Thoughts on reading Silvio Gesell on money

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.

Monetary Theory.

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.

Monetary Policy.

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.)

Comments

[Odie]

"wares" probably comes from the German word "Waren" which is the same as goods/services. In essence, everything that is sold in a market.

[Nick Rowe]

Odie: the "sold in a market" bit is perhaps important in this context. Would it be correct to say (in German) that Robinson Crusoe produces goods and services, but produces no Waren, because he does not produce for the market? If so, then the word "ware" (as opposed to goods) is very important for Gesell, when he is talking about money. He says that money is a ware.

[Sven]

Nick: I don't think so. The word "Waren" is the economic term for the word "good" in english and it only refers to tangible stuff (as oposed to service).

The german word "Güter" (which sounds somewhat like "good") is the more common term for tangible goods + service.

[Odie]

I have found the German original: http://geokey.de/literatur/doc/nwo.pdf After a quick glance it looks like he means tangible goods by "Waren". The part I have skimmed over he also talks about produced but unsold goods. His definitions may be a bit "fuzzy" than what would be standard today. Maybe not surprising since the book is a 100 years old and neither did he have a formal education in economics. I should take a closer look at the original since I have found it online; looks like it could be interesting.

[Nick Rowe]

Sven and Odie: thanks. It doesn't matter much if he's a bit fuzzy. I just wondered if he might be emphasising some distinction, by his choice of words, between goods and goods that are marketed. Because when it comes to monetary economics, goods intended for own consumption don't matter.

[Frances Woolley]

Nick,

Interesting.

What does Gesell mean by money? If money had a negative interest rate, I'd want to have as little as it as possible. And I'm thinking that if I paid for everything using my credit card, and then paid off my credit card from some kind of savings account - would I have any "money"? Is there any kind of liquid financial asset that I could use to pay my credit card bill that wouldn't count as money?

What is the difference between a negative interest rate on money and a tax on wealth held in the form of money? If there is a difference, why does it matter?

[Nick Rowe]

Frances: he's talking about currency. I didn't notice him talking about the effect his proposed tax on currency would have on the use of credit, and whether it matters. But maybe I missed it. Good point.

[Oliver]

Ware:

etwas, das in einem Laden zum Verkauf angeboten wird

translates as: something that is offered for sale in a shop.

[Nick Rowe]

Oliver: Aha! Then "Merchandise" would be a synonym. Something bought and then sold again by a merchant. Just as all of us buy and then sell money.

[Oliver]

Yes, I think that would a good synonym. The dictionary translates its meaning in commerce as product, commodity or merchandise.

Handelsware would be the exact translation of merchandise, I think. Händler = merchant. Ware may just be an abbreviation of Handelsware. Both are used exclusively in an economic / commercial context.

[marcel proust]

Small point about MV=PT:

PT is the (flow) demand for money, and the (flow) supply of goods

Since T is transactions, and there are many kinds of transactions that don't involve goods (or services), e.g., assets, including paper assets, this isn't quite correct is it? It abstracts from the effect on MV of fluctuations in volume on asset markets (bubbles and their aftermath).

[Nick Rowe]

Oliver: Bingo! That's nailed it, I think.

Marcel: true. I didn't notice Gesell discussing that. I wasn't sure whether it would be best to think of him as talking about MV=PY or MV=PT. It seemed to be something in between.

[Kaleberg]

This definitely puts an interesting spin on the banking business. A banker would want to have minimal reserves depreciating in the vault so there is a huge incentive to lend deposits as they arrive. Since no one else wants to hold money, there will always be people eager to make deposits.

Weirdly enough, I suspect the end result would be something very similar to what we have now, except that all interest rates would be negative. In fact, it is likely that all returns on investments would be negative, but some would be less negative than others. The big difference would be the need for a continuous pumping of money into the economy.

[Walter Hanschitz-Jandl]

I feel awkward about two expressions Nick Howe uses. What Gesell proposes should not be called „negative interest“. This is misleading. It is better to call it a fee for the use of money, or carry tax on money. If interest on money is a phenomenon which is associated with the lending out of money, it is obvious, that the term does not apply here, since the fee is due for holding money, that is when it is not lent out.
The other expression is „monetary policy“. Gesell‘s carry tax / money fee should be called a structural reform. What is usually called „monetary policy“ does not exist in his concept. There is in particular no such thing like an interest policy. Interest rates should be fixed by the market. Under the condition of a money with carrying costs, however, this would mean that the lower bound of interest on money, which is set by the „own rate of interest“ (in the sense of Keynes: yield (interest) - carrying costs + liquidity premium) of holding cash, would be lower (those 5 % carrying costs).
By the way, Gesell does not want negative interest rates (what ist really to be called „interest rates“). But he expects interest rates to fall to zero in the long run, when the existing lower bound of interest on money is lowered, which sets a limit to the level of employment and the production of capital-assets (says Keynes, „it seems ... that the rate of interest on money plays a peculiar part in setting a limit to the level of employment, since it sets a standard to which the marginal efficiency of a capital-asset must attain if it is to be newly produced.“ GT, Ch. 17). The rate of interest on money would fall together with the marginal efficiency of capital.
It is sometimes not worth the while studying the theory of the merchant Gesell. Keynes is at least partly the better theorist, eg when it comes to explaining the lower bound. And definitely a better theorist is Maurice Allais. It is odd that it is not known that Allais also proposed the carry tax (in Allais‘s terms: „dépréciation de la monnaie circulante“) - as a condition for an efficient economy („Ce qui ne coûte rien, est gaspillé.“ Which means that a money whose use is free, for whose advantages users do not have to pay, leads to inefficiencies)! The „socialisme concurrentiel“ which he developped in his Nobel winning „Économie et Intérêt“ from 1947 corresponds with Gesell‘s „Natural Economic Order“.
Everybody who is searching for a rigorous analysis of our monetary and economic order, its flaws and remedies for them should read Allais. And he is the man to beat for all those who do not like the idea of carrying costs on money.

[Nick Rowe]

Walter: If I hold an asset it pays a rate of return. With land we call it the rent/price ratio. With a bond or savings account, we call it the rate of interest. With currency, there is no theoretical difference between a Gesellian tax and a negative rate of interest on currency.

Walter and Kaleberg: think about when inflation rates were much higher, say 10%. So the real rate of return (the real rate of interest on holding currency) is negative 10%. That is very much like a 10% tax (negative interest rate) on holding currency. Does this mean that all other real interest rates must tend to 0%? No. Both theory and history say that does not have to happen. For example, if time preference is high, and expected future income growth is high, we can see positive real interest rates. And it all depends on the liquidity of different assets, whether their real rate of interest will be positive or negative. The interest rate on the safest and most liquid asset sets a lower bound, that is all.

Walter: I hesitated whether to call Gesell's negative interest rate proposal "monetary *policy*", because it is indeed a structural reform, rather than month-to-month policy. But then his proposal for a price level target is also a structural reform, rather than something to be changed every month. But he certainly does have a "monetary policy" in the narrower sense of adjusting tax rates to adjust the stock of money to hit that price level target. And "monetary policy" is more than just the month to month adjustments of the central bank. It includes the target (like the price level target, or inflation target, or exchange rate target, or gold price target, etc.). Monetary policy must be understood in that broader context. It does not just mean the central bank adjusting the interest rates on bank reserves. It is strategy, not just tactics.

[Nick Rowe]

When I "lend money" for one year, what I am doing is buying and holding an IOU for one year. That IOU is an asset. "Interest" is the return I get for holding that asset. Different assets pay different rates of interest. It is no different if the asset I hold is itself used as money. Balances in a chequing account sometimes pay (positive or negative) interest. Currency is no different. Gesell wanted the central bank (his Currency Office) to set a negative (nominal) interest rate of 5% on the currency it issued.

[Greg Hill]

Hi Nick,

Did you know that Irving Fisher actually wrote up legislation that would allow the U.S. Treasury to issue "script," or stamped money in Gesell's (and Keynes's) terms. There's a bit more here: https://www.blogger.com/blogger.g?blogID=906370602231941570#editor/target=post;postID=8704669232548075066;onPublishedMenu=posts;onClosedMenu=posts;postNum=23;src=postname

[Nick Rowe]

Greg: apologies: I just found your comment in the spam filter, and rescued it.

I knew that Fisher was a fan of Gesell, but didn't know he had followed up. I was unable to get access to the link you posted.

[Walter Hanschitz-Jandl]

On Nick‘s comment from July 27, 2015 at 02:26 PM:
„... think about when inflation rates were much higher, say 10%. So the real rate of return (the real rate of interest on holding currency) is negative 10%. That is very much like a 10% tax (negative interest rate) on holding currency.“
The inflation rate is not like the carry tax when it comes to decide whether to hold savings liquid or to carry them to a bank. This is a crucial point. Inflation is never an incentive to invest money (eg on a savings account), because inflation depreciates money on a savings account just like money under the mattress. The only incentive to invest money (on a savings account) in the absence of carrying costs on money is a sufficient nominal interest rate (we leave aside safety here). Without a sufficient interest rate the liquidity trap snaps. The carry tax, however, is an incentive to save on a savings account even without interest.
Does this mean that all other real interest rates must tend to 0%?
Why 0%?
„there is no theoretical difference between a Gesellian tax and a negative rate of interest on currency“
I do not understand „theoretical difference“ and translate it in my language as „theory does not distinguish ...“. But the theories of Keynes and Allais do distinguish between interest and carrying costs (the very concept seems indeed to be missing in most of the classical literature). Keynes calls Gesell‘s money fee „carrying costs“.

[Greg Hill]

Nick,

Here's the missing link: http://www.the-human-predicament.com/2012/05/how-to-stimulate-economy-without.html

[Nick Rowe]

Thanks Greg. good post.

(Your comment went into spam again. eventually, by fishing you out, I will train Typepad.)

[Greg Hill]

Thanks for taking the trouble Nick,

Perhaps it is spam at some deeper level.

[JKH]

Nick,

You may find this to be an awkward association, but the ideas here remind me of the most extreme version of MMT.

The common thread is that there are no bonds and fiscal policy is used to optimize M.

One difference is that extreme MMT wants to set rates permanently at zero.

The idea here is to set rates negative.

But in both cases it is bond-free spending that becomes the lever for optimal money creation at the margin.

[JKH]

and taxes are used in a similar way to assist with optimal marginal tightening.

[Nick Rowe]

JKH: yes, I noticed that. The Currency Office owns no assets (except the stove and printing press). The stock of bonds is assumed constant when M changes, so is G, so it's T that must change. But the big difference between Gesell and MMT is that Gesell treats M as very different from bonds, and uses MV=PT.

"One difference is that extreme MMT wants to set rates permanently at zero.

The idea here is to set rates negative."

I think it's important to ask *which* interest rate? It's the interest on currency, not bonds, that Gesell wants to set negative. He believes (I think, though I didn't read much of Gesell on interest rates) that if the government does this, then interest rates on bonds will tend towards 0% over time.

[Jeff Cliff]

Now that you've got that background, the next guy to learn from is Jorge Timon.

( https://twitter.com/timoncc )