In 1891 Silvio Gesell (1862-1930) a German-born entrepreneur living in Buenos Aires published a short booklet entitled Die Reformation im Münzwesen als Brücke zum sozialen Staat (Currency Reform as a Bridge to the Social State), the first of a series of pamphlets presenting a critical examination of the monetary system. It laid the foundation for an extensive body of writing inquiring into the causes of social problems and suggesting practical reform measures.
His experiences during an economic crisis at that time in Argentina led Gesell to a viewpoint substantially at odds with the Marxist analysis of the social question: the exploitation of human labour does not have its origins in the private ownership of the means of production, but rather occurs primarily in the sphere of distribution due to structural defects in the monetary system.
Like the ancient Greek philosopher Aristotle, Gesell recognised money’s contradictory dual role as a medium of exchange for facilitating economic activity on the one hand and as an instrument of power capable of dominating the market on the other hand.
The starting point for Gesell’s investigations was the following question: How could money’s characteristics as a usurious instrument of power be overcome, without eliminating its positive qualities as a neutral medium of exchange ?
He attributed this market-dominating power to two fundamental characteristics of conventional money:
Firstly, money as a medium of demand is capable of being hoarded in contrast to human labour or goods and services on the supply side of the economic equation. It can be temporarily withheld from the market for speculative purposes without its holder being exposed to significant losses.
Secondly, money enjoys the advantage of superior liquidity to goods and services. In other words, it can be put into use at almost any time or place and so enjoys a flexibility of deployment similar to that of a joker in a card game.
These two characteristics of money give its holders a privileged position over the suppliers of goods and services. This is especially true for those who hold or control large amounts of money.
They can disrupt the dynamic flow of economic activity, of purchases and sales, savings and investment. This power enables the holders of money to demand the payment of interest as a reward for agreeing to refrain from speculative hoarding thereby allowing money to circulate in the economy.
This intrinsic power of money is not dependent on its actual hoarding, but rather on its potential to disrupt economic activity which enables it to extract a tribute in the form of interest in return for allowing the “metabolic exchange” of goods and services in the “social organism”.
The “return on capital” is accorded priority over broader economic considerations and production becomes attuned more to the monetary interest rate than to the real needs of human beings. Long-term positive rates of interest disturb the balance of profit and loss necessary for the decentralized self-regulation of markets.
Gesell was of the opinion that this led to a dysfunction of the social system exhibiting very complex symptoms: the non-neutrality of interest-bearing money results in an inequitable distribution of income which no longer reflects actual differences in productivity. This in turn leads to a concentration of monetary as well as of nonmonetary capital and therefore to the predominance of monopolistic structures in the economy.
Since it is the holders of money who ultimately decide whether it circulates or stands still, money can’t flow “automatically” like blood in the human body. The circulation and the correct dosage of the monetary supply cannot be brought under effective public control; deflationary and inflationary fluctuations of the general price level are inevitable.
In the course of the business cycle when declining interest rates cause large amounts of money to be withheld from the market until the outlook for profitable investments improves, the result is economic stagnation and unemployment.
… to a Neutral Servant of Economic Activity
In order to deprive money of its power, Gesell did not advocate recourse to measures aimed at outlawing the taking of interest such as the canonical prohibition of medieval times.
On the contrary, he envisaged structural changes in the monetary system involving the imposition of carrying costs on the medium of exchange, thereby counteracting the tendency to hoard and neutralising the liquidity advantage of conventional money. The imposition of such carrying costs on liquid monetary assets – comparable to a demurrage fee for freight containers in the field of transport economics – would deprive money of its power to dominate the market while allowing it to fulfil its designated function as a medium of exchange facilitating economic activity.
Counteracting disruptions in the circulation of the medium of exchange due to speculative hoarding would allow the quantity and velocity of the monetary supply to be periodically adjusted to match the volume of production and the overall level of economic activity in such a way that the purchasing power of the monetary unit could be made to possess the same long-term stability as other weights and measures.
In his earliest works Gesell referred in particular to “rusting bank notes” as a method for implementing an “organic reform” of the monetary system. Money which had hitherto been “dead foreign matter” with respect to both the social system and the natural world, would thus be integrated into the eternal cycle of life and death, becoming transitory and losing its characteristic of limitless self-multiplication by means of simple and compound interest. Such a reform of the monetary system would constitute a regulative holistic therapy; by removing the cause of disruptions in monetary circulation. Gesell envisaged that the self-healing powers of the dysfunctional social “organism” would gradually increase allowing it to recover from the diverse economic and structural symptoms of crisis, ultimately reaching a state of equilibrium, in harmony with the rest of the natural order.
In his main work, Die Natürliche Wirtschaftsordnung durch Freiland und Freigeld (The Natural Economic Order through Free Land and Free Money), published in Berlin and Bern in 1916, Gesell explained in detail how the supply and demand of capital would be balanced in the case of uninterrupted currency circulation so that a reduction of the real rate of interest below the presently existing barrier of around 3-4% would become possible. Gesell used the term “basic interest” (Urzins) to denote this pure monetary interest rate of around 3-4% which is found to vary little historically. It represents the tribute of the working people to the power of money and gives rise to levels of unearned income far in excess of that suggested by its magnitude.
Gesell predicted that his proposed currency reform would gradually cause the “basic interest” component to disappear from the monetary loan rate leaving only a risk premium and an administrative charge to allow lending institutions to cover their costs.
Fluctuations of the market rate of interest around a new equilibrium point close to zero would allow a more effectively decentralised channelling of savings into appropriate investments.
Free Money (Freigeld), a medium of exchange liberated from the historical tribute of “basic interest”, would be neutral in its impact on distribution and could no longer influence the nature and extent of production to the disadvantage of producers and consumers. Gesell envisaged that access to the complete proceeds of labour brought about by the elimination of “basic interest” would enable large sections of the population to give up wage- and salary-oriented employment and to work in a more autonomous manner in private and cooperative business organisations.