1. 2 fair (= neutral) money to prevent financial crises

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2

Fair (= neutral) money

to prevent financial crises

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Four theses on

1) The added value of money

2) The non-neutrality of money

3) Interest and compound interest

4) A fee for liquiditymaking money neutral

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1st thesis:

Money has not only a nominal value

but also an

ADDED VALUEwhich consists in its liquidity

advantage.

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Comparison between

• Robinson Economy

• Barter Economy

• Monetarian Economy

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Economy of Robinson Crusoe:

1)No division of labour.Working is not very efficient.

2)No exchange. An extremely limited economy.

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Barter (direct exchange of products)

is already much better,

but has some failings:

1)Limited in space and time. Exchange only here and now.

2)Difficulty of finding partners.

The hungry tailor seeks the baker feeling cold.

3) Isolated singular action. Only two take part in it; otherwise it may go as with „Happy Harry“.

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“Happy Harry” (Hans im Glück)

Chain of barter = quite disavantageous exchangeschunk of gold

horsecow

pig

goose

grindstone

nothing

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Monetarian economy:

Replacing a difficult exchange

by two easy exchanges.

Instead of roses for a car

roses for money / money for a car

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1.500 Bunches of roses for a car?

But the car factory is in no need of roses.

Barter:one difficult exchange

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in a monetarian economy replaced by two easy

exchanges:

1.500 Bunches of

roses

One

car

€ 8.990

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Barter Economy

A B

Monetarian Economy

A B

C M D

E F

• Money as a standardised

means of exchange,

• to be divided at one’s whim,

• trans-temporal,

• acting as a catalyst,

not itself being consumed,

but only going into other hands.

The liquidity advantage of money consists

in its easy exchangeability against

everything.

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A jewel is better not divided;it would loose its value.

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Money can be dividedand re-composedwithout loosing its value.

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Monetarian Economy seems to be best:

Without limits of time or place. For money there are no costs of transport; it can be used

trans-temporarily.

2)Money as standardised means of exchange.

To be divided at one’s whim; no major problem to find partners.

3) Exchanges in chain reaction. The money remains after an exchange; it is not

“consumed”, but has only gone into other hands; it can broker further exchanges. But re-tained, it can also interrupt a chain of exchanges.

4)But it is normally easier to buy than to sell.Anyone who wants to sell, has to wait for a buyer and has many other costs (transport, stocking, maintenance, publicity).

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Money is accorded validity

through the declaration of the State

that one may pay taxes with it.

It is not necessary

that it be covered by gold

or other assets,

but its quantity must remain controlled.

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The functions of Money:

1) Unit of measurement for prices

2) Means of exchange

3) Way of storing (claims to) values

either– or ?

As long as one retains cash,

an entire chain of exchanges is interrupted.

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Holding cash:

1) Possibility of direct transactions

2) Security provision

3) Chances for speculation

= Liquidity advantage

Monetary service stream

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If money instead of being used as a means of exchange is retained as a way of storing (claims of) values, (= hoarding),an entire chain of exchanges is

hindered.

But normally,people hoard as little as possible,because they would have to renounce

interest,which one receives for bringing money in circulation againby lending it.

If there were no interest,it would anyhowbe more advantageous to hoard one’s moneyinstead of lending it:It is an advantage to benefit from its liquidity(= monetary service stream).

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1 2 3 4 5

sellingbuying

sellingbuying

sellingbuying

sellingbuying

sellingbuying

circulation of money

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1 2 3 4 5

sellingbuyinghoarding money

sellingbuying

sellingbuying

sellingbuying

sellingbuying

If money is hoarded, it is withdrawn from its function to mediate exchanges.An entire chain of exchanges is hindered.

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Money is not consumed, but

• it is either transmitted

(by buying, donating or lending)

• or it is retained (hoarded)

(disappearing for a time from circulation).

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Should not a scale of measurement itself remain unchanged?

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Yet: money as a scale contineously changes its value.

The same nominal sum after a time becomes worth only half as much.[This inflation becomes necessary, as we will see, in order to cope with the effects of compound interest.]

Should not a scale of measurement itself remain unchanged?

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Non-neutrality of money

Disadvantageson the side of merchandises and services,

advantages on the side of money.

Merchandises and services

• Transport costs• Maintainance costs• Publicity costs• Constrains in timing

Money and its joker privilege

• Freedom of choice• Freedom of timing

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Stocking

merchandises

Costs of storing,

of maintenance,

of compensation for losses,

of surveillance

“Saving money”

(lending, not hoarding)

Gain through

interest

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Therefore: by its added value (its advantage of liquidity)

money is a JOKER on the marketalways winning the trick.

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Nominal value € 100,00

+–

+ annual added value € 3,00

streaming,like km/h

fixed, like km

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2nd thesis:

In traditional moneythe owner of moneycan disfruit gratis

of its inherent added value,

or when lending money,he can sell the added value

against interest going in his own pocket.

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Net interest =

premium

for renouncing the advantage of liquidity

In brutto interest there may be added • the banking costs (personal, buildings),• a compensation for inflation,• a compensation for risk.

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Net interest =

premium

for renouncing the advantage of liquidity

this may presuppose renouncing consumption,

but the premium is not given for renouncing

consumption, but only for renouncing

the advantage of liquidity.

Even in the traditional system one would not

gain a premium only for hoarding money.

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3rd thesis:

It is the non-neutrality of moneywhich makes simple interest

and compound interest possible.

The effects are desastrous.

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Our traditional money is not neutral on the market.

It is priviliged by its added value

which consists in its advantage of liquidity.

If one lends money,

one remains the owner,

but renounces for a time its advantage of liquidity;

this is paid for by the net interest given to the owner,

although the advantage of liquidity in reality

is a public product.

Interest is not a reward for not consuming or not spending,

but for forgoing the advantage of liquidity.

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What happens

when lending money?

One continues to be its owner,

but instead of hoarding it,

one lets it circulate anew.

In exchange for what does one receive interest?

One renounces the liquidity advantage of money.

And this is paid by interest.

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GERMAN CIVIL LAW CODE

§ 248 Compound interest

(1) An agreement made in advance that interest not paid in due time is to carry recurring interest again, is null.

(2) Savings banks, loan corporations and owners of banking affairs may reach an advance agreement that interest left in the account are to be considered as new interest-bearing deposits.

Loan corporations, having the right to edit interest-bearing debenture bonds according to the amount of the loans granted to the holder are enabled to receive the promise in advance, that interest not paid in due time may be charged anew with interest.

The State wishes to guard against

compound interest,but with

interest bearing money this is technically

not possible.

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$ 10.000

with 3 % compound interest will be in 50 years ………….

with 4 % compound interest will be in 50 years ………….

with 11% compound interest will be in 50 years ………….

with 12% compound interest will be in 50 years ………….

In order to calculate roughly the time during which the initial capital doubles, the number 72 must be divided through the interest rate.

Guess, please!

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$ 10.000

with 3 % compound interest will be in 50 years

with 4 % compound interest will be in 50 years

with 11% compound interest will be in 50 years

with 12% compound interest will be in 50 years

with 12% compound interest will be after the first 10 years still only:

with 12% simple interest will be in 50 years:

$ 43.839

$ 71.066

$ 1.845.648

$ 2.890.021

$ 31.058

$ 70.000

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Interest would not be a big problem,

if there were not compound interest,which increases exponentially.

But if money brings interest,there is no technique

to avoid its earning compound interest.

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Interest isthe rental price for the added

value of money.

It compensates justlyfor renouncing this added value.

Therefore it cannot be forbidden.

Otherwise people would not lend their money,

but hoard it and thus hinder its circulation.

40

In Germany,in the prices for merchandises and

servicesincl. rents for appartments

on the average was hidden, ten years ago,

ca. 30% of interest.

Today on the average ca. 40 % of our prices

is hidden interestto be paid for the debts of other

people.

cfr.: 40% Zinsanteil in den Preisen — eine Diskussionhttp://www.humane-wirtschaft.de/pdf_z/creutz_zinsanteil-in-preisen_diskussion.pdf

03.11.2009

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‘Third-world debt’:

the original sums

are – by interest – repaid

many times over

while the poor countries

remain indebted.

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A child feels cold and asks his mother:

“Why doen‘t you turn up the heating?”

“We don’t have coal.”

“But why don’t we have coal?”

“We have no money to buy it.”

“But why don’t we have money to buy it?”

“Because your father as a miner is unemployed.”

“But why is he unemployed?”

“Because the mine has too much coal stockpiled, and nobody buys it.”

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Only with a growth of the economyof ca. 3% annually

can growing interest charges be coped with.

Otherwise, the interest charges grow at the cost of all other parts of the budget.

3 % General growth:part of interest growing

in absolute terms,but in terms of percentage

remaining the same.

No general growth:The interest component

growingat the cost of the rest.

Why is it necessary that the economy should always grow?

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Interest 60%

in all prices

With the time, the part of interestmay grow to 60% and more.

If you wish to avoid this,

the entire cake must grow.

That’s the reason why economy is forced to growexponentially.

Interest 40%

in all prices

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What would we think about the engine of a plane

which had constantly to acceleratein order not to stutter?

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normal growth exponential growth

and so on

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Anyone who believes exponential growth

can go on foreverin a finite world

is either a madmanor an economist.

Kenneth Boulding, economist

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A statistic from 20 years ago.

If one divides the German householdsinto ten groups, equal in number of households, according to the level of theirincome,

the eight (or today even nine)lower groups have a negative interest balance, while the highest group has a positive balance of daily (according to estimations)between € 100 and 300 millions.

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An advertisement (some years ago) for the German “Bank for SocialEconomy”:

How you canobtain money without any real work …

“What I am just doing? I am earningmoney.”

You may let your moneyearn some extra.

9 % annually.

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Voluntary unemployment of some people

because they can let their money “work”.

Unvoluntary unemployment of many other,

because

1)in the long run all enterprises will cease to exist,

which do not achieve the rentability of money

and

2) servicing debt service

and therefore the shortage of money

means ‘economising’ on workers.

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Rentable enterprises

interest level

(less) rentableenterprises will be dropped.

52

We need growth

according to our real needs

instead of growth

oriented on returns.

Why do share values increase

when workers are “let go”?

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Normally new money comes into circulation

in form of a loan,

for which interest is to be paid

although nobody yet has “saved” anything.

So this interest is in reality the fee

for supplying the advantage of liquidity (= a. l.),

and this money in the beginning is neutral.

But from the moment this money is used to pay a bill,

it goes – with its advantage of liquidity –

separately on its own way,

and the costs for this advantage

remain with the first who borrowed it.

From now on, this money is no longer neutral

and it becomes possible for individuals to sell its added value

for interest going into their own pocket.

So they can make money with money.

loan

feea. l.

a. l.

interest

interest

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It would be better to bring new money into circulation

as payment for goods and services for the state,

instead of being given as a loan.

But nevertheless it is to be recommended

that a fee for supplying

the added value of money’s liquidity advantage

be permanently bound to this money.

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If somebody pays an additionwith money he has borrowed, from then onthe money with its liquidity advantage goes its own way,while the interest charge (the fee for the liquidity advantage)remains with him.Nominal value € 100

Annual liquidity advantage € 3

Annual supply fee € 3

Nom

inal va

lue €

100

LAnnual liq

uid

ity a

dva

nta

ge €

3

Annual supply fee € 3

Separated ways

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Interest from B to A.

With the loan from A, B buys the same day from C.

B

C, already rich,gives the same day Da loan with the money got from B.

A A gives Ba loan.

C

Interestfrom D to C

D

= 2x

Sum of accumulatedsimultaneous interest for the same sum of circulating money.

May be: and so on.

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Nominal value € 100

Annual liquidity advantage € 3

Annual supply fee € 3

Nom

inal va

lue €

100

Annual liq

uid

ity

advanta

ge €

3

Annual supply fee € 3

Separated ways

Private interest

Private interest

Private interest

It is possibleto charge the same sum ofmoney witha private fee(interest)for the supplyof the liquidity advantage several times during the same runtime:

Everybody who ispaid with (even borrowed) moneycan eventuallyagain lend it out against interest.

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Interest:a private tax for the use

of a public means of traffic.

as if somebody would demand a ransom payment

for returning rail freight waggons that had carried merchandise to his property …

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Interest:To give money

to someone who causes a traffic jam,that he may drive on.Thus it is a reward

for ceasing to hoard money, for ceasing to be a spoilsport in

commerce.

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?Lending bread:Instead of having hadcosts by stocking one’s bread in the deep freezer,one gets back a fresh bread, but not more.

Lending moneyshould beequated by means ofa fee for itsliquidityadvantage,to lending other assets.

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4th thesis:

The added value of money,which consists in its liquidity,

should be compensated by payment of a

fee for the supply of this added value;

and this fee should always remainbound to the liquidity itself:

NEUTRAL MONEY

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Nominal value € 100,00 – annual fee for the supply of the added value € 3,00

Neutral Money.

+–

+ annual added value € 3,00

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Konfucius (551−491 B. C.)

If language isn’t correct,

then what is said,

isn’t what is meant.

If what is said,

isn’t what is meant,

then also the actions will not be in order …

and people don’t know

where to put their hands and feet.

Therefore one should pay attention

to that the words be correct.

This is the most important of all.

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Such an annual fee for the supply of the liquidity advantage

would prevent money from being hoardedinstead of remaining in circulation.

So the fee also secures circulation.

But originally it is the compensation for enjoying an advantage.

Therefore it should be called

“fee for the supply of the liquidity advantage”

rather than “fee for assuring circulation”as if one had only dutiesand had not received an advantage before.

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The fee for the supply of the added value

can be deducted

• from giro accounts automatically,

• from banknotes

recalling them from time to time e. g. according to their coulour drawn by lot

and exchanging them against payment

of a charge.

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There should be coins of even € 10 and € 20.

From coins a deduction may notbe necessarybecause they are not suitablefor the exchangeof big sums of money.

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This would mean

• that hoarding cash is costly;

• lending out money relieves one from these costs;

• so there remains an incentive to lend money instead of stocking it;

• but there would be no more net interest on ‘savings’, and a fortiori no more compound interest.

• loans continue to have to be repaid after the time agreed upon, but this now is easier because no interest is charged.

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Fair money?1) Inflationary money:

The owners of money lose value from their propriety.

2) Deflationary money:The owners of money are privileged.

3) Stable money:The owners of money are still privilegedunless the advantage of liquidity is not compensated by a fee.

4) (Stable) money with a fee for the supply of its advantage of liquidity:

The joker privilege is compensated:

Neutral money / fair money.

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Nominal value € 100

Annual liquidity advantage € 3

Annual supply fee € 3

Nom

inal va

lue €

100

Annual liq

uid

ity

advanta

ge €

3

Annual su

pply

fee €

3

The supply feefor the liquidity advantageof money

should always remain linkedwith the money itself.

70

In medieval Germany there were coinscalled bracteateswhich regularily had to return to the mint and were given back discounted.This was neutral money.

With this sort of neutral money the township of Ulm (then less than 10.000 inhabitants)was able to construct (from 1377)its famous minster.

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Imposing a fee for the supplyof the advantage of liquidity

would be an “Archimedes’ screw”to influence directly the circulation of money.

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To influence the circulation of money by controlling its quantityworks like a very long lead.

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To influence the circulation of money by setting a fee for the supply of the advantage of liquidityworks like a short lead.

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Objection:This proposal unjustly penalizes the ownership of money which has been earned with hard labour.

Answer:The nominal value of money may indeedhave been earned with hard labour by the owner.The nominal value of money is therefore the due and just compensation for this labour.

–

But the added value of money, its liquidity privilege,is a public productand should be paid for.He who enjoys this added privilege should bear costs for it.

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Aristotle (in his “Politics”, I, 1256b 26 – 1257 a 17)

distinguished between two ways of acquisition: • οἰκονομία (oikonomía),

the exchange of products (by means of money),

and • χρηματιστική (khrēmatistiké),

making money with money,

which he considers “unnatural”.

With neutral money,

χρηματιστική would no more be possible.

And there would no more be possible

a financial crisis as that of 2008/2009.

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If you wish to know more:

http://userpage.fu-berlin.de/~roehrigw/suhr/nngengl.html

Prof. Dr. Dieter Suhr (+ 1990)

The Neutral Money Network(NeuMoNe)

A Critical Analysis of Traditional Moneyand the Financial Innovation "Neutral Money"

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