When Silvio Gesell an unknown German economist living in Argentina wrote the 1891 paper titled “The Reformation in Coinage as a Bridge to the Social State” and the 1906 book the “Natural Economic Order” based on his theories to revive economies and inflation by negative interest rates, he was widely criticized by John Maynard Keynes for exclusion of a liquidity preference and others yet accepted by an economist interest rate giant named Irving Fisher. If not for Irving Fisher who believed in Gesell’s negative interest rate policies, Gesell would remain today completely unknown. To understand obscurity, Gesell was mentioned 19 times since 1969 in academic papers at the American Economics Association. Less than a handful of academic papers were actually written regarding Gesell’s negative interest rate theories because he was considered a radical outside of mainstream economic thought.
Gesell was most influenced by former economists Henry George, Pierre Joseph Proudhon and Karl Marx. Gesell was vehemently opposed to Marx as outlined in deep detail in the Natural Economic Order. Why Gesell was classified as a radical was not only because George and Proudhon were radicals but all Gesell’s writings contained portions of the Stockholm, Von Mises Austrians – Classical Liberals and Socialist thought. Communists roundly rejected Gesell but because of the questionable classifications in Gesell thought, neither economic schools or academia accepted Gesell so he fell into obscurity. The Ludwig Von Mises Institute today still considers Gesell and interest rate policies as irrelevant. Another reason is nobody ever considered negative interest rates. What developed after Gesell’s writings was the formation of the German Workers Party in 1919 to “break the back of interest slavery.” and it is here where Hitler began to rise. Today, Gesell shares a renaissance as the ECB since early 2014 studied then implemented Gesell’s negative interest rate policies. Denmark, Sweden, Norway, Japan and the Swiss adopted negative interest rate policies while more central banks could be on the way. The Israeli Shekel, Bulgarian Lev and Czech Koruna are next candidates.
The word Natural in the title in my estimation is an answer from famed Swedish economist from the Stockholm School of Economics Knut Wiksell. Knut Wiksell in 1898 wrote the most groundbreaking books on positive interest rates ever written in my opinion. Wiksell’s books remain widely read today by college students, academics and market traders. Wiksell gave the world the Natural Interest Rate to understand economies measured in 20 – 50 years and the 3 month interest rate. Interest rates viewed in 20 – 50 years determines if an economy is under performing, over performing or at equilibrium. If a financial market instrument trades today, thank Knut Wiksell.
Gesell viewed interest rates as unnatural, forces hoarding and concentrations of wealth, as collusion by moneylenders and the state and distorts the medium of exchange because only moneylenders possess the power of exchange to enter and exit markets at will based on an oversupply of money. Interest rates in Gesell terms was viewed as a monetary phenomenon and incorrectly prices money because interest was seen as a toll, a strict profit motive and tribute. Building on Proudhon, Gesell says money isn’t the key to open markets but the bolt that locks markets shut because money incorrectly priced based on interest enters and exits markets at the wrong time. Its a market distortion so money should be priced based on commodities or in Gesell terms, wares because its an all encompassing term to products in any economy. Money in Gesell’s negative interest rate world should not only be free and traded as any normal commodity but to charge interest hinders economic growth and prosperity.
If demand is viewed as money and commodities as supply, the regulator is price yet value in demand and supply is unknown. Price is always known while value in Gesell’s terms is always an illusion. A supply in tractors and apples is ready always while demand is never ready. Money locked in bank faults sees interest rates drop because supply of money is off balance. A lack of money exists in markets. Empty banks, interest rates rise because supply of money is too great. In a falling price world, supply of money is insufficient and hoarded so suppliers offer credit interest deals. An apple offered today at $2 must repay tomorrow at $3. Price rose, suppliers profited, consumer satisfaction. Restrict interest, price drops. Fear of price drops, money hides. Interest rates drove the transactions aligned to wares and forced price movement, drove money circulation. At a time when money was needed to rescue the economy and rotten apples in a falling price world, it was absent and hoarded in banks needlessly to earn little. If ever money exceeds supply of wares, credit and interest becomes king. The corollary is why must money come to markets when prices rise and at the wrong time. In a rising price world by Gesell example, if I sell four apples today, I buy a gold ring only to sell it for a loss tomorrow to the melting pot. Should a bank lend to buy a house in a rising price world. Gesell views supply and demand of capital at equilibrium at 5%.
Interest rates says Gesell is a burden to commodities so barter takes over to replace money only to see money demand drop. Marx believed money and commodities are equivalents while Gesell says money should be free and universally equivalent aligned to commodities and capital. Gesell calls this combination Basic Interest viewed as money, wares, interest / surplus. Cost plus interest must meet a sale price, consumers then pay for the positive capital. Suppliers receive negative capital since supplier receives the price paid by consumers less interest. Basic interest is the equal point where interest rates in all forms of real capital oscillates. Previously, Basic interest was raised unjustifiably because of money, not wares. The difference between negative and positive interest rates is negative has a zero bottom while positive interest goes to infinity.
The proper term for Gesell negative interest rate policies is Demurrage, a built in reduction of the currency. Negative interest rates is a forced borrowing program as central banks charge higher interest as a liquidity tax than the cost of market rates. Money is freed in the marketplace at zero and negative interest and aligned to ware prices. Its a system with a price focus but a reprice in the economic system as opposed to Keynes top down, government demand -controlled money supply. Zero and Negative interest eliminates the taxing power of money to focus on price. Done correctly, savers will find rising accounts, wages will rise, economies will skyrocket in GDP. To work says Gesell, speed in the velocity of money equalizes goods and money and stabilizes purchasing power. Velocity says Gesell is the most important factor because velocity determines prices. Negative interest not only eliminates the lower bound consideration but real capital is stagnant by the rate of interest and if removed, growth would rise so fast, negative interest would be justified.
To guard against the Basic formula Money, Wares, Interest, Gesell offered a Hausse Premium where profits would be earned from rising prices since commodities and interest rates would also rise. Interest rates would rise with prices in Gesell’s world. A rise in prices, borrowed money is paid back with a rise in commodities, governments lose by previous loans and mortgages because less commodities are received. The rate of interest as a Hausse Premium must replace what money capital loses through commodity price rises. If prices rise 5%, Basic is 3% then interest on loans must rise to 8% so money capital is unaffected. This example is an outline of prices connected to interest rates as the overall economic driver rather than money. The Austrian School in Von Hayek would say money cannot remain neutral but money influences prices. Gesell says Basic, Hausse premium and risk premiums aligns the interest rate system. Gesell advocates read Basic interest as a rate to eliminate to monetary loan rates to focus instead on risk premiums. Price stability is offered as money and wares regulates the medium of exchange rather than the previous moneylenders unearned income abilities. Inflation equals interest rate risks and inflation premiums.
What if government mandated as Gesell recommended to affix a time stamp on dollars today. What if government gave 10 days to spend $10 and offered depreciation rates at 5%, essentially a Carry rate charge and a forced decay of money. Government forces $10 to work or money is lost. That’s the basic principle behind negative interest. Negative interest forces money to move in economies, to put it to work, prevent hoarding and money decay in banks, prevent wealthy from gaining more wealth and to even level the wealth playing field among populations as wages would skyrocket. Negative interest is a zero tax on money therefore money is free and freed to perform its original function to remain as any normal commodity. A slice of bread must be eaten in 2 days so why not money to circulate with the same intended purpose as bread.
In depressions, goods still exist but money is absent or scarce. In Gesell’s negative interest rate world, depressions would no longer exist, business cycles would smooth, good times would exist always. The key is negative interest to move with prices. Negative interest allows a start from a lower base. The purpose for negative interest for central banks is to force lending, see rises in Inflation and GDP. Its not only an economic rebuild but it revolutionizes the concepts of medium of exchange in a world where all benefit Pari Passu, an equalized world where hoarding is punished but circulation is promoted. Negative interest doesn’t eliminate money, it revolutionizes the medium of exchange by shift of focus to commodities and real capital. The tractor and apples are more valuable over time than money because of its lasting value.
Brian Twomey, Inside the Currency Market, btwomey.com