A New Theory on Money

7/29/2019 A New Theory on Money

1/15

A New Theory on Money, Interest Rates,Productivity and Taxation.

By Santiago Sevilla Lic.Oec. Publ. University of Zurich, andEx-Prof. SEK University Quito

Some axioms and thoughts about Economics :

1. The production of money is the attribution of Government.

2. Having the capacity to create money,Government does not need to tax the people.

3. Spending new created money by Governmentrepresents a form of taxation without

bureaucracy.

1


2/15

4. Spending newly created money may causesome degree of inflation.

5. In this case taxation equals the rate of inflation, if any is caused at all.

6. The growth of money is generally determined by the rate of interest. (See note 1.)

The compound interest formula, dependent on acontinuous variable x, is an abstraction of theextreme inflationary behavior, when interest is

compounded as frequently, as possible.It must be added that inflation increases the rate of interest in direct proportion to the growing demandfor money. Basically, the rate of interest defines therate of growth of the money supply.In the end it appears as a tautology: The growthof money is equal to the rate of interest .The rate of inflation is equivalent to the excess of money growth as compared with productivity. Or inother words, the more interest rate exceeds

productivity, prices will increase.It becomes obvious that increases in the rate of interest, as a measure against inflation, are

counterproductive, contradictory in terms of purelogics, and foolish in deed.7. Inflation is determined by the rate of growth

of money, compared with productivity.8. Productivity is the rate of growth of

production, in excess of the rate of growth of population.

2


3/15

9. If the rate of growth of money exceeds productivity, inflation is the result.

10.If the rate of growth of money is less than theincrease of productivity, recession and deflationis the result.11.In normal and stable times, Government should

produce only so much money as needed to

finance the growth of production at a stable price level.12.Eventually, circumstances may obligeGovernment for substantial investment. Naturaldisasters, war, revolution, plagues may causeexcessive creation of money over a period.Inflation may become a necessary but onlytemporary evil.13.The improvement of productivity as a result of technological progress must produceunemployment, at least, of less skilled labor.

14.Society must care for the unemployed.15.Wealth is created by savings.16.Savings are deposited into the banking system.17.

3


4/15

Savings finance investment at a cost, which isthe rate of interest.

18.Productivity pays for the rate of interest.19.Productivity depends on the improvement of technology.20.

Interest rates must move closely around the rateof productivity if the system is to remain stableat a steady growth.21.If the accumulation of capital is only the resultof the growth of savings, then the growth of money should equal the rate of interest paid todepositors.22.Taxation as it is carried out in most countriestends to destroy savings and accumulatedcapital in a discriminatory way. It

punishes success defined as the capacity to

generate higher productivity.23.Taxation, as carried out today, both throughIncome Tax or Sales Tax, castigates and

punishes the most productive, and promotes theemployment of costly bureaucrats, establishinga police state which restricts civil liberties.24.

4


5/15

A taxation system made by the creation of money, controlled through a democraticallyapproved budget, is much less costly than theusual one, but must limit itself by the resultingdegree of inflation and the damage done to therate of interest which tends to increase with therate of inflation.25.Considering international relations, the

unification of currencies is a must. Competitivedevaluations promote inflation. The ruining of certain currencies through inflation anddevaluation, damages wages, destroys savings,and spreads poverty and crime.

26.A single currency for a continent implies aFederal Reserve System working beyondnational boundaries, as is the case in Europe,and this should be done in the AmericanContinent as well.

27.Taxation should not restrict the freedom of International Trade.

28. Import Duties or Taxes on Exports promotecostly protectionism in detriment to consumersand create a sordid alliance between the

bureaucracy of Government and industrialoligarchy.

29. International competition under a singlecurrency (or under very few properly managedcurrencies) makes protectionism unnecessary

5


6/15

and superfluous, and provides lower prices for consumers.

30. The supply of money for public worksinternationally, would promote trade anddevelopment for the whole world. Appropriatevigilance would ban corruption.

31. The superfluous actual system of taxation,with its huge bureaucracy to spy on citizensand business, once abolished and replaced by

budgeted Central Bank financing on acontinental- or perhaps even world wide level,under strict vigilance and control, wouldreduce the cost of government.

32.The United States is the best proof of wiseadjusting of interest rates to the rate of

productivity. It is also the best demonstrationof controlled inflation over almost a wholecontinent with a Federal Reserve System of Banks able to create new money throughRediscount of Treasury Bills and credit tocommercial banks, yet an example of moderatemoney creation.

33. The manipulation of interest rates ruins theeconomy. Very high rates of interest promotethe creation of new money. Open Marketoperations by the Central Bank in countriessuffering inflation have produced more andmore money with rates going beyond 100% per year. This has not deterred inflation andcurrency devaluation. On the opposite. The

6


7/15

examples of Argentina, Brazil and Ecuador arefoolish indeed.

34.The excessive lowering of interest ratesrestricts the production of money to a pointwhere countries like Japan cannot get out of recession. People living on interest paid ondeposits languish in bad need of income. Thisis punishment for the creation of wealththrough savings.

35.The reduction of the number of nationalcurrencies would make the IMF redundant.It has been a bad umpire for the internationalcurrency system: A blind bureaucrat tamperingwith interest rates, currencies, and budgets,causing havoc among ill managed nations.

36.A world where communication has becomeinstant and transportation easy and secureshould abolish small nations and integratethem into perhaps one single nation with onecurrency and equal opportunities without theneed of emigration.

37. Europe and the USA are the examples to

follow.38.More and more small nations are taken over bycriminal demagogues who become a menacefor their own citizens and, through arms of mass destruction, a threat to the rest of theworld.

39.Congresses, governments have becomeextremely expensive. Legislation should cover

7


8/15

the world and not be produced locally inaccordance to vested interests.

40.Latin America and Africa would benefit mostof these propositions.

41. The world would get out of chronic recession.42.The Government being able to produce money,

there is no logical explanation for Governmentissuing debt. This action is illogical andcontradictory. The accounting of money as

debt of the Central Bank is also nonsense. Theobligation to support the issue of money withgold or reserves in other currencies is obsolete.Legislation and logics has made the issue of money dependent from other considerations,mainly the need to equal the growth of moneyto the rate of productivity and to the increase of

production as a result of population growth.43.Economics as a science has lost its bearings.

For many years Economics has tried to followBertrand Russells effort to find amathematical language to express the laws of macro-economic behavior. It has failed.

Economics trails behind Political Science andPsychology as an amateurish and dilettante pretender of scientific perfection. Many basiccontradictions in economic theory haveremained unsolved. Mainly the Theory of Interest and Money has remained chaotic.Central Banks statistics have remainedignored by analysis. There it is obvious that the

8


9/15

growth of money depends on the rate of interest. The growth of money is directly

proportional with the rate of interest. The moreinterest is paid on debt, the more money grows.So, any increase in the rate of interest as a

policy against inflation is a contradictory, self defeating action, because the amount of moneyincreases, while production of goods andservices is hampered. Economic Theory asserts

quite the opposite: it commends the increase of the rate of interest to check inflation, which istotally wrong. This error shows that it is intatters.

44. The origin of economic thought is philosophy.The future of Economics as a science is

philosophy, particularly logics. Mathematics is but a part of logics. Statistics and stochastic is part of mathematics and logics. So, the wholeof Economics, as a science, must be cleanedand cleared of contradictions, if it is to haveany scientific respectability. Thecontradictions in the Theory of Interest Rates

and Money must be solved, before central bank policies can be enacted.45. Economics, as part of philosophy, has to

address in its own way, problems of politics,international and constitutional law, moralsand ethics. International relations are verymuch affected by economics. Populationmovements, like emigration from ill managed

9


10/15

countries to well managed ones, is a dramaticexample. Basic human rights are at stake.Humanity is more important than any singlenation. Economics must go beyond its usualanalysis of a close economy meaning a nation,or the international economy, meaning tradeand capital transfers among nations, to theeconomic, political and moral problems of thewhole of humanity.

From this analysis certain advice couldemerge, which could contribute to constructivechange.

46.Economics has to go by the numbers, but not by a mystified language pretending to bemathematical. Pareto, Wittgenstein and Russelldid not get anywhere with their efforts tocreate a mathematical language. Alfred JulesAyer, the English philosopher and professor of Logics at Oxford University in his writingLanguage, Truth and Logic as well as inPhilosophy and Language clarifies the role of language in the pursuit of knowledge.

Economists must still try and digest hislessons. Economics has to go back to the plainlanguage of logics.

47.Politicians usually are not philosophers. Butonce economists go beyond the narrow path atinventing a mathematical language lacking any

practical meaning, and only when and if they base themselves in logics, they may be able, as

10


11/15

thinkers and philosophers, to contribute muchmore effectively not only to the wealth of certain nations but also to the welfare of humanity.

48.There are a number of purely political problems, which have a bearing on economics.They must also be addressed by philosophicaleconomists. The economy develops itself within a frame of national, and international

law and order. Money Supply and CapitalMarkets are affected by war, terrorism, famineor natural disasters. Here Economics, as ascience, must have answers for questionsemerging from theses scenarios.

49. The press and the media need analysis by philosophical economists to be able to judgeevents in a more sophisticated and practicalmanner. Economists at the moment are notable to contribute with any important wisdomto the solving of emerging problems. Theythither about trying predictions of economicgrowth or perhaps the trends of the stock

market, which usually fail.50.Compared with medicine, economics isstagnant at a level of knowledge which is morethan one hundred years old, without anysubstantial improvement.

51.Once Economics is put up to date, mended andrepaired, economic growth will be warranted,taxation will be rationalized, the international

11


12/15

economic order will be improved, irrationalmovements of emigrating and wandering

populations will be avoided and the welfare of humanity will be changed for the better.

Note 1 . It is important to show that the growthof money derives mostly from compoundinterest.

A sum of $ 100 is invested in Certificates of Deposit

issued by the banking system at the rate of 4% per year. If interest is added yearly, then$100+$4= 104=$100(1.04) is the amount at

the end of the first year.Again $104 + $ 4/100 104= $104(104) =$100(1.04)* (*=2) is the amount of the investment atthe end of two years. Similarly, $100(1.04)* (*=3) isthe amount of the investment after three years and soon. In general, $Y is the amount of the investmentafter x years, then

y=100(1.04)* (*=x).

Assume now that interest is added twice a year.

Then, with a rate of 4 per cent. per year, 2 per cent.is added on each first half-year and another 2 per cent. in each second half year. It follows, as before,that $100 amounts at the end of successive half-years to sums given by the sequence$100(102), $100(102)*, .hence at the end of x years, the amount is $y wherey=100(102)* (*=2x)

12


13/15

These results can be generalized at once. If $a isinvested at compound interest at 100r per cent. per year compounded yearly, then the amount after xyears is $Y wherey = a(1+ r)* (*=x)If the interest is added n times a year, themY = a(1+ r / n)* (*= n x)In this result, which includes the previous one as a

particular case, it is to be understood that x is a

discontinuous variable, taking values which aremultiples of 1/n . Discontinuity is an essentialfeature of this compound interest problem.The dependence of y on the parameters indicatingthe interest rate and the frequency of compoundinginterest is to be noticed. The amount y, after any

period, is clearly larger, the higher is the interestrate. Further, the amount is larger when interest iscompounded twice a year than it is on yearlycompounding. In general, the more frequently isinterest added, the larger is the amount of a givensum at the end of any period.The amount of an investment increases over time in

what is called a geometric progression, eachamount being a fixed multiple of the previous yearsamount. Analytically, we can express this growth atan ever increasing rate by the exponential functiony = ab* (* = n x),where b = 1+ r/n is a constant greater than unity. Thegrowth is shown by the heights of successive pointson a certain exponential graph, the points being

13


14/15

spread out at equal distances along the horizontaltime axis. The compound interest growth curve isthen a straight line with a gradientlog b = log (1+ r / n).The percentage rate of growth is a constant fixed byr and n.The growth of an investment when interest is addedat definite intervals is a function of a discontinuousvariable. It remains to consider what meaning can be

attached to a notion of growth at continuouscompound interest. Our problem now is to examinethe result of letting n, the number indicating thefrequency of compounding interest, take larger andlarger integral values.To start with a simple case, $(1+1/n)* (*=n) is theamount of $1 at the end of a year when interest iscompounded at 100 per cent. per year n times in theyear. The values of this expression for certain valuesof n aren 1 10 100 1000 10,000(1+1/n)* 2 2.594 2.704 2.717 2.718*=n

the values being given correct to three decimal places. It is clear that(1+ 1/n)* (*=n) tends to a definite limit, in theneighborhood of 2.718, as n tends to infinity.The limiting value is denoted by the pure number e.e = 2.71828.Our definition of e is such that the amount of $1 atthe end of one year, when the interest at 100% is

14


15/15

added more and more frequently, approaches thevalue $e.As n tends to infinity and interest is added more andmore frequently, the compound interest formulatends to assume the form y=a e* when *= rx and thevariable x tends to become continuous.The amount of $a after x years when interest iscompounded continuously at the nominal rate of 100r per cent. per year is given by y =a e* (*=r x)

15

Documents

A New Theory on Money