Thoughts on our circumstances...: Transitioning to Private Currencies

Thursday, February 25, 2021

Transitioning to Private Currencies

SILVIO GESELL'S THEORY

AND ACCELERATED MONEY EXPERIMENTS

ABSTRACT

Silvio Gesell (1862-1930) proposed a system of stamped money in order to accelerate monetary circulation and to free money from interest. This was part of a global socialist system intended to free economy from rent and interest. In the 1930s, Irving Fisher, who proposed the system to President Roosevelt, and John Maynard Keynes rendered homage to Gesell's monetary proposals in the context of the economic depression. Among the experiments that took place, several were based on his ideas, notably in the Austrian town of Wörgl and in the United States. These experiments were always local and never lasted more than a few months. This article shows that trust is the main issue of this kind of monetary organization; and therefore, that such experiments can only take place successfully on a small scale.

A former version of this paper was published as "Free Money for Social Progress: Theory and practice of Gesell's accelerated money", American Journal of Economics and Sociology, 57(8), October, 1998, pp. 469-483.

FREE MONEY FOR SOCIAL PROGRESS:

THEORY AND PRACTICE OF GESELL'S ACCELERATED MONEY

I. INTRODUCTION

Money is often the central point of theories that are designed to improve social organization. In the 1930s, the Great Depression led to a search for alternative solutions to restart the economy, or at least to slow its decline. Thousands of persons proposed plans for just this purpose. Many of these plans were based on a reform of the monetary organization, and most of them were never actually tried.

This was not the case with a pre-existent theory — Silvio Gesell's theory of free money — on which John Maynard Keynes showered fulsome praise and which Irving Fisher tried to apply in the United States. This theory was tried. Admittedly, there are key differences between Gesell's theory and the several attempts made to employ it. These differences include the fact that none of the attempts occurred at a national or worldwide level, despite the preferences of Gesell and some founders of the experiments. Moreover, the theoretical purpose of free money became simply the acceleration of monetary circulation, that is, accelerated money, thus abandoning the other dimensions of Gesell's socialist theory.

However, both these experiments and their underlying ideas stress the necessity of the quick circulation of income. It is possible to accelerate the flowering of society by encouraging the circulation of currency, by setting up a monetary organization that promotes what might be called consumption money. Money is viewed as a necessary medium of exchange, but its organization is transformed in order to suppress the disastrous effects of speculation, hoarding, and usury, which are considered to be the sources of economic crises.

The purpose of this paper is not to reappraise Gesell's theory but rather to compare his theories to some issues raised by the twentieth-century experiments. I shall also examine Gesellian socialism and the theoretical context of Gesell's monetary theory as well as the debates and social experiments that grew from these ideas mainly in the period between the world wars. Finally, I discuss the practical issues that face every attempt to employ monetary organizations remain local and confined to a single small region in order to work.

II. GESELLIAN SOCIALISM AND MONEY

Silvio Gesell (1862-1930), born in Germany, worked as a successful importer in Argentina at the end of the nineteenth century. He began to study economics when a huge monetary crisis occurred in Argentina in the 1880s. In 1891 he published Die Reformationim Münzwesen als Brücke zum socialen Staat1. He returned to Europe and started writing the Natural Economic Order, a major work based on his 1891 book. It was published in 1911, reprinted several times, and translated into several languages. English translations were published in 1929 and in 1934, the latter based on the sixth German edition.

In Europe, The Natural Economic Order aroused wide interest during the period between the wars. Gesell acquired many followers... and even more detractors. His admirers considered him a prophet, but among his detractors, orthodox economists in particular, he was dismissed as a crank2.

What provoked such a rejection were both Gesell's non-academic and deeply heterodox ideas, and his hysterical rhetoric, which was similar to that of many socialist writers. In fact, Gesell considered himself a socialist - not a Marxian, but a Proudhonian one.

Some economists considered Gesell as a stage in heterodox economics between the monetary theory of Knut Wicksell and that of Keynes3. This was in part due to the fact that the analyzed a monetary economy and stated that economic crises have a monetary origin. Thecrises Gesell was interested in are deflationist ones, like the Argentinean crisis of the 1880s, which gave him the substance of his theory, and the worldwide one of the 1930s (during which Keynes wrote his General Theory).

Gesell's theory was intended to change the economic organization of society and promote progress towards social justice and economic welfare, by way of freeing the economy and thus establishing what he called a natural economic order. This move towards a free economy (Freiwirtschaft) requires the freeing of land from rent and the freeing of money from interest. In an economic organization cleared of the economic privileges of land owners and money lenders, workers would receive the whole value of their output. Competitors would then have a level playing field, and economy would subsequently flourish.

Let us now turn to Gesell's monetary proposal of a free money. In his theoretical view of the economy, the stockpiling of wealth is identified as the danger to be avoided, because it stops the revenue flow dynamics. Gesell, as Keynes did some years after, denounced the hoarding of money, even as savings deposited in financial institutions, since high interest rates make loans difficult. Two key points appear here: hoarding and the cost of credit. Both blockade a part of the money supply from functioning properly.

Gesell identified the primary function of money in its circulation: economic dynamics are based on money as a perpetuum mobile4. Above all, money has to have a means of circulation. How then, Gesell pondered, could the slowing of monetary flow be prevented? An arrangement favoring monetary circulation and discouraging the stockpiling of wealth had to be set up.

It is true that many other economists developed ideas promoting the circulation function of money. Keynes, for example, advocated the lowering of interest rates. But this is not sufficient to create a monetary utopia. Gesell did inasmuch as he developed an organizational perspective of consumption money.

One can distinguish two meanings of the idea of consumption money:

1. The quick and whole spending of money. This means that income is not hoarded during the period of production that follows its distribution.

2. The disbursement of money in the very place where incomes are created. This means that income does not get used for consumption or invested elsewhere.

It is possible to mix these two meanings, but their theoretical and practical consequences are very different.

In the first meaning, one can recognize many less utopian than heterodox authors who wanted to break the cycle of hoarding and reduce the motive for saving. Keynes was among these; that is why he saw Gesell as a greater writer than Marx. Gesell advocated destroying the function of storage of wealth. This led him to advocate accelerated money5, that is, organizing the acceleration of its circulation.

In the second meaning, the issue to solve is the localization of the formation, the distribution, and the disbursement of income. Big companies and money management induce a gap between where incomes are formed and the where they are spent. This leads to projects at the local level intended to speed up the relocalization of the economic flow. This is not necessarily a return to autarky linked to fear of outside influences. In the town of Wörgl (Austria), in 1932-33, the organization of local accelerated money on Silvio Gesell's model was simply intended to revitalize the local economy.

Hence, a consumption money can be set up by two means: by reducing or even destroying the monetary function of store of wealth and by the organization of local and even strictly closed-region economic flows. The purpose of some monetary utopias was the creation of the first sort of consumption money, but the actual application of such consumption money on a national scale appeared impossible and so it could only be applied on a local scale. Hence the attempts to put in practice accelerated money (as Gesell theorized)led to the setting up of local regional systems.

III. TOWARD THE PRINCIPLE OF AN ACCELERATED MONEY

The purpose of Gesell's monetary theory was to free money from interest rates, in order to set in motion the dynamics of credit, investment and consumption. This freeing involved an acceleration of monetary circulation, or accelerated money.

The core of Gesell's monetary theory consists of a theory of interest. Like Wicksell, Gesell distinguishes between a monetary interest rate and a real interest rate. Gesell considers the second as linked to the first one; hence only the monetary interest rate is of importance in his analysis. In Gesell's theory, then, the monetary domain determines the real one.

The monetary interest rate consists of three parts: a risk premium linked to the loan, a premium linked to the expected rate of inflation, and, above all, a fundamental interest rate called tribute paid for the natural advantage of possessing money over other goods. Gesell reasoned that the natural advantage of money is twofold: first, that money is indestructible and possessing it does not incur costs; and second, that money is the only liquid good by which everything can be obtained.

As a necessary remuneration for the advantages of money, paying a tribute establishes a lower limit to the rate of return on every business project6. This means that someone lends capital only if its interest rate is over the cost of the tribute, and that someone purchases or invests only if he expects the selling price to be over the buying price increased by the tribute.If the numbers do not add up, money will be hoarded and withdrawn from the economic flows7. Hence, the capitalist is likely to break the cycle of economic activity if he abstains from any economic action.

Hoarding then becomes the cause of the crisis, and the natural advantages of money cause hoarding. How then to stimulate the circulation of money and discourage hoarding?The lowering of the interest rate below that of the tribute (estimated to be nearly 3 to 4 percent a year, according to Gesell) would be disastrous, because it would encourage hoarding outside of banks. This is the mechanism of Keynes's awful liquidity trap8.

Gesell stated that the lowering of the interest rate at a level even above that of the tribute rate would not discourage hoarding and stimulate the circulation of money. That is why Gesell did not wish to merely lower interest rates. Rather, he wanted to free money from interest rates altogether. The lowering or even the abolition of interest is not a way to boost the economy but may be a consequence of its new organization.

The solution was to be found in the depreciation of money. That is the only way to pass beyond the mechanism of the tribute. Money, as we have seen, has two advantages over goods: no carrying costs and general liquidity. The first one is linked to the store function of money, the second to its payment function. The solution is to give money an artificial carrying cost in order to suppress the first advantage and to privilege the second one. Thus Gesell proposed his famous stamped money system. Every month or every week notes lose a fixed percentage of their nominal value, for example a weekly rate of 0,1 percent of the nominal value of the notes, i.e. a yearly depreciation of 5,2 percent9. Then, in order to maintain the value of the notes, people would have to purchase stamps every week at the Post Office10. Stamped money means that the authorities impose on money, not prices, a stable, fixed and announced inflation.

Yet, the storage of wealth is safe in Gesell's system. While every deposit in the savings bank creates a need to buy stamps, it is always the holder of the notes who needs to buy them. In the case of deposits in savings banks, the banks have this responsibility. The saver withdraws his deposit at the same value he deposited it. Hence the savings bank is stimulated to loan its funds in order to avoid this costly need. When funds are loaned, the stamps are bought not by the depositor or the savings bank, but by the borrower who holds the money. In this system, lies not in borrowing money, but in holding money idle.

Since it is in the interest of no one to hold notes idle, this system stimulates deposits, discourages hoarding, stimulates loans, and, finally, stimulates monetary circulation in general.

IV. ACCELERATED MONEY DEBATES AND EXPERIMENTS

Gesell's ideas and militancy gave occasion for the birth of several groups promoting his Free Economy. Despite the academic rejection of Gesell's ideas, Keynes noted that many non-academic were infatuated with his ideas:

"In the post-war years his devotees bombarded me with copies of his works [...]. The last decade of his life was spent in Berlin and Switzerland and devoted to propaganda. Gesell, drawing to himself the semi-religious fervour which had formerly centered round HenryGeorge, became the revered prophet of a cult with many thousand disciples throughout the world. [...] Since his death in 1930 much of the peculiar type of fervour which doctrines such as his are capable of exciting has been diverted to other (in my opinion less eminent) prophets11."

The German hyperinflation in the twenties, the subsequent difficulties experienced ingoing back to the gold standard, the monetary disorders and then the great economic depression with its extraordinary unemployment in Europe and America, allowed heterodox, even utopian, ideas to flourish. Debates on Gesellian ideas occurred in the context of the lack of money in Europe from the beginning of the First World War to the middle of the twenties, and in the context of the depression of the thirties. Gesell's ideas were well discussed in Germany, France, Switzerland, Great Britain, Austria, and the United States, long before people experimented with their practical application.

The birthplace of the debates was Switzerland, where Gesell settled in 1900. Dr. Theophile Christen, Fritz Schwartz, and Gesell created in the 1910s the Freiland-und Freigeldbund, an organization intended to promote the Free Economy. The Popular Socialist Party supported them. The free economy projects were discussed in 1923 at the MonetaryConference convoked by the Federal Council.

An engineer and friend of Gesell, Hans Timm, founded the first experiment with stamped money. It occurred in Germany in 1930, and was based on an exchange bank and stamped notes called wära12. Soon the government argued that this system was hurting the issuing privilege of the Central Bank and creating a risk of inflation. The government lost a court case against the experiment, but eventually banned by decree the use of this sort of money in October 1931 13.

Perhaps the most important experiment with accelerated money took place in Wörgl, a little town in Austria, in 1932-3314. It is still considered today to be the seminal experiment of its type. Founders of LETS (Local Exchange Trading Systems) all over the world frequently refer to Wörgl in order to outline the historical context of LETS, despite the absence, today, of any accelerating system of exchanges derived from Gesell's ideas.

Wörgl was an impoverished town of 2,000 inhabitants; within its borders there were 1,500 unemployed. Moreover, the town was in state of bankruptcy. In July 1932, its mayor, Michael Unterguggenberger15, set up a system of stamped notes called "labour notes" of one to ten Austrian schillings that were issued by the municipal office. Every month, holders of labor notes had to buy stamps of 1 percent of their nominal value to maintain the notes.The notes issued were totally backed on a schilling reserve. The municipal office paid a part of the salaries of the municipal employees. This stamped money circulated in the town and the neighbourhood, people trusting in their final reception by the municipal office, which received them in payment of taxes at par with the Austrian schilling. Moreover, it secured the convertibility between the stamped notes and the Austrian schilling, taking a 2 percent duty.

The currency movement in Wörgl sharply accelerated16. Some paid their taxes in advance to avoid buying the stamps. The financial situation of the town and the local economy recovered. The municipality even hired workers to perform public works projects. The principle of savings was safe with a system of deposits, and currency depreciation ended.However, in spite of the apparent success of the system of Wörgl17, and facing the desire of many towns to set up similar systems18, the Austrian government, goaded by the NationalBank of Austria, banned the principle of local stamped money in September 1933 19.

In the United States, some debates on and experiments with stamped money occurred in the thirties. In addition to Keynes, it seems that Irving Fisher was the only other famous economist who observed, criticized and encouraged experiments with Gesell's theory, especially the Wörgl one. Fisher even wrote a book titled Stamp Scrip in 1933. However, this aspect of Fisher's works has been blotted out of the collective memory of economists20.

In the context of the American deflation at the beginning of the thirties, Fisher proposed to set up a temporary but nationwide system of accelerated money, wherein depreciation would be 2 percent per week. He wanted the velocity of money to accelerate, and prices to rise21.

Please go to Research Gate to read the entire paper.

________

"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks." – Lord Acton

More:

The rentier resurgence and takeover: Finance Capitalism vs. Industrial Capitalism