensive for the poor, neutral money is transparent and reflects the real needs in an unfalsified way, giving the poor a chance to acquire goods at costs similar to those at which rich people can acquire them and giving the rich the chance to experience a life without being artificially subsidized. With the prices reflecting the real needs more adequately, allocation of funds will be improved. Prices will respond to these changes in demand. Therefore the counterproductive allocation by the price of money (interest) will be substituted for by the more efficient allocation by the prices of the goods themselves.

With the subsidies for the wealth holders tending to zero, the accumulation of real goods becomes costly instead of being profitable because the increasing marginal cost of goods overcompensates their declining marginal utility. Hence, the real costs of goods limit the mass of goods which are worthwhile holding. Then, individuals will not be so irrational to take out unlimited amounts of neutral money credits (which must be spent to avoid liquidity costs!) if additional goods only bring to them more (marginal) cost than benefit. The absurdity, thus, is not with neutral money, but with the present system which motivates and induces wealth holders to hold goods which they do not need and, at the same time, to prevent others, who need the goods, from using them. Neutral money is both destined and suited to abolish these deficiencies in the allocation of goods.

Besides, who or which bank will be ready to credit to a borrower more than he is able ro repay? Even today, loans are limited not only by their (pure) interest cost but also by the costs of the default risk. Indeed, this should be the "real" limit on credits." (http://userpage.fu-berlin.de/~roehrigw/suhr/nngengl.html#6.)