Silvio Gesell

Gesell was a successful German[26] merchant in Buenos Aires. He studied monetary problems by the crisis of the late ’80s, which was especially violent in Argentina.

His first work, Die Reformation im Münzwesen als Brücke zum socialen Staat was published in Buenos Aires in 1891.

The part which derives from Henry George,[27] though doubtless an important source of the movement’s strength, is of altogether secondary interest.

My book’s purpose is to establish an anti-Marxian socialism. It is a reaction against laissez-faire built on theoretical foundations totally unlike those of Marx. His is based on:

• a repudiation of the classical hypotheses, and
• an unfettering of competition instead of its abolition

The future will learn more from the spirit of Gesell than from that of Marx.

The preface to The Natural Economic Order shows the moral quality of Gesell. It is the answer to Marxism.

Gesell’s specific contribution to the theory of money and interest is as follows.

He distinguishes clearly between:

• the interest rate and
• the marginal efficiency of capital.

He argues that:

• it is the interest rate that limits the rate of growth of real capital.
• the interest rate is a purely monetary phenomenon arising from the fact that money has carrying expenses.

He cites the comparative stability of interest rates throughout the ages as evidence that it cannot depend on purely physical characters, inasmuch as the variation of the latter from one epoch to another must have been incalculably greater than the observed changes in the rate of interest.

It means that the interest rate depends on constant psychological characters. It has remained stable, whilst the widely fluctuating characters, which primarily determine the schedule of the marginal efficiency of capital, have determined not the rate of interest but the rate at which the (more or less) given rate of interest allows the stock of real capital to grow.

Gesell’s theory’s great defect is that he shows how it is only the money interest rate which allows a yield to be obtained from lending out stocks of commodities.

His dialogue between Robinson Crusoe and a stranger[28] is a most excellent economic parable — as good as anything of the kind that has been written — to demonstrate this point. But, having given the reason why the money-rate of interest unlike most commodity rates of interest cannot be negative, he altogether overlooks the need of an explanation why the money-rate of interest is positive, and he fails to explain why the money-rate of interest is not governed (as the classical school maintains) by the standard set by the yield on productive capital.

This is because the notion of liquidity-preference had escaped him. He has constructed only half a theory of the rate of interest. The incompleteness of his theory is doubtless the explanation of his work having suffered neglect at the hands of the academic world. Nevertheless he had carried his theory far enough to lead him to a practical recommendation, which may carry with it the essence of what is needed, though it is not feasible in the form in which he proposed it.

He argues that the growth of real capital is held back by the money-rate of interest, and that if this brake were removed the growth of real capital would be, in the modern world, so rapid that a zero money-rate of interest would probably be justified, not indeed forthwith, but within a comparatively short period of time. Thus the prime necessity is to reduce the money-rate of interest, and this, he pointed out, can be effected by causing money to incur carrying-costs just like other stocks of barren goods. This led him to the famous prescription of “stamped” money, with which his name is chiefly associated and which has received the blessing of Professor Irving Fisher.

According to this proposal currency notes (though it would clearly need to apply as well to some forms at least of bank-money) would only retain their value by being stamped each month, like an insurance card, with stamps purchased at a post office. The cost of the stamps could, of course, be fixed at any appropriate figure. According to my theory it should be roughly equal to the excess of the money-rate of interest (apart from the stamps) over the marginal efficiency of capital corresponding to a rate of new investment compatible with full employment. The actual charge suggested by Gesell was 1 per mil. per month, equivalent to 5.4% per annum.

This would be too high in existing conditions, but the correct figure, which would have to be changed from time to time, could only be reached by trial and error. The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale. But there are many difficulties which Gesell did not face.

He was unaware that money was not unique in having a liquidity-premium attached to it, but differed only in degree from many other articles, deriving its importance from having a greater liquidity-premium than any other article.

Thus if currency notes were to be deprived of their liquidity-premium by the stamping system, a long series of substitutes would step into their shoes — bank-money, debts at call, foreign money, jewellery and the precious metals generally, and so forth. As I have mentioned above, there have been times when it was probably the craving for the ownership of land, independently of its yield, which served to keep up the rate of interest; — though under Gesell’s system this possibility would have been eliminated by land nationalisation.

The theories which we have examined above are directed, in substance, to the constituent of effective demand which depends on the sufficiency of the inducement to invest. It is no new thing, however, to ascribe the evils of unemployment to the insufficiency of the other constituent, namely, the insufficiency of the propensity to consume.

But this alternative explanation of the economic evils of the day — equally unpopular with the classical economists — played a much smaller part in sixteenth- and seventeenth-century thinking and has only gathered force in comparatively recent times.

Complaints of under-consumption were a very subsidiary aspect of mercantilist thought. Heckscher quotes a number of examples of what he calls “the deep-rooted belief in the utility of luxury and the evil of thrift.

Thrift was regarded as the cause of unemployment, and for two reasons=

1. Because real income was believed to diminish by the amount of money which did not enter into exchange,
2. Because saving was believed to withdraw money from circulation."[29]

In 1598, Laffemas (Les Trésors et richesses pour mettre l’Estat en Splendeur) denounced the objectors to the use of French silks on the ground that all purchasers of French luxury goods created a livelihood for the poor, whereas the miser caused them to die in distress.[30]

In 1662, Petty justified “entertainments, magnificent shews, triumphal arches, etc.”, on the ground that their costs flowed back into the pockets of brewers, bakers, tailors, shoemakers and so forth. Fortrey justified “excess of apparel”. Von Schrötter (1686) deprecated sumptuary regulations and declared that he would wish that display in clothing and the like were even greater.

Barbon (1690) wrote that “Prodigality is a vice that is prejudicial to the Man, but not to trade. … Covetousness is a Vice, prejudicial both to Man and Trade.” [31] In 1695 Cary argued that if everybody spent more, all would obtain larger incomes “and might then live more plentifully”.[32] But it was by Bernard Mandeville’s Fable of the Bees that Barbon’s opinion was mainly popularised, a book convicted as a nuisance by the grand jury of Middlesex in 1723, which stands out in the history of the moral sciences for its scandalous reputation. Only one man is recorded as having spoken a good word for it, namely Dr. Johnson, who declared that it did not puzzle him, but “opened his eyes into real life very much”.

Adam Smith

Adam Smith has stated that capitals are increased by parsimony, that every frugal man is a public benefactor, and that the increase of wealth depends upon the balance of produce above consumption. That these propositions are true to a great extent is perfectly unquestionable. … But it is quite obvious that they are not true to an indefinite extent, and that the principles of saving, pushed to excess, would destroy the motive to production. If every person were satisfied with the simplest food, the poorest clothing and the meanest houses, it is certain that no other sort of food, clothing, and lodging would be in existence. … The two extremes are obvious; and it follows that there must be some intermediate point, though the resources of political economy may not be able to ascertain it, where, taking into consideration both the power to produce and the will to consume, the encouragement to the increase of wealth is the greatest.[38] Of all the opinions advanced by able and ingenious men, which I have ever met with, the opinion of M. Say, which states that= un product consommé ou détruit est un débouché fermé (I. i. ch. 15), appears to me to be the most directly opposed to just theory, and the most uniformly contradicted by experience.

Yet it directly follows from the new doctrine, that commodities are to be considered only in their relation to each other, — not to the consumers. What, I would ask, would become of the demand for commodities, if all consumption except bread and water were suspended for the next half-year? What an accumulation of commodities! Quels débouchés! What a prodigious market would this event occasion![39] Ricardo, however, was stone-deaf to what Malthus was saying.

Mill

Mill’s successors rejected his Wages-Fund Theory but overlooked the fact that Mill’s refutation of Malthus depended on it.