Debate about alternative monetary systems: Silvio Gesell, John Maynard Keynes, Irving Fisher

Master's Thesis, 2013

109 Pages, Grade: 1,0



Index of Appendices

Index of Figures

1. Introduction
1.1 Literature review

2. Theoretical approaches to the problems of monetary systems
2.1 Silvio Gesell
2.1.1 Silvio Gesell’s theory of interest
2.1.2 Free Money System Description of Free Money Description of Free Land
2.1.3 International Valuta Association
2.1.4 Critical acclaim
2.2 John Maynard Keynes
2.2.1 John Maynard Keynes’s theory of interest
2.2.2 Keynes’s monetary reforms
2.2.3 Bancor Plan
2.2.4 Critical acclaim
2.3 Irving Fisher
2.3.1 Irving Fisher’s theory of interest
2.3.2 Stamp Scrip
2.3.3 Compensated Dollar Plan
2.3.4 Critical acclaim
2.4 Comparison

3. Case studies of Gesellian’ monetary systems in the past
3.1 WÄRA – a demurrage-charged currency
3.2 Wörgl – a free economy experiment
3.3 Free Money – realizable in practice nowadays?

4. Complementary currency systems
4.1 Definition of complementary currencies
4.2 Development of complementary currencies

5. Current case studies of complementary currencies
5.1 Regional currencies
5.1.1 Chiemgauer
5.1.2 Bremer Roland
5.2 Local Exchange Trading Systems
5.2.1 Graine de sel
5.2.2 WIR – Wirtschaftsring
5.3 Community currencies
5.3.1 Ithaca hours
5.3.2 Curitiba
5.3.3 Fureai Kippu
5.4 Critical acclaim

6. Could a global alternative monetary system be established?

7. Conclusion

8. Appendix


Index of Appendices

Appendix 1: Concentration of wealth

Appendix 2: Increasing volume of investments brings a decreasing return

Appendix 3: WÄRA stamps

Appendix 4: WÖRGL – stamps

Appendix 5: Interview with Bernd Senf about alternative monetary systems

Appendix 6: Interview with Margrit Kennedy about alternative monetary systems

Appendix 7: Presentation of different types of currency

Appendix 8: CHIEMGAUER – coupon

Appendix 9: Interview with Christian Gelleri about alternative monetary systems

Appendix 10: BREMER ROLAND – coupon

Appendix 11: Interview about alternative monetary systems –Roland Regional

Appendix 12: Ithaca Hours – bills

Appendix 13: Mechanism of the Terra Trade Reference Currency

Index of Figures

Figure 1: Comparison of official and complementary currencies

Figure 2: Development of complementary currencies worldwide (1984-2003)

Figure 3: Annual growth of complementary currency systems worldwide (1993-2012)

Figure 4: Development of the velocity of circulation of the Chiemgauer and the Euro

Figure 5: Development of Chiemgauer’s membership (2003-2012)

Figure 6: Development of all member companies’ turnover in Chiemgauer (2003-2012)

Figure 7: Development of Bremer Roland’s membership (2001-2013)

Figure 8: Development of all participating companies’ turnover in ROL (2001-2013)

1. Introduction

The various financial crises of the past have shown that financial and monetary markets worldwide are not stable and have many problems. The financial crisis of 2007/08 as well as the current Euro crisis indicate that the financial systems are globally linked and that the stability of currencies cannot be guaranteed. Furthermore, the principal of interest rate and the dynamic of compounded interest are leading to an exponential growth of financial assets if the possessors earn more than they spend. In consequence, debts grow also exponentially if the debtors have to pay more interest than they are able to pay. The interest which is not paid will be added to the debts and becomes therefore subject to interest, too. In consequence, if the dysfunctions of current capitalism will not be resolved, financial crises will arise continuously.

Due to these problematic characteristics of the current financial system, the objective of this Master’s thesis is to discuss theoretical approaches of alternative monetary systems and to analyze the practical realization on the basis of historical and current projects. Furthermore, this thesis aims out exploring which advantages and disadvantages exist for the theoretical and practical approaches of alternative monetary systems. Finally, it is the objective of this paper to analyze if a global complementary monetary system could be an alternative to the existing financial system.

Concerning the methodology of this thesis, an extensive literature study has been accomplished in order to define and discuss alternative monetary systems. Furthermore, four interviews with monetary experts have been held and various case studies are presented and analyzed to get inside information and an extensive overview of the debate about alternative monetary systems. In a first step, theoretical approaches of alternative monetary systems of three economists will be described and criticized. Finally, historical as well as current case studies of alternative monetary systems will be analyzed and evaluated.

In the first main part, this paper focuses on Silvio Gesell, John Maynard Keynes and Irving Fisher because they made important contributions in the field of theories of interest and alternative monetary systems.

First of all, Gesell’s approach to the problems of monetary systems will be presented. His theory of interest will be analyzed in order to identify his explanation of interest and its determining factors. Furthermore, his criticism of money as a medium of exchange will be discussed in order to understand the origins of his alternative monetary system. In a second step, his Free Money system will be described. In order to analyze not only a national, but also an international monetary concept of Gesell, his “International Valuta Association” will be examined in order to get an extensive overview of his propositions. Finally, all these approaches will be criticized.

Secondly, this thesis will explore Keynes’s theories for monetary problems. In order to understand his monetary theory, Keynes’s interest rate approach as well as its determining factors will be explained. As Keynes did not develop a national monetary system as Gesell or Fisher, three monetary reforms of him will be analyzed in order to compare the chronological development of his ideas. In a third step, Keynes international monetary system “Bancor Plan” will be investigated. All these subparts have the objective to present a final critical acclaim of Keynes’ theories.

Finally, the monetary approaches of the third economist Irving Fisher are discussed. In order to understand his monetary reforms, the first subpart aims out analyzing his theory of interest. In a second step, his national monetary reforms “Stamp Scrip” as well as the “100% system” will be explained in order to present the practical realization of his theory. In a last subpart, Fisher’s “Compensated Dollar Plan”, an international monetary reform, will be described in order to get an extensive overview of his approaches. Furthermore, these reforms and systems are criticized in order to present a personal opinion.

Finally, this thesis is comparing the theories of interest as well as the national and international monetary reforms of the three economists in order to identify similarities and differences.

In the second main part, this thesis will examine alternative monetary systems which have been implemented into practice.

First of all, two case studies of Gesellian’ monetary reforms of the past (“WÄRA”, “Wörgl”) will be described and compared with Gesell’s theoretical propositions presented in the first main part. The objective of this chapter is to answer the question if a Free Money system could be established nowadays.

The next part is dealing with current complementary currency systems. Initially, a definition of these currencies is being developed. In a second step, the worldwide development is presented in order to understand the importance of these systems. After having analyzed the theory, five practical case studies of current complementary currencies will be discussed. Among these examples are regional currency systems (“Chiemgauer”, “Bremer Roland”), Local Exchange Trading Systems (“Graine de Sel”, “WIR- Ring”) and community currencies (“Ithaca Hours”, “Curitiba”, “Fureai Kippu”). This part aims out to evaluate their concept, theory and success. Furthermore, all these different types of complementary currency systems are criticized in order to present advantages and disadvantages of these concepts.

Finally, this thesis intends to explore if a global alternative monetary system (“Terra”) can be established.

1.1 Literature review

On the one hand, the literature selection is based on classical works and theories of Gesell, Keynes and Fisher. On the other hand, various articles from economic magazines and current literature have been selected in order to get an extensive overview of the debate about alternative monetary systems. The major contribution of these authors and references was to point out that there is a need for alternative and complementary currency systems. However, they failed to consider Irving Fisher’s and John Maynard Keynes’s work. Yet this paper does not only deal with Gesellian’ monetary systems, but also analyzes and compares monetary reforms of Fisher and Keynes.

Furthermore, four interviews have been held in order to get opinions and information of experts (cf. appendix 5, 6, 9, 11). Two initiators and executives of regional currency systems in Germany have been interviewed: Christian Gelleri, the initiator of the most successful regional currency in Europe, the “Chiemgauer” and Karl-Heinz von Bestenbostel, the executive of the “Bremer Roland”, the first regional currency in Germany. Furthermore, Margrit Kennedy, an economist, book author and monetary expert as well as Bernd Senf, a former professor of the “Hochschule für Wirtschaft und Recht Berlin” (HWR) and also book author, have been questioned. These interviews represent an important source for this thesis, because they give inside information and a personal view of experts concerning current monetary problems, potential and current alternatives to the existing financial system as well as future outlooks.

2. Theoretical approaches to the problems of monetary systems

The financial crisis of 2007/08 has shown at the latest that a lot of monetary and financial systems are not stable and have various problems. For this reason, the following part of this master’s thesis is dealing with theoretical approaches concerning alternative monetary systems of three economists. Silvio Gesell, John Maynard Keynes and Irving Fisher have been selected, because they made important contributions in the field of alternative monetary systems. First of all, this part aims to examine the economists’ theories of interest. In a second step, the national monetary reforms which had been proposed by Gesell, Keynes and Fisher will be analyzed. Furthermore, in order to present an overview of monetary approaches, their international monetary systems will be examined, too. Finally, the theories and proposals will be criticized and compared.

2.1 Silvio Gesell

Silvio Gesell (March 17, 1862 – March 11, 1930) was a German theoretical economist. He was founder of “Free Economy” (“Freiwirtschaft”) and discoverer of the significance of hoarding money and of “Free Money” (“Freigeld”) (cf. Thomas Betz, 2012, p. 25). In Argentina, where Gesell lived during several years, he was confronted with a highly unstable currency and Gesell was convinced that there have to be money and land reforms in order to solve the problems of capitalism. In 1891, he stated that the velocity of money represents an important factor in determining the level of prices (cf. Bernard A. Lietaer, 2001, p. 150).

2.1.1 Silvio Gesell’s theory of interest

In contrast to Orthodox and Marxian economists who believe that interest has a connection with private ownership of the means of production and that the origin of interest can be found in the factory or, at least, in the separation of the workers from the means of production, Silvio Gesell was of the opinion that the nature of interest can be analyzed by investigating money (cf. Silvio Gesell, 1929, p. 302). He acted on the assumption that the existing monetary system at that time was the origin for crises and instability.

Gesell did not develop an own theory of interest, but he opposed interest rates in general. On the one hand, he believed that interest is “unnatural” and on the other hand he thought that interest leads to a concentration of wealth (ibidem, pp. 189) (cf. appendix 1).

Gesell’s criticism concerning interest rates refers to the interest on “real” capital (houses for example) and the money-interest. Money-interest is the product of an independent capital and is not influenced by interest on real capital. However, the interest on real capital is influenced by money-interest. According to Gesell, the gross interest (rate of interest) has three components: the basic interest, a premium for risk and a hausse-premium. Gesell defined the interest on money as “basic interest” (“Urzins”) (ibid., pp. 316). The basic interest is a part of the interest rate which is raised unjustifiable because of the exceptional position of money compared to goods on the market (cf. Martin Menner, 2011, p. 4). Interest on real capital depends on the basic interest. Gesell’s intention was to let the basic interest disappear in order that borrowers of money will no longer pay interest.

The premium for risk is an insurance against risks and the hausse-premium is “the share of the profit from an expected rise of prices (Hausse) falling to the giver of money” (ibid., p. 356). Gesell was of the opinion that the interest on real capital and the basic interest are the two components which represent the price for money. The premium for risk and the hausse-premium should be minimized by Gesell’s monetary reform, in order for money to become less expensive.

Gesell was of the opinion that interest is a result of the blockage of the money-goods-cycle due to the hoarding of money. According to the quantity theory of money, the creation of a price level (P) in a national economy depends on: the existing amount of money (M), its velocity of circulation (V) and the real value of all the transactions (Q) (cf. Ulrich Blum, 1987, p. 242).

If a price level has been created and market participants who possess money do not spend the money but hoard it, then the velocity of circulation decreases respectively the real amount of money. In consequence, the amount of transactions or the price level of the national economy has to decrease. If the amount of transactions decreases in the national economy, fewer products will be sold. The result is a stagnation of the market in the macroeconomic cycle. If the price level falls down there could emerge a deflation spiral (cf. Norbert Rost, 2003, pp. 20).

Gesell was of the opinion that the interest rate is an unreliable instrument for money circulation. During some phases of economic development, the interest rate is not able to bring the hoarded money back to the capital market. With an increasing national income for instance a higher percentage rate of money, which will not be consumed but hoarded, remains. This mechanism is disrupting the macroeconomic cycle. In order to avoid a macroeconomic demand deficit, there have to be more investments. Nevertheless, investments cannot be increased discretionary without affecting the return. Gesell emanated from a decreasing return when the volume of investments is increasing (cf. appendix 2). In consequence, if the return on investment is decreasing in the long term, investments with a return below the market interest cannot be realized anymore. In addition, the demand for credit from the enterprises will go down and the market interest will fall down. In consequence, banks will pay less interest for savings. This situation is unfavorable for savers and they will rather hoard their money instead of investing it on the capital market. The more money is hoarded, the less money is on the capital market. In consequence, there will be disruptions in the macroeconomic cycle which can lead to economic crises (mass unemployment, recession) (cf. Bernd Senf, 2007, pp.117). According to Gesell, there are no investments made if the general market interest is below 3%. This amount of money would instead be held liquid for speculative purposes. In order to be sure, that money with a negative interest is being invested, Gesell introduced an “anti-hoarding fee”, because he was of the opinion that such crises can be avoided when the circulation of money is secured.

Silvio Gesell’s criticism of money as a medium of exchange

Silvio Gesell discovered that money fulfills two functions at the same time: it is a medium of exchange and a store of purchasing power. These two functions come into conflict with each other, because in contrast to money, goods can decay, they are subject to expensive storage or they can lose value (cf. Gesell, 1991, pp. 304). The only protection for an owner against losses is to sell the goods. In consequence, the owner of goods is dependent on a possibly fast sale. Money is not affected by such problems because it can be retained by hoarding. In consequence, the possessor of money is protected against losses and he is not forced to sell his property. This situation is unnatural. Money has a supreme advantage over all goods. According to Gesell, money has to lose this monopoly and has to be treated as goods.

Due to this advantage of money over goods, money creates an added value. Gesell was of the opinion that this surplus value results from the “capitalistic quality of money” (Gesell, 1929, p. 305). This characteristic is based on the following four characteristics of money:

1. Money is the essential condition of a highly developed division of labor.
2. It can be withdrawn indefinitely from the market without material cost of storage.
3. The merchant can force the possessors of goods to make him a special payment and he can prevent the exchange of goods by holding back his money.
4. Interest on commercial capital is composed of this regular payment. According to Gesell the basic interest represents about 4 or 5% per annum of the capital sum involved (ibid., p.305).

The pressure which results from these characteristics of money provokes that a special payment (interest) can be asked in order to force the money possessor to spend his fortune instead of hoarding it.

For Gesell, the solution for the problem of hoarding money consists of an “oxidizing banknote” (“rostende Banknote”). In consequence, money would become perishable like goods and its privilege would disappear. The advantage of the money holder against the goods owner has to be removed. Money should only be a medium of exchange and not being hoarded (cf. Günther Bartsch, 1994, p. 17). The only way they give up their liquidity and emit money into circulation is against interest; the basic interest. If money is hoarded, fewer products are bought, which results in stagnation. The results are unemployment and insufficient distribution. With a new legal system, Gesell wanted money to become a neutral medium of exchange. He proposed to punish the hoarding of money by increasing the demurrage amounts (“Durchhaltekosten”) of money (cf. Elmar Altvater, 2004, p. 20). When somebody is hoarding money he has to pay the basic interest (cf. chapter This mechanism also applies when loaning money in order to invest. In consequence, the market interest rate and the marginal efficiency of real capital would decrease gradually towards zero. The interest would not be abolished, but it would oscillate near zero (cf. Betz, 2005, p. 14).

Silvio Gesell wanted to replace the existing monetary system (at his time a two-stage banking system with a central bank and commercial banks) by a system in which a national authority (“Reichswährungsamt”) passes demurrage in circulation. The granting of credit can be realized on the basis of this demurrage (cf. Gesell, 1991, pp. 105).

2.1.2 Free Money System Description of Free Money

From a regulative point of view Gesell’s monetary system can be described as a „market economy without capitalism”. In consequence, it represents a double alternative: on the one hand, it is an alternative to the capitalistic market economy which is amongst others based on Adam Smith and the neoclassical economy in the Western world and on the other hand, it is an alternative to the central managed economy which resulted from Karl Marx and his adherents in the Eastern world (cf. Werner Onken, 1999, p. 8).

In his book “The Natural Economic Order”, Silvio Gesell described the traditional form of money as an inefficient instrument of exchange, because it is “a form of money that necessarily withdraws when there is lack of it, and floods the market when it is already in excess”. (Gesell, 1929, p. 211). In addition, he asked for the abolishment of the gold backing which was at that time widespread in the whole world. Gesell was of the opinion that there is only a limited amount of gold available for the money flow whereas an economy can nearly grow indefinitely. Furthermore, a surplus of gold could cause a destabilized inflation and a lack of gold could provoke deflationary conditions.

Gesell’s Free Money approach is partially based on the analysis of the French economist and sociologist Pierre-Joseph Proudhon (January 15, 1809 – January 19, 1865). Proudhon hypothesized that money has a privilege over goods because goods lose their value in contrast to money. In consequence, money can exact an additional price and the possessor of money rips the owner of goods. His solution consisted of the equalization of money and goods which cannot decay thanks to banks which trade with goods. In 1849, Proudhon developed the concept of a popular bank (“Banque du people”) which envisaged that everybody could exchange wares against wares or interest-free credits. In those banks money is replaced by vouchers (“bons d’échange”). These vouchers were given to people who delivered real goods or services to the bank (cf. Christian Grüner, 1999, p. 2).

Silvio Gesell adhered to the idea of Proudhon that goods and money are not equal. Nevertheless, the proposition of Gesell was not to solve the discrepancy of goods’ decay and stable currency with goods, but to give money a limited “life time”.

Due to the negative characteristics of traditional money and Gesell’s concern that “during times of financial stress, people hoard money rather than lend it” (N. Gregory Mankiw, 2009, p. 1), he developed his own monetary system: “Free Money system”. The core idea of Silvio Gesell’s Free Money concept is to encourage people to circulate money faster and to equalize the position of goods and money by having no interest rates. With a steady circulation of money which is not interrupted, the amount of money can be batched in such a way that the purchasing power of currencies can be stabilized (cf. Onken, 1999, p. 7).

In order to increase the money circulation and to secure that investments will be made Gesell proposed to introduce an anti-hoarding fee (“demurrage”). Hoarding of money would be expensive and spending money on the market would become economically attractive. The banknotes of this system typically should have 12 boxes (one for each month) where a stamp could be affixed. The stamp has to be up to date otherwise the banknote would not remain valid (cf. Lietaer, 2001, p. 151). Gesell proposed that the banknotes would lose one-thousandth (0.1%) of its face value weekly (about 5.2% annually) at the expense of the holder if the stamp is not up to date. In consequence, this fee can be described as a “carry tax in currency” (Willem H. Buiter, 2005, p. 5). With this concept the circulation of money is under pressure and according to Gesell everyone will pay cash, repay debts and bring the surplus funds to a bank. At the end of each year the fully-stamped banknotes will be exchanged for new ones. Through the loss in value of 5.2% annually, the currency notes in circulation would decrease (200-300 million Mark per annum at that time). In consequence, the currency office always has to replace these millions by new banknotes in order to avoid lack of money. As the sale of the currency stamps creates regular annual revenue for the currency office, the disposal of this revenue will be specially provided for by law (cf. Gesell, 1929, pp. 217).

In the Free Money system the Banks of Issue are not allowed to issue banknotes. They are replaced by the national currency office which has to satisfy the daily demand for money. The currency office is bound to adapt the spending of money to the market in such a way that the price level remains stable. In consequence, when the prices of goods tend to fall the currency office will issue more money and when the prices tend to increase the office will withdraw money, because the prices only depend on the amount of money offered for the existing stock of goods. The currency office does not carry on banking business and it has no relations to private persons.

Concerning the international trade in the Free Money system Silvio Gesell thought that there should be an international agreement in order to stabilize the international exchanges (fixed exchange rates).

Referred to Silvio Gesell, Free Money has on the one hand impacts on trade and on the other hand on capital, work and wages. Concerning trade, the Free Money system enables for example the circulation of money, an unlimited sale of goods, the elimination of stock exchange speculation and the removal of instable market conditions. Concerning capital, work and wages, Free Money facilitates for instance the elimination of unemployment, a gradually decrease of the interest on capital (which will be zero if the Free Money system is introduced worldwide), a step by step wage increase and the conversion of all the surplus funds in production facilities and apartments. In addition, money will be equal to goods and work (ibid., pp.218). Description of Free Land

According to Silvio Gesell, there exist two monopolies which have to be broken in order to answer the social question – the money monopoly through a money reform and the land monopoly through Free Land. Silvio Gesell was of the opinion that there exist two causes why a land reform is necessary. On the one hand, he wanted to avoid that people invest too much in property values after the realization of a monetary reform. On the other hand, he was of the mind that land should not be an object of trade and speculation (cf. Onken, 1999, p.8). If the Free Money system would be introduced without stabilizing and accompanying measures the hoarding of money would be transferred to real estate speculation. In consequence, Gesell always considered his reform as a combined money and land reform. Only with the help of these two reforms, humanity would be released from economic crises and wars (cf. Bartsch, 1994, p. 21).

Like Pierre-Joseph Proudhon, who thought that property is “incomprehensible, contradictory, impossible, and absurd” (Pierre-Joseph Proudhon, 1966, p. 457), Silvio Gesell was of the opinion that unlimited sovereign power and private land holding of counts for example are reasons for war. In consequence, he proposed to abolish special private or public rights over land. The land has to be property of the nation and it is leased to the cultivators by public auctions for terms of one,five,ten years, or for life, to the highest bidders. Every inhabitant, without exception, can participate in these auctions. The lease received goes to the public treasury. It is distributed monthly in equal shares to mothers and depends on the number of their young children. Furthermore, the parcelling of the land is governed entirely by the needs of the cultivators (for example small land for small families and bigger land for bigger families).

In order to abolish private land holding, the state has to purchase all private property (agricultural land, forests, building sites, mines, gravel-pits, water-power) and compensates the landowners in return. The state is able to pay the landowners with the rent of the land, which flows into the public treasury (cf. Gesell, 1929, pp. 56).

In practice, after the land has been nationalized it will be divided according to requirements of housing, agriculture and industry, and leased by public auction. The leaseholders will be given certain securities by guaranteeing minimum prices for their manufactures or by reduction of the rent in case of a general rise of wages (ibid., pp. 60).

In conclusion, it can be said that according to Silvio Gesell the land reform is a necessary reform with regard to the Free Money system, but it cannot solve the social problems. Free Land influences the distribution of the product. However, unemployment and economic crises are not problems of distribution, but problems of exchange or trade. In consequence, the land reform has to be combined with a money reform.

2.1.3 International Valuta Association

In his book “The Natural Economic Order” Silvio Gesell proposed an international union, the “International Valuta Association” (IVA) in order to stabilize the international exchanges (prices, foreign exchange rates) and to regulate both the currency standard and the exchanges. This union should act as a central bank which is superior to all the other central banks.

In all the states which want to participate in this association, the new currency “IVA” (paper- money) would be issued and the notes are delivered for a bill of exchange. The international currency should constitute about 20% of the national money supply. The monetary policy of the IVA-states is national but attuned to the IVA-standards (ibid., p. 292). If the national amount of money in circulation increases for example, the inflation rate increases which leads to higher prices and to a lower competitiveness concerning the sale of domestic products and vice versa. This results in a deficit on current account which provokes a higher flow of IVA-notes. In consequence, every increase or decrease of prices in the participating states would lead to a flow or inflow of IVA-notes in these countries, which would result in an adjustment of the price level. However, in a situation in which an increase of the national money supply “disperses” the IVA-notes in a country, the balance of trade cannot be equalized anymore. In consequence, the IVA-administration only issues new IVA-notes in this country against an additional charge (agio). This implicates a withdrawal of the national money supply and leads to a decrease of prices and to an equalized balance of trade (cf. Edoardo Beretta, 2012, p. 16).

In the following, a concrete example of two IVA-countries (A, B) will be shown. Country A and B will produce 100 units (UA, UB) each. There are no exchange rates and according to Silvio Gesell each country will get IVA-notes (IVAA, IVAB) in the amount of 20% of the national money supply. In consequence, the money stocks (MSA, MSB) of the two countries are composed of:

MSA = 100 UA + 20 IVAA

MSB = 100 UB + 20 IVAB

Furthermore, the price levels (PA, PB) of the two countries depend on their money stocks (MSA, MSB).

If country A exports more than country B, it will get more IVA-notes than country B. In this example, country A exports 50% more than country B and gets half of the IVA-stock of country B. This results in a higher money supply for country A:

MSA = 100 UA + 30 IVAA

MSB = 100 UB + 10 IVAB

In consequence, according to the quantity theory of money, there will be a price increase in country A and price decrease in country B. In consequence, country A will lose its competitiveness due to the increased prices and country B will export more. Finally, the two balances of trade will be equalized.

To summarize, it can be said that the stabilization of international exchanges should not be caused by an internationalization of the whole money supply but by giving a limited amount of banknotes (20%) international validity.

2.1.4 Critical acclaim

Silvio Gesell’s interest rate criticism is comprehensible. He was of the opinion that money has a supreme advantage over goods. Nevertheless, his description of the basic interest (“Urzins”) is not clear especially when he explained the transfer of the basic interest on wares. In consequence, there has to be a more detailed analysis of the basic interest in the free economy literature. Furthermore, Gesell did not develop an own theory of interest, but was more criticizing the characteristics of money and the existence of interest rates in general.

Even if Keynes appreciated Gesell’s work by saying: “I believe that the future will learn more from the spirit of Gesell than from that of Marx” (John Maynard Keynes, 1973, p. 355), he was of the opinion that there is a great deficiency in Gesell’s theory. According to Keynes, Gesell only constructed half a theory of interest rate, because he overlooked the notion of liquidity-preference (cf. Keynes, 1973, p. 356).

In the 73rd edition of the magazine “Zeitschrift für Sozialökonomie” (ZfSÖ) Hansjörg Herr criticized Gesell’s proposition of an unregulated monetary economy. According to Herr, such an economy is not compatible with a zero interest rate. If the collapse of the monetary system shall be avoided in an unregulated monetary economy, the social demand has to be restricted in such a way that the social supply will not be exceeded permanently. On the market, the restriction of demand is normally achieved by a positive interest rate. In consequence, a positive interest becomes an inhibitor of inflation in an unregulated monetary economy. A zero interest rate and a stable price level on the market contradict each other (cf. Hansjörg Herr, 1987, p. 13).

The theory of Gesell is a pure monetary analysis. His theory is based on the characteristics of money as a store of purchasing power and instrument of payment. From my point of view, he could have integrated other aspects as employment and investment in order to have a general analysis of the economy. Besides, according to Friedrich August von Hayek, money can never be neutral, because it always has an influence on relative prices (cf. Friedrich A. von Hayek, 1977, pp. 77).

In his analyses, Gesell was criticizing capitalism. Important characteristics of capitalism are the distribution and property of the means of production and the allocation and distribution of the production factors work, capital and land. Gesell’s theory criticizes only money and the interest rate mechanism. According to the free economy, it is money as a store of purchasing power which causes unemployment and social injustice. The other aspects of capitalism are not taken into consideration. It is correct that capitalism is not possible without money, but it is not possible to consider the monetary system detached from the production level. In consequence, the free economy literature should also discuss the other factors of capitalism.

Furthermore, Gesell is considered to be a representative of a liberal free market economy. Nevertheless, there exists a contradiction in his theory and the politico-economic consequences. On the one hand, his argumentation is based on strong market liberalism where the state does not intervene a lot. On the other hand, his Free Money system is strongly linked to governmental institutions like the “national currency office”. (Cf. chapter In consequence, he was more in favor of a managed system instead of a laissez-faire economy.

According to Gesell, Free Money should provide more welfare to the citizens by increasing the production and the consumption. Money has to circulate faster in order to avoid anti-hoarding fees. Furthermore, the creation of real capital is necessary in order to decrease the interest near to zero. In my opinion, it is doubtful where such an increasing production will end and it is not sustainable from today’s point of view.

Assuming that a Free Money system would be introduced in one country, speculations at foreign stock exchange markets for instance could be possible. Which problems would occur if more and more money would be invested in foreign stock-exchange markets or in direct company shares? According to Bernd Senf these possible capital gains could lead to growing social differences (cf. Senf, 2007, pp. 126). Nevertheless, Senf said in an interview that the advantages of Gesell’s theory overweight the disadvantages and that other popular economic theories have more serious blind spots (cf. appendix 5).

Gesell’s main problem concerning the monetary system was the hoarding of money and the following deflationary consequences. The idea to introduce a demurrage fee could be very efficient in times of economic crises. Furthermore, at the time of the gold standard there was no other possibility to create new money besides the discovery of gold for example. Today, it is the European Central Bank (from a European point of view) which is able to generate money. When there is money scarcity for example, the European Central Bank has the possibility to regulate the amount of money by open-market policies. In consequence, the hoarding of money is not the main problem in today’s monetary systems. Furthermore, a Free Money system can be successful in regions, but not in a whole country, because nowadays globalization is too present in the economy. From a legal point of view, legislation in most countries would not accept the abolishment of the official currency.

Gesell’s International Valuta Association which is based on the quantity theory of money would have been realizable at that time. Nowadays, the introduction of two different currencies in one country could provoke the depression of the national currency. The development of the exchange rate is dependent on individual expectations concerning the economic situation. In consequence, if the citizens of one country expect that their domestic currency will decrease in value, they could convert their assets into the other currency. In consequence, the domestic currency will be depressed.

In conclusion, it can be said that Silvio Gesell’s interest rate and monetary criticism is comprehensible. Furthermore, at the time of the gold standard, the hoarding of money was a main problem of the monetary system in economic difficult periods. The introduction of a demurrage fee would improve the circulation of money and the economy. It would be recommendable to adapt and refine the Free Money system to today’s circumstances. The Free Money system should not replace, but complement the existing financial system. Nowadays, citizens want to have savings in order to build a house for example. Furthermore, from a legal point of view it would not be possible in most countries to abolish the official currency and to introduce a new system. In consequence, complementary currencies are more effective than the pure Free Money system (cf. chapter 5). The International Valuta Association could provoke positive effects to the economy, but it is not probable that such a system could be introduced nowadays, because a second currency could provoke the depression of the national currency.

2.2 John Maynard Keynes

John Maynard Keynes (June 5, 1883 – April 21, 1946) was a British economist. He was one of the founders of modern macroeconomics. With the publication of his book “The General Theory of Employment, Interest and Money” (1936) he became the most influential economist of the 20th century. One of his most revolutionary theses is that aggregate demand determines the overall level of economic activity. Furthermore, he suggested that if entrepreneurs do not invest enough, the state has to invest in order to leverage the economy. In order to create additional demand, public authorities have to take out loans and finance additional investments as schools, airports and infrastructure for example.

2.2.1 John Maynard Keynes’s theory of interest

Keynes turned away from the classical quantity theory of money and centered the importance and functionality of money in his analysis (cf. Hajo Riese, 2001, p. 300). This fundamental difference to the classical and neoclassical economics is the basis of Keynes’ newly created economic model. For Keynes, the sphere of money is not a disruptive factor of a theoretically adopted real economy but a “center of control” (Michael Heine/ Hansjörg Herr, 2013, pp.339). In addition, he did not emanate from a merchandise market, but from an economic system which is controlled by the financial market. In consequence, there exists a monetary system, because the sphere of money dominates the sphere of goods (cf. Riese, 2001, p. 78). Like Gesell, Keynes also observed that most assets lose value over time, in contrast to money. The return of money is zero, its storage costs are unremarkable, but its liquidity premium is remarkable (cf. Keynes, 2009, p.190). Furthermore, he was of the opinion that the existing monetary system at that time was one of the origins for crises and instability.

In his analysis John Maynard Keynes centered the factor “uncertainty”. According to him, “the fact that our knowledge of the future is fluctuating, vague and uncertain, renders Wealth a peculiarly unsuitable subject for the methods of the classical economic theory” (Keynes, 1937, p. 213). With the factor uncertainty Keynes meant for example the rate of interest twenty years hence or the obsolescence of a new invention; situations with no scientific basis in order to calculate the probability (“We simply do not know”) (ibid., p. 214). Expectations are not based on objective economic fundamentals and are not stable (cf. Hansjörg Herr/ Milka Kazandziska, 2011, p. 8). In consequence, in an uncertain world money plays an important role and wealth owners keep their money in order to protect themselves against uncertain future situations.

According to Keynes, economic agents think that the hoarding of liquidity represents a benefit for them (“liquidity-preference”) (cf. Curt Philipp Lorber, 2009, p. 127). Money will be held liquid, because the risk of losing value in contrast to portfolio investments for instance is minimal. In addition, economic agents can speculate for better future investments when holding liquidity (cf. Gerhard Wilke, 2002, p. 92). Referred to Keynes, the liquidity-preference is determining the monetary interest rate which determines in turn the profit rate. Furthermore, the liquidity preference is depending on investments and represents a subjective interest rate (cf. Riese, 1986, p. 53). In consequence, the interest is only a recompense for the give-up of liquidity. With the power of control over money concerning the decision of hoarding or investing money, the monetary capital is dominating the whole economic process. Variations in the affection for hoarding money determine the liquidity premium and consequently the rate of interest to be applied (cf. Betz, 2012, pp. 25). In consequence, it is an expression for the psychological propensity to save.

Keynes thought that if the propensity to hoard or the state of liquidity-preference changes, then the rate of interest is affected and not prices.

“The rate of interest obviously measures […] the premium which has to be offered to induce people to hold their wealth in some form other than hoarded money. The quantity of money and the amount of it required in the active circulation for the transaction of current business (mainly depending on the level of money-income) determine how much is available for inactive balances, i.e. for hoards. The rate of interest is the factor which adjusts at the margin the demand for hoards to the supply of hoards.” (Keynes, 1937, pp. 216).

Concerning the determination of interest Keynes was of the opinion that the quantity of money in conjunction with liquidity-preference determines the actual rate of interest under given circumstances. When the rate of interest is given, liquidity-preference is a functional tendency which fixes the amount of money which the wealth owners will hold. In consequence, if M is the quantity of money, L the function of liquidity-preference and r the rate of interest (Keynes, 1973, p. 168):

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Debate about alternative monetary systems: Silvio Gesell, John Maynard Keynes, Irving Fisher
Berlin School of Economics and Law
International Finance
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Alternative monetary systems, Keynes, Gesell, Fisher, Free Money, Free Land, IVA, Bancor, The General Theory, Stamp Scrip, 100% money, Chicago Plan, Compensated dollar plan, Wörgl, Wära, Chiemgauer, Bremer Roland, WIR Bank, economic circle, regional currencies, complementary currencies, community currencies, LETS, Graine de sel, Curitiba, Fureai Kippu, Ithaca Hours, Time Dollars, Terra, global currency, currencies, financial crises, development, definition, Komplementärwährungen, demurrage fee, interest rates, theory of interest, compounded interest, inequalitites, Alternative Währungssysteme, Währungen, Euro, Regionalwährungen, Gemeinschaftswährungen, Interviews, Margrit Kennedy, Christian Gelleri, Bernd Senf
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Lina Laubisch (Author), 2013, Debate about alternative monetary systems: Silvio Gesell, John Maynard Keynes, Irving Fisher, Munich, GRIN Verlag,


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