I hadn't read Silvio Gesell. I only knew about him from Chapter 23 of Keynes' General Theory, from Miles Kimball's post on Gesell's plan for negative interest rates on money, and from the Wikipedia entry. But I'm halfway through writing a paper on Keynes vs Gesell, so I thought I should probably actually read him. Fortunately, I found his book online, so I didn't have to try to find the Carleton library.
Obviously he's a bit of a nut, but monetary economics does seem to attract nuts. Great monetary economists like Wicksell and Fisher were a bit nutty too. I set his nuttiness aside, because it comes with the territory.
I mostly ignored the rest of his book, and stuck to the monetary bits. I did quickly sample what he says about the determination of interest rates, where he seems to be a bit out to lunch.
But when it comes to money, he's one of us! At least, he's a lot closer to me than I ever imagined he would be. I like this guy!
This is not History of Thought. I am not placing Gesell in historical context or trying to give an accurate or complete account of his thought. I am looking back on Gesell from 2015, and reporting what he looks like when seen through my eyes. I am especially interested in his proposed monetary policy. But I need to look at his monetary theory to see where his monetary policy is coming from.
Gesell is a Medium of Exchange guy. Money is the medium of exchange. The division of labour would be next to impossible if we had to use direct barter.
How can an intrinsically worthless bit of paper money be valuable? Simple. Given that barter is next to impossible, the only way I can sell the "wares" (Gesell loves that word, or whatever it is in German) that I produce, to buy the goods I want to consume, is to sell them for money, and then sell that money for the goods I want to consume. It's really no different from a merchant buying wares from me and then selling them to someone else. The merchant only wants my wares because he plans to sell them to someone else. The only difference is that while other wares will eventually end up in the hands of someone who wants to use them, and stop there, money can circle around forever.
But why do these particular bits of paper, rather than something else, get used as money? Because the state says they are money (which is not the same as the state saying you must pay them in taxes). OK, here's where Gesell isn't exactly one of us. But he does say that if all the people simply decide to use something as money, that is no different from the state saying that something is money, because all the people, well, they are the state.
What determines the price of money (what determines the reciprocal of the price of goods in terms of money)? He's a quantity theorist. MV=PT. MV is the (flow) demand for goods, and the (flow) supply of money. PT is the (flow) demand for money, and the (flow) supply of goods. But he's a soft quantity theorist, who pays a lot of attention to fluctuations in V, which is definitely endogenous in his model.
(And he treats Marx's theory of value, especially when applied to paper money, as the joke it is.)
What causes fluctuations in V? Here he's very good. Two things in particular: the expected inflation rate (higher inflation increases V); interest rates (higher interest rates increase V).
He is not very consistent when it comes to the use of credit. He sees credit more as a substitute for money than something that increases velocity.
What causes booms and busts? Fluctuations in MV, mostly caused by fluctuations in V. V tends to be unstable, because an increase in inflation causes an increase in V which causes a further increase in inflation. And credit is procyclical too, which makes PT even more unstable. No, he doesn't set up the differential equations, but he does have a nice little picture of a boom and crash:
So far so good, but nothing especially revolutionary here. It's when we get to monetary policy that things get interesting.
Ditch gold, and gold convertibility. Tell people that paper will be the new money, and give them a few months to convert their gold coins into paper, if they wish. Melt all the gold coins and gold reserves, convert it into jewelry, and give that jewelry to new brides.
Pay (say) 5% negative interest on paper money. This is the famous "stamped money" policy. You have to buy stamps from the government (like postage stamps), and put one stamp a week on your money to keep it valid. It is designed to discourage hoarding and ensure that V is high. There's an implicit assumption in Gesell that a high V would be a more stable V. If we can just eliminate hoarding, that would make V more stable. But where precisely does "hoarding" begin? How low does V have to be, before we can say that people are "hoarding" money?
Because people have to pay money to the government to buy the stamps to ensure their money remains valid, 5% negative interest on money means the stock of money automatically decreases by 5% per year, unless the government takes offsetting action to put that money back into circulation.
The offsetting action is helicopter money. By lowering tax rates, and printing money to finance the resulting deficits, the government can increase the stock of money. Varying the tax rate from year to year is how the government controls M. So we are talking about combined monetary/fiscal policy. Gesell's Currency Office (which replaces the central bank) has only a stove (to burn money) and a printing press.
Target the price level. The government sets up a statistical office to construct a price index, and it adjusts tax rates to adjust M to try to hold P at a constant level.
Gesell notes, but only in passing, that an alternative way to target the price level would be to hold M constant and adjust the negative interest rate paid on money.
"(Instead of altering the volume of money the Currency Office might alter its rapidity of circulation by reducing or raising the rate of depreciation of 5.2%. But the first method proposed is preferable)."
So if the price level started to rise above target, the government could raise the interest rate from minus 5% to minus 4%, to reduce V, and bring the price level back down. But he prefers to control MV by adjusting M rather than by adjusting V through varying the price of stamps. Maybe because he thought it would be administratively easier in practice? Or maybe because he knew that increasing the price of stamps would also cause the money stock to decline faster, unless the government took offsetting action, and the declining stock of money would cause deflation, which would cause an offsetting fall in V?
If Gesell had instead decided the government should vary the price of stamps and hold M constant, the only important difference between Silvio Gesell and Michael Woodford would be that Gesell wants the interest rate paid on money to be negative, and Woodford wants it to be positive. (If the natural rate of interest is positive, and the central bank targets a fixed price level, then you need a positive rate of interest paid on money, equal to that natural rate, to ensure the optimum quantity of money.)