20
F. Fuders
3.3 Our Monetary System Produces Income Inequality
The money interest rate is also a powerful driver behind income inequality. As said
above, money supply and debt grow in a likewise manner. This means that while
on the one side we find ever more monetary units on bank accounts, on the other
side ever more people are ever more indebted. In other words: the income inequality,
too, grows exponentially. We can visualize this drawing money supply and debt on
the same graph. In Fig. 2 using data from Germany we can see that monetary assets
mirror total debt. This is no surprise since, as outlined above, there is no interest
paying without debt. The gap between the upper and the lower point in the graph is
the (exponentially growing) inequality. The same gap can be observed in any other
country if the observed time period is only long enough. Accordingly, the Gini-index
that measures inequality shows not only similarly high values for almost all OECD
countries but also a significant incrementation of inequality over the last 30 years
(Bárcena et al. 2018).
4 Policy Recommendation: Gesell’s Solution
Economic schools should study and analyse the conventional economic theories in
order to formulate a new model of a market economy that is not perverted by the need
to grow and by a constantly increasing income inequality, that is a market economy
with a different kind of money. We could probably learn a lot from the proposal
offered by the German-Argentine economist Silvio Gesell (1949) in his work, “The
natural economic order”. Gesell designed a currency that being equipped with some
sort of “carrying cost” (Keynes 1936: 357) cannot be hoarded eternally, and thus
circulates without interest as reward for parting with liquidity being necessary. Money
then loses its special position compared to real goods, and the money holder cannot
“press” interest anymore (Gesell 1949: 205, 344). This interest-free currency, Gesell
called it “free money”, would serve solely as a means to facilitate the interchange of
goods and services and not to store wealth. Consequently, it would truly comply with
the concept that conventional economic theory usually calls monetary neutrality, but
which does not hold under today’s financial system (see already Suhr 1989).
Probably the easiest way to practically employ Gesell’s proposal would be through
an effective negative Central Banks interest rates policy, i.e. a monetary policy where
negative interest rates are not only charged for deposits of commercial banks at the
Central Bank, but that also apply to cash. Different ways have been discussed to
achieve this (Buiter 2005; Seltmann 2010; Agarwal and Kimball 2015; Assenmacher
and Krogstrup 2018).
F. Fuders
3.3 Our Monetary System Produces Income Inequality
The money interest rate is also a powerful driver behind income inequality. As said
above, money supply and debt grow in a likewise manner. This means that while
on the one side we find ever more monetary units on bank accounts, on the other
side ever more people are ever more indebted. In other words: the income inequality,
too, grows exponentially. We can visualize this drawing money supply and debt on
the same graph. In Fig. 2 using data from Germany we can see that monetary assets
mirror total debt. This is no surprise since, as outlined above, there is no interest
paying without debt. The gap between the upper and the lower point in the graph is
the (exponentially growing) inequality. The same gap can be observed in any other
country if the observed time period is only long enough. Accordingly, the Gini-index
that measures inequality shows not only similarly high values for almost all OECD
countries but also a significant incrementation of inequality over the last 30 years
(Bárcena et al. 2018).
4 Policy Recommendation: Gesell’s Solution
Economic schools should study and analyse the conventional economic theories in
order to formulate a new model of a market economy that is not perverted by the need
to grow and by a constantly increasing income inequality, that is a market economy
with a different kind of money. We could probably learn a lot from the proposal
offered by the German-Argentine economist Silvio Gesell (1949) in his work, “The
natural economic order”. Gesell designed a currency that being equipped with some
sort of “carrying cost” (Keynes 1936: 357) cannot be hoarded eternally, and thus
circulates without interest as reward for parting with liquidity being necessary. Money
then loses its special position compared to real goods, and the money holder cannot
“press” interest anymore (Gesell 1949: 205, 344). This interest-free currency, Gesell
called it “free money”, would serve solely as a means to facilitate the interchange of
goods and services and not to store wealth. Consequently, it would truly comply with
the concept that conventional economic theory usually calls monetary neutrality, but
which does not hold under today’s financial system (see already Suhr 1989).
Probably the easiest way to practically employ Gesell’s proposal would be through
an effective negative Central Banks interest rates policy, i.e. a monetary policy where
negative interest rates are not only charged for deposits of commercial banks at the
Central Bank, but that also apply to cash. Different ways have been discussed to
achieve this (Buiter 2005; Seltmann 2010; Agarwal and Kimball 2015; Assenmacher
and Krogstrup 2018).