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

By Santiago Sevilla Lic.Oec. Publ. University of Zurich, and Ex-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 Government represents a form of taxation without bureaucracy.

are counterproductive. 6. Spending newly created money may cause some degree of inflation.4. prices will increase. if any is caused at all. The rate of inflation is equivalent to the excess of money growth as compared with productivity. the more interest rate exceeds productivity. (See note 1. Or in other words. compared with productivity. 8. The growth of money is generally determined by the rate of interest. It becomes obvious that increases in the rate of interest. In this case taxation equals the rate of inflation.) The compound interest formula. Productivity is the rate of growth of production. as possible. when interest is compounded as frequently. 5. is an abstraction of the extreme inflationary behavior. dependent on a continuous variable x. Basically. It must be added that inflation increases the rate of interest in direct proportion to the growing demand for money. Inflation is determined by the rate of growth of money. as a measure against inflation. 7. in excess of the rate of growth of population. In the end it appears as a tautology: The growth of money is equal to the rate of interest. the rate of interest defines the rate of growth of the money supply. contradictory in terms of pure logics. 2 . and foolish in deed.

If the rate of growth of money is less than the increase of productivity. revolution. at least. If the rate of growth of money exceeds productivity. circumstances may oblige Government for substantial investment. 10. 11. plagues may cause excessive creation of money over a period. recession and deflation is the result. 15. 12. The improvement of productivity as a result of technological progress must produce unemployment. 13. Eventually. 14. Natural disasters. Government should produce only so much money as needed to finance the growth of production at a stable price level. 16. Wealth is created by savings. Society must care for the unemployed. of less skilled labor. 3 . inflation is the result. Inflation may become a necessary but only temporary evil. war. Savings are deposited into the banking system.9. In normal and stable times. 17.

21. Taxation. If the accumulation of capital is only the result of the growth of savings. then the growth of money should equal the rate of interest paid to depositors. 23. 18.Savings finance investment at a cost. both through Income Tax or Sales Tax. as carried out today. 4 . castigates and punishes the most productive. establishing a police state which restricts civil liberties. It punishes success defined as the capacity to generate higher productivity. 20. 19. 22. Productivity pays for the rate of interest. Productivity depends on the improvement of technology. Interest rates must move closely around the rate of productivity if the system is to remain stable at a steady growth. Taxation as it is carried out in most countries tends to destroy savings and accumulated capital in a discriminatory way. 24. and promotes the employment of costly bureaucrats. which is the rate of interest.

Considering international relations. and this should be done in the American Continent as well.A single currency for a continent implies a Federal Reserve System working beyond national boundaries. and spreads poverty and crime. 27. the unification of currencies is a must. 28.Taxation should not restrict the freedom of International Trade. but must limit itself by the resulting degree of inflation and the damage done to the rate of interest which tends to increase with the rate of inflation. 29. 26.A taxation system made by the creation of money. destroys savings. 25. International competition under a single currency (or under very few properly managed currencies) makes protectionism unnecessary 5 . controlled through a democratically approved budget. as is the case in Europe. Competitive devaluations promote inflation. damages wages. Import Duties or Taxes on Exports promote costly protectionism in detriment to consumers and create a sordid alliance between the bureaucracy of Government and industrial oligarchy. is much less costly than the usual one. The ruining of certain currencies through inflation and devaluation.

once abolished and replaced by budgeted Central Bank financing on a continental. It is also the best demonstration of controlled inflation over almost a whole continent with a Federal Reserve System of Banks able to create new money through Rediscount of Treasury Bills and credit to commercial banks. 33. The superfluous actual system of taxation. 32. The 6 . would promote trade and development for the whole world. Appropriate vigilance would ban corruption.and superfluous. yet an example of moderate money creation. 31. under strict vigilance and control. Very high rates of interest promote the creation of new money. would reduce the cost of government. and provides lower prices for consumers. This has not deterred inflation and currency devaluation. with its huge bureaucracy to spy on citizens and business. 30. The manipulation of interest rates ruins the economy. The supply of money for public works internationally.The United States is the best proof of wise adjusting of interest rates to the rate of productivity. Open Market operations by the Central Bank in countries suffering inflation have produced more and more money with rates going beyond 100% per year. On the opposite.or perhaps even world wide level.

causing havoc among ill managed nations.The excessive lowering of interest rates restricts the production of money to a point where countries like Japan cannot get out of recession. currencies. 38. This is punishment for the creation of wealth through savings. 36. 35.examples of Argentina. It has been a bad umpire for the international currency system: A blind bureaucrat tampering with interest rates. a threat to the rest of the world. Brazil and Ecuador are foolish indeed. 34. 37. Europe and the USA are the examples to follow.The reduction of the number of national currencies would make the IMF redundant. People living on interest paid on deposits languish in bad need of income.More and more small nations are taken over by criminal demagogues who become a menace for their own citizens and. governments have become extremely expensive.A world where communication has become instant and transportation easy and secure should abolish small nations and integrate them into perhaps one single nation with one currency and equal opportunities without the need of emigration. and budgets.Congresses. 39. Legislation should cover 7 . through arms of mass destruction.

40. 42. Legislation and logics has made the issue of money dependent from other considerations.The Government being able to produce money.Economics as a science has lost its bearings. Many basic contradictions in economic theory have remained unsolved. This action is illogical and contradictory. For many years Economics has tried to follow Bertrand Russell’s effort to find a mathematical language to express the laws of macro-economic behavior. 43. Economics trails behind Political Science and Psychology as an amateurish and dilettante pretender of scientific perfection. mainly the need to equal the growth of money to the rate of productivity and to the increase of production as a result of population growth.Latin America and Africa would benefit most of these propositions. It has failed. The accounting of money as debt of the Central Bank is also nonsense. There it is obvious that the 8 .the world and not be produced locally in accordance to vested interests. The obligation to support the issue of money with gold or reserves in other currencies is obsolete. there is no logical explanation for Government issuing debt. 41. The world would get out of chronic recession. Mainly the Theory of Interest and Money has remained chaotic. Central Bank’s statistics have remained ignored by analysis.

must be cleaned and cleared of contradictions. the whole of Economics. So. any increase in the rate of interest as a policy against inflation is a contradictory. problems of politics. Economics. So. The growth of money is directly proportional with the rate of interest. while production of goods and services is hampered. international and constitutional law. like emigration from ill managed 9 . The more interest is paid on debt. Population movements. as a science.growth of money depends on the rate of interest. The future of Economics as a science is philosophy. Statistics and stochastic is part of mathematics and logics. morals and ethics. particularly logics. This error shows that it is in tatters. which is totally wrong. 44. The contradictions in the Theory of Interest Rates and Money must be solved. International relations are very much affected by economics. 45. Mathematics is but a part of logics. has to address in its own way. if it is to have any scientific respectability. because the amount of money increases. before central bank policies can be enacted. Economic Theory asserts quite the opposite: it commends the increase of the rate of interest to check inflation. self defeating action. the more money grows. The origin of economic thought is philosophy. as part of philosophy.

Humanity is more important than any single nation. which could contribute to constructive change. Pareto. Economics must go beyond its usual analysis of a close economy meaning a nation. Economics has to go back to the plain language of logics. Alfred Jules Ayer. the English philosopher and professor of Logics at Oxford University in his writing ‘Language. 46. but not by a mystified language pretending to be mathematical. and only when and if they base themselves in logics. 47. political and moral problems of the whole of humanity. Basic human rights are at stake.Politicians usually are not philosophers. Wittgenstein and Russell did not get anywhere with their efforts to create a mathematical language. Economists must still try and digest his lessons. meaning trade and capital transfers among nations. to the economic.Economics has to go by the numbers. or the international economy. as 10 . But once economists go beyond the narrow path at inventing a mathematical language lacking any practical meaning. From this analysis certain advice could emerge. Truth and Logic’ as well as in ‘Philosophy and Language’ clarifies the role of language in the pursuit of knowledge. they may be able.countries to well managed ones. is a dramatic example.

mended and repaired. terrorism. and international law and order. which have a bearing on economics. 51. The economy develops itself within a frame of national. The press and the media need analysis by philosophical economists to be able to judge events in a more sophisticated and practical manner. They thither about trying predictions of economic growth or perhaps the trends of the stock market. Money Supply and Capital Markets are affected by war.thinkers and philosophers. 49. which usually fail.Once Economics is put up to date. the international 11 .There are a number of purely political problems.Compared with medicine. to contribute much more effectively not only to the wealth of certain nations but also to the welfare of humanity. as a science. must have answers for questions emerging from theses scenarios. Here Economics. economic growth will be warranted. taxation will be rationalized. They must also be addressed by philosophical economists. Economists at the moment are not able to contribute with any important wisdom to the solving of emerging problems. 48. famine or natural disasters. 50. economics is stagnant at a level of knowledge which is more than one hundred years old. without any substantial improvement.

then $100+$4= 104=$100(1. Again $104 + $ 4/100 ·104= $104(1·04) = $100(1. $100(1.04)* (*=2) is the amount of the investment at the end of two years. that $100 amounts at the end of successive halfyears to sums given by the sequence $100(1·02). per year. In general. irrational movements of emigrating and wandering populations will be avoided and the welfare of humanity will be changed for the better. A sum of $ 100 is invested in Certificates of Deposit issued by the banking system at the rate of 4% per year. 2 per cent. Note 1. as before. then y=100(1. It follows.04) is the amount at the end of the first year. Then. Assume now that interest is added twice a year.04)* (*=x). the amount is $y where y=100(1·02)* (*=2x) 12 . in each second half year. with a rate of 4 per cent. Similarly. If interest is added yearly. …. hence at the end of x years. $100(1·02)*. It is important to show that the growth of money derives mostly from compound interest.04)* (*=3) is the amount of the investment after three years and so on.economic order will be improved. $Y is the amount of the investment after x years. is added on each first half-year and another 2 per cent.

then the amount after x years is $Y where y = a(1+ r)* (*=x) If the interest is added n times a year. The amount y. we can express this growth at an ever increasing rate by the exponential function y = ab* (* = n x). per year compounded yearly. If $a is invested at compound interest at 100r per cent. The growth is shown by the heights of successive points on a certain exponential graph. the points being 13 . them Y = a(1+ r / n)* (*= n · x) In this result. where b = 1+ r/n is a constant greater than unity. Analytically. Discontinuity is an essential feature of this compound interest problem. the amount is larger when interest is compounded twice a year than it is on yearly compounding. Further.These results can be generalized at once. is clearly larger. The amount of an investment increases over time in what is called a “geometric progression”. it is to be understood that x is a discontinuous variable. each amount being a fixed multiple of the previous year’s amount. the higher is the interest rate. which includes the previous one as a particular case. The dependence of y on the parameters indicating the interest rate and the frequency of compounding interest is to be noticed. the more frequently is interest added. In general. after any period. taking values which are multiples of 1/n . the larger is the amount of a given sum at the end of any period.

The compound interest growth curve is then a straight line with a gradient log b = log (1+ r / n).718 *=n the values being given correct to three decimal places. The percentage rate of growth is a constant fixed by r and n. The values of this expression for certain values of n are n 1 10 100 1000 10. take larger and larger integral values. per year n times in the year. Our problem now is to examine the result of letting n. The growth of an investment when interest is added at definite intervals is a function of a discontinuous variable.594 2. as n tends to infinity.spread out at equal distances along the horizontal time axis.704 2. To start with a simple case.71828. Our definition of e is such that the amount of $1 at the end of one year. It is clear that (1+ 1/n)* (*=n) tends to a definite limit. It remains to consider what meaning can be attached to a notion of growth at continuous compound interest. $(1+1/n)* (*=n) is the amount of $1 at the end of a year when interest is compounded at 100 per cent. e = 2. when the interest at 100% is 14 . in the neighborhood of 2. The limiting value is denoted by the pure number e.717 2.718. the number indicating the frequency of compounding interest.000 (1+1/n)* 2 2.

As n tends to infinity and interest is added more and more frequently. per year is given by y =a e* (*=r x) 15 . The amount of $a after x years when interest is compounded continuously at the nominal rate of 100r per cent. the compound interest formula tends to assume the form y=a e* when *= rx and the variable x tends to become continuous.added more and more frequently. approaches the value $e.