Silvio Gesell: “A strange, unduly neglected” monetary theorist

Abstract

In recent years negative nominal interest rates came to the attention of a wider audience as one instrument to overcome the lower zero bound to conventional monetary policy. Modern proponents trace the origin of the proposal back to Silvio Gesell, a largely forgotten German autodidactic scholar of the interwar period, whose work provides valuable insight into heterodox late nineteenth- and twentieth-century economic thinking. Against this backdrop, the present article provides a comprehensive review of Gesell’s life and social economy, firmly linking him to German anarchism of the interwar period. It suggests that Gesell not only provided a monetary theory of interest, but put forward an independent monetary theory of economic crisis that is essential in understanding the historical origins of depreciative currency proposals. Moreover, the article maintains that Gesell’s monetary theory of interest can be seen as the missing link between heterodox economics, The General Theory, and anarchist economic theory.

Key words:

• History of economic thought
• theory of interest
• negative interest rates
• John Maynard Keynes
• Silvio Gesell
• Keynesianism
• heterodox economics

JEL classifications:

• B19
• B22
• B31
• E49

Notes

¹Because conventional monetary policy measures had been spent, the monetary authorities turned to what was labeled “unconventional” monetary policy, a combination of “qualitative and quantitative easing” (Buiter, 2008a), measures with which central banks hope to affect asset prices and financial conditions by balance sheet policy in contrast to conventional interest rate policy. Although it is hard to argue that these policies were effective in avoiding a deflationary spiral at the height of the crisis, they have some potentially distortive side effects with respect to competition, financial stability, and the long-run risk of inflation (Borio and Disyatat, 2010, pp. 85–86).

²The European Central Bank cut the deposit facility first to −0.1 percent effective from June 11, and then to −0.2 percent by September 10. For the rationale and the ECB’s assessment of the effects of negative rates for the deposit facilities see Cœuré (2014).

³For further references, see Buiter (2009, p. 5). A review of monetary policy at the zero bound is given by Ullersma (2002) and Yates (2004).

⁴Gesell (1958, pp. 266–276) proposed that a stamp worth a thousandth of the note’s face value had to be attached to it once a week, amounting to an annual depreciation rate of approximately 5 percent.

⁵Fisher (1933a) for his part noted that debt deflation would lead to a fall in nominal interest rates while the real interest rate on money holdings would rise, which in turn would lead to hoarding and a slowdown in the velocity of circulation of money, thereby depressing prices and economic activity. With respect to Fisher’s notion behind stamp scrip, see also Pavanelli (2004, pp. 293–295).

⁶This is not surprising since Fisher anchored his theory of interest on time preference (Fisher, 1930).

⁷Keynes (1936) refers to Gesell on pages 32, 353–358, 371, and 379. In general, these remarks are very positive in tone. For example, Keynes judged Gesell’s dialogue between Robinson Crusoe and a stranger in which Gesell expounds the logic of his argument to be “a most excellent economic parable—as good as anything of the kind that has been written” (Keynes, 1936, p. 356). Keynes also maintained that The Natural Economic Order was written in a “cool, scientific language,” but also with “emotional devotion to social justice” and a “moral quality” (p. 355) that is visible in the preface of Gesell’s main work. See Darity (1995, pp. 34–39) for Gesell’s moral qualities in the eyes of Keynes.

⁸Hansen (1953, pp. 155, 159) famously stated that chapter 17, “The Essential Properties of Interest and Money,” of The General Theory is “simply a detour” and “that not much would have been lost had it not been written.”

⁹See Onken (1999), Schmid (1954), and Wolf (1995) for an extensive overview of Gesell’s life and work. Malmedy and Eupen were two Prussian/German districts that were annexed by Belgium after World War I. Its population makes up Belgium’s German minority.

¹⁰The later added “Freiland” idea postulated a landowners’ monopoly on land. Since land is not reproducible, its owners will receive an unjustified rent, because the law of competition does not apply. Hence currency reform will affect the scarcity of land and may still cause monopoly rents or interest (see the discussion below). Therefore, a free society must forbid the ownership of land. Given that Gesell’s proposal for land reform has received little attention (see, e.g., Keynes, 1936, p. 355), I will not elaborate on it further. For a short overview of the proposals for free land, see Wirth (2003, pp. 111–128). See also Lorber (2009).

¹¹For an introduction to libertarian ideas, see Vallentyne (2009). The term quasi-libertarian is used to reflect that the government included members from various backgrounds, that is, to account for the heterogeneity of its composition.

¹²For an overview of the revolution including further references, See Grau (2009).

¹³Gesell was the only member of the Soviet Republic who was not found guilty (Karl, 2008, p. 185).

¹⁴Such a testimony cannot be found in the report of the trial that was published in 1920 together with Gesell’s plea in Die Freiwirtschaft vor Gericht. However, according to Engert (1986, p. 64), who was present during the trial, the protocol was done by two female sympathizers of Gesell who volunteered for the task because the court had failed to ask for a professional stenographer. Therefore, Engert notes that the transcript of the proceedings offer only an inconsistent account.

¹⁵Gesell was a very prolific writer, his collected works consisting of eighteen volumes.

¹⁶Evidently, both initiatives are somewhat similar in nature to the various LETS (Local Exchange Trading Systems) in the United States, Canada, and Germany in particular. Yet there were also substantial differences. For example, the German Wära-Tauschgesellschaft actually created money by accepting collateral (which, to the best of my knowledge, today’s LETS do not) or that in the Austrian case the depreciative currency scheme was initiated by local authorities (whereas today’s LETS are based on private initiative). Rösl (2008) offers a short theoretical assessment of existing regional and local currencies.

¹⁷In the United States, most of the stamp scrip had the notes stamped per transaction, not per period, which contrary to Gesell’s and Fisher’s intentions amounted to an additional sales tax and were thus not long-lived (Gatch, 2006, pp. 27–29).

¹⁸This was meant to allow women to choose the potential fathers of their children according to their fitness (in a Darwinist sense) and not out of economic or social necessity. For an overview, see Bartsch (1989, pp. 24–31). An explanation of the social utopia is proposed by Senft (2006, p. 79), who argues that Gesell incorporated much of contemporary zeitgeist into his economic theory in order to enhance its public reception.

¹⁹Having offspring from three extramarital affairs, besides his legitimate children, and being openly critical of Christian values, did not enhance his reputation in academic circles either (Flik, 2004, p. 125; Senft, 1990, p. 36).

²⁰“Free” refers to Gesell’s claim that depreciative money will set the stage for a truly free economy by eliminating monetary interest that constitutes unearned income and hampers capital growth. See the discussion below.

²¹For the notion of justice in Gesell’s work, see Senft (2006).

²²There is no single definition of anarchy (De George, 2005, p. 31). Generally speaking, anarchism “combines ideas and values from both liberalism and socialism and may be considered a creative synthesis of the two great currents of thought” (Marshall, 2010, p. 639).

²³“Libertarian socialism” or “left libertarianism” (Sullivan, 2003, p. 612) combines the conventional liberalism of the right with egalitarianism of the left. They distinguish sharply between talents, which are at the complete disposal of an individual, and external resources, of which each individual is entitled only to a fair share (Fried, 2004, pp. 67–68; see also Vallentyne et al., 2005).

²⁴For Proudhon’s concept of “mutualism,” a middle way between the principles of property and communism that would reward only labor as a source of income, see Miller (1987, pp. 11–12). Gesell repeatedly referred to Proudhon (Senft, 1990, pp. 71–76). However, he maintained that he had developed his theory without reading Proudhon (Gesell, 1958, p. 31).

²⁵The first Bavarian Soviet Republic in Munich of of April 7 was dominated by left-wing libertarians (Seligmann, 1989, p. 49; see also Karl, 2008). Two of three of Germany’s outstanding anarchist intellectuals, Erich Mühsam and Gustav Landauer, occupied important posts within the Soviet government (Woodcock, 1962, p. 431).

²⁶The classification “right-wing extremist” school is mainly driven by the racist set of beliefs propagated by this particular strand of the free-economy movement.

²⁷See also Schmitt (1989, p.44), who called Gesell’s theory the preliminary conclusion of independent anarchist economic theory, and Preparata (2002, p. 218), who called him an “anarchist prince.”

²⁸“Wares collect basic interest from the consumer, not for the producer but for the possessor of money (medium of exchange)” (Gesell, 1958, p. 388). Gesell quite often refers to the merchant as the true capitalist, which Dillard (1940, pp. 163–164) explains by the economic situation in Argentina at the time. However, if the merchant relies on borrowed money, he has to hand over interest to his creditor (Gesell, 1958, p. 375). Therefore, Gesell’s theory is not a theory of the “tradesman” as Clerc (2002) claims, but rather one of the money lender.

²⁹Evidently, Gesell fails to provide convincing evidence for this claim (Clerc, 2002, p. 95).

³⁰Gesell does not distinguish between real capital and commodities. According to Gesell, commodities have to yield interest as well as real capital: “wares must necessarily always find the market conditions which permit them to appear as interest-exacting capital—at least to the consumer, since he pays the price which the producer receives, plus interest” (Gesell, 1958, p. 388).

³¹See also Dillard (1940, p. 165). It must be noted, however, that Gesell acknowledged that contractual interest rates contain risk and inflation premiums (Gesell, 1958, pp. 431–436), but he maintained that these would only be slightly above zero. Risk premium, understood as the marginal costs of lending, will be low, because most savers will invest their money in life insurance, which, in turn, will invest in real assets that act as securities (pp. 407–408). The inflation premium will eventually be reduced to zero, because under Gesell’s scheme, price stability will be ensured (pp. 278–285).

³²It is interesting to note that the issue of credit money (“bargeldlosen Verkehrs”) has received different treatment in the various German editions of The Natural Economic Order, with the 7th and 8th editions apparently including a chapter that was found among the papers in Gesell’s estate after his passing. However, in the editorial preface to the 9th edition published in 1949, Karl Walker pointed out that this chapter was merely a fragment and had become obsolete based on two articles written by Gesell in 1921 and 1923, respectively.

³³This constitutes the “unleashing” (Suhr, 1983, p. 46) of productive forces of society that his followers claimed would result from Gesell’s scheme. Nevertheless, the introduction of depreciative money will not eliminate interest all of a sudden. As long as there is excess demand for capital, interest will be paid. However, with the monetary rate of interest reduced to zero, the capital stock will expand and demand for it will equal supply and the scarcity premium will vanish. This process will take time and thus free money will only gradually eliminate the scarcity of real capital (Gesell, 1958, p. 415; see also Dillard (1940, pp. 170–171).

³⁴Gesell postulated that in a society with a division of labor, human needs only become “effective” demand if they are endowed with money: “The ‘needy’ need or desire commodities, but only those persons demand commodities who offer money for them… . In short, the demand for wares consists of the offer of money, those who have money must create a demand” (Gesell, 1958, p. 207).

³⁵This appears to be similar to Hawtrey’s and Keynes’s use of the term as “aggregate nominal expenditure in the economy” (Laidler, 1999, pp. 116, 250–251). Interestingly, Gesell (1958, p. 241) stated that personal credit was also a component of monetary demand. However, he argued that the availability of credit behaves similarly to the velocity of money. In a boom, when there was confidence, there would be credit, in a depression, there was no confidence and hence no credit (pp. 233–234).

³⁶According to Gesell (1958, pp. 209–215), the stock of wares depends on the amount of goods being brought to the market and the amount of goods leaving the market after being consumed. Gesell assumes that this stream is continually increasing due to population growth, increasing the division of labor, technological progress, and new products.

³⁷“When confidence exists, there is money in the market; when confidence is wanting, money withdraws—such is the teaching of experience” (Gesell, 1958, p. 260). In this context, Gesell refutes the popular belief that a fall in prices stimulates aggregate demand because people know “what is offered cheap to-day will be offered still cheaper tomorrow,” and thus refrain from purchase (p. 234).

³⁸Here it seems that Gesell’s argument is very similar to Fisher’s (1933a) debt-deflation theory.

³⁹Gesell (1958, pp. 191–192) argues that monetary policy should aim at price stability not only because it facilitates exchange that nearly always includes a temporal dimension, but also because it saves debtors and creditors alike from unforeseen changes to their assets and liabilities.

⁴⁰Aside from this passage, there are no further references to Gesell’s concept of monetary demand in The General Theory. One can only speculate as to the reason, but the most likely explanation is that, while Keynes believed Gesell’s theory of interest to be his original work, he credited Malthus for the concept of effective demand.

⁴¹See, for example, the various mathematical interpretations discussed in Darity and Young (1995).

⁴²Minsky (1975) argues that the reason that Hicks’s interpretation became accepted as the conventional wisdom was that (1) Hicks (1937) offered a formalized and simplified model while Keynes (1937a) in his response to Viner used a rather complicated informal model that included uncertainty, and (2) Keynes fell ill at the beginning of 1937 and did not fully recover before the war, in which he served as a government adviser, dying shortly afterward. Therefore, the so-called Keynesians failed to grasp the concept of liquidity and monetary contracts.

⁴³Advocates of the orthodox school assumed the contradictions away by declaring them simple “detours” or reducing their complexity (Darity and Young, 1995, p. 6).

⁴⁴The term “bastard Keynesian” was coined by Joan Robinson (1965, pp. 100–101).

⁴⁵Davidson (2000, p. 7) argues that that the essential properties of money and savers’ desire for it are ultimately responsible for a lack of effective demand. According to Davidson (2007, pp. 30–35) Keynes rejected two further axioms: (1) the gross substitution axiom, and (2) the ergodic axiom (for a concise introduction into the post Keynesian school, see also Fazzari, 2009).

⁴⁶Once can only speculate as to why Dillard’s pioneering research concerning the link between Proudhon, Gesell, and Keynes went mainly unnoticed. One explanation offered is that the academic debate about Keynesian ideas took off somewhat later Gischer (1997, p. 5).

⁴⁷Besides the already quoted Keynes (1937a), he also defended his view in an article in the Economic Journal, where he stated, “the rate of interest is that rate at which the demand and supply of liquid resources are balanced. Saving does not come into the picture at all” (Keynes, 1937b, p. 668). Concerning the perceived acceptance of his theory, Keynes wrote: “Now that we have got away from the idea of the rate of interest being depended on saving and have reached the idea of its being in some sense a monetary phenomenon, the remaining difference of opinion cannot be fundamental and agreement should be within reach” (Keynes and Robertson, 1938, pp. 318–319).

⁴⁸The last part of the quote may be understood as a reference to the labor theory of value. To assess the extent to which the latter would be aligned with Gesell’s notion of money as the “only” capital would require further study.

⁴⁹This argument was explicitly restated by Keynes (1937a, pp. 222–223): “Thus, instead of the marginal efficiency of capital determining the rate of interest, it is truer (though not a full statement of the case) to say that it is the rate of interest which determines the marginal efficiency of capital.”

⁵⁰See Meltzer (1988, 1996) for a similar interpretation of The General Theory, but without any reference to the Gesellian link.

⁵¹Further references include Betz (2005, pp. 13–18), Flik (2004, p. 127), and Senf (2007, p. 241).

⁵²Manuel Garcia, a Spanish vocal trainer and singer, developed the laryngoscope in 1854 to view the functioning glottis and the vocal folds. With modification, his device has been used as a medical instrument ever since.

⁵³Gesell had a somewhat naive belief in stamp script as a panacea for the economic ills of capitalism: “More than that is not needed to protect the exchange of goods against any conceivable disturbance, to render crises and unemployment impossible, to reduce commercial profits to the rank of a wage, and in a short space of time to drown capital-interest in a sea of capital” (Gesell, 1958, p. 272).

Additional information

Notes on contributors

Cordelius Ilgmann

Cordelius Ilgmann is Head of Department at Thuringian Ministry for Economic Affairs, Science and Digital Society, Erfurt, Germany.