About Real Protocol

Milton Friedman's Monetary Rule

Milton Friedman advocated for removing discretionary authority from central banking through systematic rules. His "Friedman Rule" identified zero nominal interest rates as the optimal monetary policy, but his implementation through steady deflation proved impractical. Our framework achieves his objective through different mechanisms better suited to digital implementation.

The Wörgl Experiment (1932-1933)

During the Great Depression, the Austrian town of Wörgl implemented a local currency with a small holding fee (essentially a negative interest rate or tax on money). The results were remarkable:

• With minimal initial funding (just 32,000 schillings), the system generated extraordinary economic activity
• Velocity of money increased dramatically as the holding fee incentivized circulation rather than hoarding
• The town achieved near-zero unemployment while surrounding areas remained depressed
• Infrastructure projects were completed, businesses revived, and tax arrears paid
• Price stability was maintained despite increased economic activity

The American economist Irving Fisher was so impressed that he advocated for similar "stamp scrip" approaches throughout America, believing they could rapidly end the Depression by addressing velocity problems.

Silvio Gesell's "Natural Economic Order"

In the early 20th century, economist Silvio Gesell proposed "free money" (Freigeld) – currency subject to a small carrying tax that would prevent hoarding and ensure continuous circulation. John Maynard Keynes praised Gesell in his "General Theory," writing that "the future will learn more from the spirit of Gesell than from that of Marx."

Gesell recognized that money's ability to serve as a store of value without depreciation gave it an unfair advantage over productive goods and labor, creating economic imbalances. His insights into monetary velocity anticipated modern understandings of how money circulation affects economic stability.

System Dynamics: A Transformation in Both Results and Process

What makes the Real Protocol uniquely powerful is how its system dynamics simultaneously improve economic outcomes while eliminating the need for discretionary management:

• Increased monetary velocity creates predictable circulation effects, addressing the fundamental instability that prevented Friedman's k-percent rule from functioning
• Increased relative demand for bonds naturally drives interest rates toward zero through market mechanisms rather than central bank intervention
• Automated taxation via dynamic wealth tax and VAT ensures fiscal neutrality while creating countercyclical stabilizers that function without requiring human judgment
• Zero rate targeting creates optimal monetary conditions without requiring the deflation Friedman's approach called for

These dynamics work together to shift economic incentives toward real investment and production rather than financial engineering. By eliminating the interest-based growth imperative, resources flow toward solving genuine economic problems instead of perpetuating financial cycles.

Unlike conventional approaches that require constant intervention and judgment calls from central banks and treasuries, this system embeds stability directly into the monetary architecture. The result is not just better economic outcomes, but a fundamental transformation in how those outcomes are achieved - through transparent, predictable rules rather than discretionary decisions.

Case Study: Fiscal Balance Through Dual Tax Reform

This simulation demonstrates how a simplified dual tax system—combining a 2.5% wealth tax and a 15.47% Value Added Tax (VAT)—could achieve fiscal balance while dramatically simplifying the US tax regime.

Rather than complex tax codes, the system applies uniform rates to two clear bases:

• A 2.5% tax on total wealth ($132 trillion), yielding $3.30 trillion
• A 15.47% VAT on consumption ($19 trillion), yielding $2.94 trillion

This structure automatically adjusts tax rates in response to government spending, ensuring fiscal sustainability. A dynamic wealth tax on financial assets excluding debt obligations could lower interest rates on government debt. It could also target 0% rates, thereby ending the current problematic paradigm of interest-based public finance.