Friday, November 22, 2019

Notes from an inter-planetary monetary anthropologist

My work as an inter-planetary monetary anthropologist has brought me to dozens of different planets to study their monetary systems. The monetary system of the most recent planet that I visited, the planet of Zed in the Xv2 galaxy, falls into the same classification as the systems on Vigil X and Earth (which I last visited in 1998 and, according to other anthropologists, hasn't changed much).

As on Earth, markets on Zed tend to lie towards the free end of the spectrum. Zedians can own property. And property rights are enforced. Zedians often put their savings in institutions much like banks and earn interest. Banks in turn lend to individuals and business.

However, one of the oddities of the planet of Zed is that its inhabitants universally adhere to an economic religion, Zodlism. One of the strictures of Zodlism is that all monetary instruments must yield at least 2% interest. Even a transactional account, say like Earth's checking accounts, must offer the account holder a minimum 2% per annum.

This requirement is based on the Zodlist stricture that anyone who is temporarily deprived of an object to the benefit of someone else deserves a minimum reward for their sacrifice. Banks that fail to meet the 2% requirement risk censure from the planetary religious organism, the Zodl Council, and ostracism by customers. (For a full account of Zodlist economic doctrine, see Smith & Elf33, pgs 450-512).

Interestingly, banknotes (which on Zed are issued by all sorts of different institutions and individuals, unlike Earth which confines that role to central banks) also pay 2% interest. Each note has a sensor in it that records how much interest the note has accrued. Any Zedian can access unpaid balances by uploading them to their account or claiming them at a trading post when making a purchase. Zed is a little further ahead than Earth in this respect, which still hasn't bothered digitizing its banknotes.

While I was visiting Zed, the planet's economy was facing an unprecedented economic slowdown. With optimism sapped, borrowing on Zed had been plummeting. Zedians were simply too afraid about the future to take out loans to fund business expansion or enlarge their underground shelters. In response to this decline in loan demand, bankers had been trying to make loans more attractive to the Zedian public by pushing lending rates ever closer towards 2%. 

Bankers have even been entertaining the revolutionary idea of lending at rates below 2%, say to 1.5%.

This would leave Zedian banks and note issuers in an odd position. If they only earn 1.5% from borrowers while paying depositors the obligated 2%, banks would be effectively paying out more than they receive in interest. But this is the opposite of what banks are supposed to do! They would soon go out of business. (Any Zedian could make a risk-free profit by taking out a bank loan at 1.5% and depositing those funds at the bank to earn 2%.)

Pressure is building on Zed's religious leaders to alter the 2% rule. Some moderate Zodlists have proposed that a ceremonial 2% rate continue to be paid to depositors and banknote owners, but a fee be levied to claw back a part of the interest. So that if someone is paid 2 Zed in interest, the bank or banknote issuer will take back about half that in fees, ie. 1 Zed. This would allow issuers to 'synthesize' an interest rate of 1% while still conforming to the letter of Zodlism. Once this change is implemented, banks would be able to safely lend at 1.5% or so.

These pragmatists argue that at 2% per annum, borrowing it just too expensive for most people. The planet requires an interest rate of 1.5% if lenders are to be successful in luring the public back into taking on loans. They further argue that when would-be borrowers are priced out of the market, the downturn is exacerbated and prolonged. But strict Zodlists refuse to budge. The idea of earning just 1% on banknotes appalls them. "It's unnatural!" they cry.

The debate certainly reminds me of my time on Earth. Historically, Earth's religions also set limits on interest rates. But whereas Zodlism dictates a minimum interest rate on deposits, Earth tended to set a maximum rate on loans. These rules were referred to as usury laws. Perhaps Zed could learn from its distant planet, since Earth (or at least parts of it) saw it fit to end usury laws long ago. I feel like this softening is likely to happen. In their survey of 450 planetary monetary systems, LeGuin & Xsszym find that law and religious practices tend to bend to planetary economic exigencies. 

Unfortunately, I never saw the resolution to Zed's 2% debate. My ship had arrived to take me to the next planet. Perhaps I can come back one day to see if Zedians have solved the problem.

Addendum: In 2019 I returned for a quick return visit to Earth. Who would have guessed, but they are facing many of the same problems that Zed is experiencing!


  1. Non-spam but equally content-free comment: this is one of my fave Moneyness posts in recent memory.

  2. I'm super confused - are you suggesting that the elimination of usury laws will fix the economy?

    1. Not quite. The Zodlist's 2% stipulation is an allegory for 0% here on earth.

  3. I think economists tend to illogically privilege cash as "savings" and it seriously hinders analysis. Saying "put their savings in institutions," or "put my money in the bank" rings wrong to me. You're not "temporarily deprived" of anything when you hold a checking account.

    If you take paper cash to the bank, what you've done is sold a claim against the gov to purchase a claim against the bank. It's not temporary, and you're not deprived of savings in any way. Your savings are still just as much, but now a claim on a different entity.

    The terms of that sale (ie what kind of liability the bank has to issue to you in order to get you to be willing to sell your gov liabilities) do depend on the particulars. But that's true for all financial transactions, and really all transactions of any kind.

    Note: this is not necessarily a condemnation of insisting on a 2% interest rate on the accounts. As I said elsewhere, my critique isn't of the Zodlist practice per se, but of the description of the operations involved.

    As an example of how to get deposits without giving up anything, suppose you work for the bank and bank at that bank. On payday, they credit your account. You did not "give up" anything, and actually chances are good that you'll never "get anything back" either as the probability of withdrawal into cash are low.

    1. "If you take paper cash to the bank, what you've done is sold a claim against the gov to purchase a claim against the bank. It's not temporary, and you're not deprived of savings in any way. Your savings are still just as much, but now a claim on a different entity."

      I agree!

  4. the real issue is no longer how much interest one entity pays out or another entity charges or any of that - but how creatively the entity of money is utilized