Some readers may find Margrit Kennedy's website on Complementary currencies useful. Michael Hudson's website also has useful articles

First, cathedrals were not built in order to earn a financial return.  The rate of interest was probably not very relevant. In fact, estimates of medieval interest rates place them generally higher than modern interest rates.  For a reference that is available on the web, see

http://www.ecn.bris.ac.uk/www/ecesc/Articles/mn.pdf

Second, low/negative interest rates can also stimulate consumption, by making saving less attractive.

Third, even if money has a negative interest rate, other investments will not (and if they do, we don't really want people making them), and it will still be desirable to allocate your capital to those investments that pay off more and sooner.

It is also important to remember that the future is uncertain, and the far future is very uncertain, and investments tend to have finite lives (and/or high maintenance costs).

I think it is hard to say what investments people with then-current knowledge and a very long term view should have been making in the early 20th century that we would be glad they had made now.  For instance, this is the 50th anniversary of the very large investments made in the US Interstate highway system. Certainly that was a far-sighted investment, but in light of the liquid fuels crisis which is now in view, perhaps not far-sighted enough?

I'll stick to conventional discount rates, I think.

If you want to support a case for central planning please let me know where you believe such a system has worked to the benefit of the people.

A few additional points: (1) Money in the middle ages was mostly hard money, not "currency". Dishonest lords still play money games. The lords are now Federal Government and the the Financial Sector both of which have grown out of proportion in the last several decades. Both groups are IMO too large for the continued well being of the country. What will reverse the trend, I do not know. (2) Projects with very long paybacks are made much less certain when inflation must be priced into the picture [a moving target made up of not just anticipated revenue stream, but fluctuating real values for those revenue streams.] They become much harder to finance [at least in theory] as who knows what if any value the principle would have upon maturity of a 100 bond. A hundred years ago there was no expectation of a general and persistant inflationary trend. We got that with the birth of the Fed in 1913. (3) If you want to encourage immediate consumption and discourage savings, a "demurrage" sounds like just the ticket. Party hardy. Eat the seed corn. (4) Until our fractional reserve banking reserve requirements got so out of wack, savings were important as the base for the money supply. Now debt is its own merit bringing forth new debt. (5) If booms and busts [which are largely monetary phenomena] were not so prevalent, the desire to clear cut would be a less rational response. During the boom times, the theory is to get what you can as soon as you can, becasue the bust if coming. Most participants in the oil industry see the current price cycle as the prelude to another bust or at least a significant softening as supply overwhelms demand.

Where is Sailorman when you need him? He seemed to just disappear a month or two back. I hope he is well.

Money does not have to work the way our system does. One good suggestion came from the young Milton Friedman, who advocated 100% reserve banking rather than fractional reserve banking.

Another controversial idea was proposed by Nobel Prize winning economist Friedrich Hayek--privatize money so that governments cannot finance themselves by creating too much of it and inflating away their debts.

Personally, I don't have much money--i.e., coins, currency and checking accounts. On the other hand, I do have an income and some wealth in various forms. Many times I have been a borrower and also a lender. You cannot buy health or happiness with money. On the other hand, with money around it makes it much easier for people such as Bill Gates and Warren Buffett to give large sums away. Indeed, IMO the only reasonable motivation for great wealth is to give it away to worthy causes, including some for needy family and friends. Aristotle agreed with this idea and regarded maganimity and generosity as important parts of virtue.

But capital barriers and massive government overregulation, taken together, mean that unless one is enormously rich, one must invest in assets via intermediaries, such as banks, which do not, after all, hoard currency in vaults. (If they did, the post would have a better point.) Almost any economic activity one can name requires a good deal of capital and many hours of hugely expensive lawyer time, so a (quasi-) corporate form is practically mandatory. Reality check - it takes half a million bucks just to open a "simple" local ice cream shop these days - all that government-mandated stainless steel, wheelchair ramps, fancy landscaping, etc. etc. ad infinitum.

Which means that the simplest and safest thing for most of us to do is to buy a house with lots of extra lawn and lots of extra rooms. Which is how we've gotten to where we are - a negative savings rate, overinvested in enormous houses ("I don't really need all those rooms, but if need to put something aside, where else can I put it? In the stock market? Ptui!"), and woefully underinvested in everything except for houses, such as energy required to prevent those countless millions of unneeded rooms from mildewing away.

Life is simply too short for most people to be able to learn enough to directly manage a variety of hard assets, which is what they would have to do under the quasi-barter system recommended in the post. (Throwing everything into just one asset is an excellent way to risk a miserable retirement, unless that asset is a house, protected to the hilt by the government.) So the practical upshot of going aggressively for even more demurrage would be even more hoarding of real estate, and even more consumption of all the resources necessary to support that hoarding. That would happen at the expense of everything else and aggravate an imbalance that is already far out of hand. Not a really good idea.

Thanks for the article since I don't understand our current banking system its difficult to consider the value of these interesting alternatives. First I read up on fractional banking which underlies our economy. Basically the banks get to generate loans at a rate of 10:1 vs real deposits so for every dollar deposited they can loan out 9 dollars thus creating instantly 9 dollars. Now lets say they charge interest on the loan resulting in 1 dollar interest at the end of the loan period. They have earned one dollar and the other 9 dollars literally disappears at this point but in reality it was converted to a fixed asset i.e. what was bought or created with the loan. In our economy business loans dominate and generally this is hard manufactured goods that were created thus increasing real wealth. Inputs are raw materials and labor.

In this simplistic scheme the government is simply treated as any other company that can borrow money and indeed in general it works that way it pays its debts via taxes. The government power to create money is actually not that important. What is important it seems is that the federal reserve works basically in the opposite manner of most banks. When the banks finally borrow from the feds which back there money by basically faith ( T Bills ) backed in the end by taxes ( real work ) things work a little bit different the feds throw away the money they receive in interest and the principal acting as a sink hole for money.
No problem with the principal since that eventually went to real loans for real assets but by throwing away the interest they decrease the real money supply by exactly the amount of interest charged which must be paid in cash.

At this point feel free to correct any mistakes I've made.
I actually really don't have a problem with this in general as long as the economy is growing. In fact in reading this type of banking became entrenched exactly when enormous increases in wealth were occurring the 1600's in Europe when the new world and trade routes to china. Since then its been periodically powered by colonialism then coal then finally oil along of course with massive technical improvements in manufacturing etc.

Of course periodically the house of cards has collapsed i.e. in the 1920 when colonialism lost steam ( literally ) The oil economy had yet to start and the west was won. The first world war was actually a colonial war and does not seem to be economically driven.
The eventually lead to the second world war where the American economy was basically created from a simple source of wealth which was our factories were not being bombed.

The oil economy was bootstrapped during the second world war and the rest is of course history.

Now I've made a lot of simplifying assumptions but the main point is that this economy only lost it one time when it truly stopped growing this was during the great depression at all other times it seems something has saved the day until now.

No my big question with my new understanding of our economy and the fact that its basically underpinned by growth is what happens when we start economic contraction ?

Well of course the first and obvious response is to raise the fed interest rate reducing the money supply and thus basically treading water.  But that's all I see and it can only go so far before interest rates are ruinous prob say 30% before you basically shut down the economy.

So am I right the feds control of the money supply is actually only useful within a narrow band over basically a growing economy.  If real economic losses start occurring.
Then things get really really messy.

This is the part I'm hoping others will comment on.

Firs lets say you default on the loan leaving the bank with the asset. They of course now sell the asset at the end of the day for a loss against the original loan. It seems to me that this loss is real money i.e. the bank basically lost the difference. The money from the sell went to write off the loan and the difference comes directly out of the bank.

Basically they take it hard on bad loans not surprising and in a sense justifies there real high interest rates over 100% on house loans for example.

Now as the economy crumbles and loans start unwinding forcing settlement in real cash we see a massive deflation of the money supply so to me it looks like the effect of raising the fed rate is actually to flush out bad loans which are the real deflationary effect the other side is tightening credit requirement etc forcing the bank to make less loans and probably forcing them to higher reserves.

So the fed rate which at first site looked like it was ineffectual actually has a profound effect in time on the economy by eventually forcing the poor bankers to cough up real cash not to the feds but covering insolvent loans and simply not issues loans since there is a smaller pool of borrowers as the interest rates increase.

Now at this point we have a unhappy economy but its functioning as designed the money supply is being restricted and anyone in shaky positions is forced into to default with the bankers picking up the tab.

But what happens when the intrinsic reason is that growth is slowing because of a resource constraint or high wages.

Well the high wage problem we solved via globalization giving us many years of unearned growth. This can actually continue but it was tied to cheap resources. So or world economy could perk along. Now in many ways were facing the second time that real growth is stopping from increased resource costs which have the side effect of undermining gains from globalization significantly.

What happens next it seems to me the only way we can respond is to initially increase interest rates significantly to prevent wage inflation and generic inflation as weak business attempt to borrow to cover high fuel costs and then try to pass those off to the consumer. Next I see interest rates start falling ans the economy contracts and nothing the fed can do can restart it since so many business become uneconomical.  For example no one buys the patriotic figurines made in china. Since a lot of our business's are based on discretionary income all of them probably rapidly become effected as the economy contract. For profitable business there is actually wage pressure as they are forced to pay there workers more to maintain there standard of living reducing there profits at least until the work pool increases reducing wages. In any case I see a massive cycle of feedback loops but with the general direction downward and there is nothing anyone can do about it.

The energy producers initially flush with cash but no real economies invest heavily in the mature economies and lose the butts as there investment losses mount. Maybe they try to invest locally but since they produce nothing they must pay a multiple for there high energy costs simply because everything they need costs far more because there commodities are over priced so they really can't win either.

So sure you will see a initial cash flow into the commodities economies but it will get sucked out immediately since they in reality produce nothing outside of there base commodities. Sure there will be a net transfer of material wealth but to what effect ? More mansions who cares. Even more factories who cares ? Since no one can buy there goods.

So at the end of the day the whole world spirals down the negative growth curve.

So it looks to me that our fractional reserve system for wealth creation is particularly destructive in fact it look to me like it over corrects and has a positive( negative to those in it ) loop forcing more and more business to unprofitably since no one knows were it will stop in a sense it overshoots slowing the economy to much which slows the economy.  Lowering rates then does no good since the economy is truly contracting then what ?

This actually seems to have happened in japan the response was massive investment in China and globalization but this won't save us now.

At this point the various alternative economic models presented become interesting and the question I have is how do all of them work in this power down scenario our current fractional reserve does really well in growth okay in temporary downturns and it seems really really bad in real growth reduction.

Can someone more knowledgeable then me correct any mistakes and also present economic models that actually work in a steadily shrinking economy.

A quick note for the skeptics: demurrage-type currency systems have typically been implemented as a complementary or local alternative to national curencies, not as full-on replacements for them. They've been voluntary, localized, and usually temporary by design.

Also, increasing the velocity of money is not necessarily synonymous with increasing consumption. If I have $100k and I know that dollar amount will increase over time sitting in a bank account, it makes sense for me to leave it there and spend as little as possible by buying cheap goods that need replacement pretty quickly. If I have $100k and I know that the dollar amount will shrink, it makes sense for me to exchange it as quickly as possible on anything that will last a long time. Thus the economy can keep growing, due to the high velocity of money, at the same time that consumption shrinks.

For an example of a demurrage-currency in action, check out the history of the Wörgl stamp scrip.

For another, separate approach to addressing overconsumption from a financial perspective, check out Catherine Austin Fitts' solari model.

Another approach to the forest cutting problem is that of an 'intergenerational flows'. To max NPV using bank interest rates the solution may be to  harvest sooner than later but we might conserve in order to get the same harvest in 20,40,60 etc years time.

Also, proles with no long-term thinking are more profitable to the ruling class than a socially cohesive and thoutful yeomanry (which is what the founding fathers originally planned for).

The internal and external trade that was financed by the (inflated) currencies, gold and silver, led to higher standards of living and, mostly, expanding populations world wide (omitting, of course, the slavery and new diseases transmitted tn the americas and other locales.) Increased wealth allowed gentlemen researchers the time for thought and experimentation; this progress led to better understanding of the world we live and, of course, further improved living standards and life expectency.  

Of course, none of this had anything to do with cheap oil. BTW, those unhappy with the feds should consider the many deep recessions in the 1800's when we were under the gold standard, and therefore had no way to adjust prices and output.

It's interesting to see how modern Bible translations handle this verse.  The idea of modern translations of the Bible, of course, is to remove the archaic terms of the translation commissioned by King James in the early 1600s which was practically the sole English translation for over 300 years and in some churches is still the only accepted translation.  Usury certainly seems to me an archaism if ever there was one.  "Charging interest" would seem to be the most obvious update for the term usury.  Yet it seems not many Bible translators have the cojones to update this verse into plain English.  They hide the blunt message of this verse by preserving the archaisms or by softening the verse to something far vaguer.

The most popular modern English translation, the New International Version keeps the archaic term "usury" and felt the need to add the term "excessive" onto interest:

He lends at usury and takes excessive interest  

The New King James Version takes the 1611 text of King James and spins it into modern language without really consulting the original Greek and Hebrew texts.  The idea was to keep the beloved King James Version for people but remove just enough of the archaic language to make it modern.  Yet "usury" apparently was not considered achaic enough:

If he has exacted usury or taken increase

The Message (a paraphrase) skips over the issue entirely with the vague phrase:

exploits the poor

The New Life Version, also employs the use of paraphrasing away the sting of the original passage:

And he makes people pay back more than they owe him

Hats off to the New American Standard Bible (one of the most literal translations available) for translating it fairly bluntly:

he lends money on interest and takes increase

There are some Christian groups that still take the ban on usury seriously, e.g. the Amish.  Also I have read about elaborate money making schemes for devout Muslims who want to make money off of their money without directly charging interest.  Another tactic used by such people is lease-to-own contracts.  I.e. buy a house by paying, for example  $1000 a month.  Your "rent" is $700 while the remaining $300 is credited to you as a payment on the house until you pay for the whole value that the house had when the contract began.  

And Paula, thanks for the Wörgl Stamp Scrip link.  Especially interesting because it was done locally...which will probably be the only way to do anything.  Reforming the global economy from the top down seems an unsurmountable task.    

Firstly, the distinction between "money", and other assets is actually extremely hard to make in any sensible way at this point.  We are used to thinking of money as a thing - actually we generally use a "substance" metaphor with money as a liquid that flows from one place to another, except occasionally when we store it in an illiquid form.  Thus we think there's a quantitative amount of money.  Obviously when money was gold, this was true.  When money was gold + banknotes this was also true.  However, at present I don't think it's any longer coherent to think of money as a quantity of something, the total amount of which can be measured in the economy.  I think it's more useful to think of money strictly as a system of units.  It's no more sensible to say "the total amount of dollars in the economy" than it is to say "the total amount of inches in the country".

The reason is that there are now too many forms of dollar-quantified electronic accounts which can be used for transactions.  Besides checking accounts (in M1), savings accounts (in M2), we have credit card and other unsecured credit accounts, margin accounts with stock/bond/commodities brokers, the stock/bond/securities balances themselves, paypal accounts, real estate backed credit lines (which are like using your real estate asset as a form of money), REIT balances, etc, etc.  In each case, these are things that can be used to make a transaction in a heartbeat, and transaction flows in or out of them can certainly affect the demand for goods and services in just the same ways as things more traditionally thought of as money.

So now, which of these things is the demurrage to be charged on?  If all of them, then nobody will invest in anything (since the return on investment will always be negative).  But if the demurrage is only to be charged on some kinds of electronic asset balances, then people will rapidly figure out to only use the other kinds as a store of value.  Since those will still pay interest (at least as long as stock and bond issuing companies would like to attract any investment), in effect nothing will have changed except a shift in the exact kind of asset balances people like to maintain (and some corresponding repricing - downwards for asset types subject to demurrage and upwards for those not).

Below I'll try to show that:

1. The existence of a WIDELY available, RISK-FREE, interest bearing investment requires a "soft" monetary system.
   
2. For that investment to also yield a REAL positive interest rate, the economic system must be on the way up to Hubbert's Peak.

So, funny monetary systems comprise:

• the fractional gold standard, which was inherently unstable (because a fractional reserve banking system demands a lender of last resort and the gold standard prevents the existence of one), was suspended during any major upheaval (such as Napoleonic War, American Civil War, WWI) and was definitively abandoned during the Great Depression, and
  
• the fiat money system, both in its universally adopted fractional reserve banking flavor and in the theoretical-domain 100% reserve banking flavor (Simons 1934 and Fisher 1935).

To demonstrate the first point, let 's assume we have a pure gold system.  How can some person or institution make a risk-free promise to anyone to pay them interest on the gold they initially lent (plus the principal at maturity)?  By one of two ways:

a. The borrower has the power to exact ever increasing quantities of gold from subject/victim populations, i.e. to forever expand its share of the total bullion stock.  Clearly that cannot last long.

b. If we assume the borrower's share of total bullion stocks to remain constant at most, which is plausible, then we need the total stock of monetary gold to grow exponentially at that rate or higher (which implies that the amount of gold mined each year must grow exponentially at the same rate too).  Actually, the cumulative gold production did grow exponentially, only the rate was very low, as you can calculate from the data at page
http://www.gold-eagle.com/editorials_00/mbutler031900.html

Thus, the annual rate of growth of above-ground gold stocks was 0.11 % from 1200 BC to 600 BC and again from 300 BC to 500 AD (see the reason for the biblical prohibition of interest?), dropping to 0.05 % during the Middle Ages, to rise to 0.59 % during the XIX century and to 1.7 % on average during the XX century (actually it was 1.8 % 1900-1950, 1.6 % 1950-1975 and 1.5 % 1975-2000).  Adding silver to the picture changed the above percentages very little.

As said, the above figures provide the ceiling for the interest that could be offered by a risk-free investment if a pure gold standard had been in place.  BTW, 1.5 % leads to k = 1/67.  Of course, the correlation of higher rates with higher energy use in the XIX and XX centuries is no coincidence, as modern mining is very energy intensive, which also means that, after Hubbert's Peak (for oil and for precious metals), the annual growth rate is bound to get lower and lower.  

In a fiat money system, on the other hand, the monetary stock can (and certainly does!) grow exponentially at any rate that suits the keepers of the printing press, so the government can promise beyond any risk to anybody to return them any nominal interest rate below that.

Now comes the second point: how do you insure that the nominal interest earned (plus the returned principal) allows the lender to buy more REAL goods and services than the principal initially allowed them to, in a fashion of a certain annual real rate?  By having the amount of available goods and services grow exponentially at a rate that fulfills:

(1 + yGR) = (1 + RIR) (1+MGR) / (1 + NIR)

where
yGR: real Net National Income Growth Rate (approx real GDP Growth Rate)
RIR: Real Interest Rate
MGR: Monetary stock Growth Rate
NIR: Nominal risk-free Interest Rate

Since MGR >= NIR as said above (to make the investment yielding NIR risk-free), it follows that the real GDP growth rate must be >= the real interest rate.

(BTW, the last condition holds for any monetary system, hard or soft, and it comes from the Fisher Equation of the Quantity Theory of Money, MV = Py, assuming constant V.)

The good news, then, is that after Hubbert's Peak, since real GDP Growth rates will become negative for a long time, so will real "risk-free" interest rates, and therefore there will be no financial incentive for clearcutting the forest.

As an aside, Colin Campbell has become increasingly aware of the financial and monetary implications of Peak Oil.  See:
The Dawn of the Second Half of the Age of Oil (Feb 2005)
Financial Consequences of Peak Oil (May 2005)
What is Money? (May 2006)

The second problem is that the future profit must be discounted to its present value. The investor has the alternative in an expanding economy of depleting now and investing the short-term profits in another line that will earn the expected going rate, which will be close to the growth rate of the economy. The discount rate he applies to future profit is the same as the rate at which he would expect his reinvested short-term profits to grow. This expected rate is determined largely by the current rate and by recent changes in the current rate. The result is that high and increasing current growth rates, based on high and increasing current depletion rates, lead to high and increasing discount rates applied to future values. The last condition in turn leads to a low incentive to conserve, which feeds back to high current depletion and growth rates, high discount rates, and so forth. Present value calculations thus have an element of positive feedback that is destabilizing from the point of view of conservation. Financial prudence usually advises depleting now and investing short-term earnings in depleting some other resource. The presumption again is infinite resources. There will always be more material and energy resources available to feed the march of compound interest, with its consequent discounting of future values and disincentive to conservation.

Will post more later.
;
Best,

Matt

Bernard Lietaer's book, The Future of Money, really is a well written and thought provoking book.  I recommend it highly.

Anyway, I have had a project brewing (sadly, for years now) around the concept of "negative interest".  (There is a haphazard and outdated collection of information about it at [http://www.nubux.com])

In a nutshell:

• Credits devalue with time.  It may be easier to think of it as a "demurrage" fee.  One tenth of a percent per day, for example.
  
• To prevent the money supply from dwindling to nothing over time, the total amount of devaluation (or demurrage fee) is redistributed equally to every person.
  
• There is a quiescent equilibrium at which the total money supply is equally distributed, all people having the same amount of credits.  Personal accounts will always move toward this amount in the absence of transactions.
  
• As a social enhancement to this redistribution, a fixed percentage of the redistributed credits are directed to a special social funds account.  Each person can has such an account to which they can transfer only to entities that benefit society in general.  (Scientific research, arts, charity, open source, etc)
  
• Of the three major functions of money; a medium of exchange, a measure of value, and a store of value, Nubux aims to fulfill the first two, but not the last.

I'll close with a few general observations...

The negative interest system is inherently stable, whereas positive interest is not.  I mean this in a mathematic sense, but the terminology fits the general sense as well.

Inflation is a form of devaluation, but the devaluation is not distributed equally.  There is a time factor involved in the inflationary effect, such that new money (from central and large commercial banks and government) enjoys full value, but as the new money works it way through the system, the devaluing effects of inflation takes its cut.

There should be no inflation if the money supply is kept constant per capita.  (At least from a monetarist point of view)  So prices should remain constant given the same demand levels.  This would provide more recognizable price signals, since inflation adjustments would not need to be made (or fudged).

Centrally created money is authoritarian (bank or government), whereas the distributed money injection is inherently egalitarian.

Using the Nubux concept of social accounts, Government could be operated without tax collection.  (Although I personally think that resource usage such as land should be taxed)  So long as the government's spending is equal to the total devaluation over the period, the system remains stable.

In a capitalist society, it seems reasonable to tax capital.  (Maybe it's just me)

A common misconception is that negative interest discourages saving.  It certainly will discourage saving currency, but not saving other forms of wealth.  One could easily use precious metals, even stocks or bonds.  Life would go on pretty much as usual.  There would just be a necessary paradigm shift that money is not real wealth, it is only a human construct.  Money should be an effective means of trading things of real value, that's all. (IMHO, of course)

I've probably gone on too much already.  I'd love to discuss this more with anyone interested.  Thanks to everyone for the great site!