A summary of Gesell’s thought

The more original feature in Silvio Gesell’s work is his theory on interest. Here’s his not very controversial definition of interest:

gross/nominal interest = real interest + inflation premium = basic interest + risk premium + inflation premium

Note that the inflation premium could be negative. Austrians often refer to basic interest as time preference.
The basic interest is an economic rent inherent in non perishable monies like gold. While the yield of real capitals stay above the basic interest everything’s fine. But by competition among capitals, the yields of real capital should drop to zero just like economic profits do in perfect competition.
But the basic interest prevents that from happening (that’s his definition of capitalism and that’s what he wants to remove to achieve a free market).

How does the basic interest prevent capital yields from falling?

When a given type of capital yields under the basic interest, lenders refuse to finance that capital market. No new production goods of that type (say houses, or facories of a given type) until by deterioration of capital or by an increase in demand, the capital can pay the basic interest again.

What happens when most or all types of capital yield below the basic interest? Aren’t lenders forced to lower the rate?

Staying liquid represents an insurance against uncertainty that money holder gets for free if he doesn’t want or can’t exact the basic interest.
Hoarding increases which causes deflation, which encourages hoarding. Besides credit/debt gets destroyed by deflation.
The financial market gets cleared fast with these two positive feedbacks and a new price equilibrium is reached in which money-capital has recovered its privileged position and real capitals yield over the basic interest again. Note how the monetary rent is transferred to real capital through the financial market.
This rent is collected not only in loans but from the price of all products by the merchant. Money enables specialization and the market itself. But it can also stop commerce if it doesn’t receive its tribute. Money is like a tollgate wares have to pay to pass through. All wares perish in the market waiting for the consumers, but money can wait as long as it takes to get its tribute.
His solution is therefore letting the money rot too. He wants to suppress this rent by charging a demurrage fee on money that prevents hoarding.
Money should only serve as medium of exchange and not storage of value.

Isn’t it attacking savers?

You can buy commodities or invest in real capital yourself. You need to lend to have the symbolic value contained in money in the future. You can’t hold that wildcard (which is the product of an implicit agreement among the currency users) for free. Yes, a demurrage few will make interests drop and lower their returns, but they will be saving much more from the chepeast products they will find in the market. Think about the price of the rent of a house which construction and maintainance costs in all its lifetime equal the sum of all the rents in the same period (economic profit = 0). Really cheap houses and everything else. Because there would be more houses and also more factories competing with each other. More employment too, because of this factories abundance.
Also, what made us think that money could serve as an effective store of value in the first place? He puts it this way
“As long as paper-money remains what it was meant to be, a medium of exchange, everything works smoothly. Paper-money used for any other purpose is not worth the paper upon which it is printed. It becomes a scrap of paper fit at best for lighting a pipe.

The anomaly of the physical junction of the medium of exchange and the medium of saving is still more obvious if we suppose that, as in Joseph’s time, a series of fruitful years is followed by a series of bad ones. During the fruitful years the people would of course be able to save, that is, to pile up a mountain of paper-money. If during the following years of scarcity the people wish to utilise this mass of paper it becomes apparent that there is no supply to balance the piled-up demand.”

He’s taling about paper money here, but the example also serves for gold (as money, not as commodity once demonetized).

How this is different from Keynesianism?

Here he discusses a Keynesian-like paper-money reform: http://www.community-exchange.org/docs/Gesell/en/neo/part3/13.htm

“But here the reformers of the note-issue intervene and say, Why did the crisis break out ? Because prices fell – and prices fell because money was scarce. Because of the lowered rate of interest on real capital, part of the stock of money was withdrawn from circulation. Good ! We leave the savers or the savings-banks in possession of the money, and let them hoard it; we shall replace it with new money. The State prints money and advances it to the employers, if the money of capitalists and money-savers is held back. If the rate of interest on real capital falls, the State also reduces the rate of interest on the money it issues. If employers can extract only 3, 2, 1% from their houses, factories, ships, the State supplies them with money at 3, 2, 1 %, or, if necessary, at 0 %.
Savers produce more commodities than they consume, and they do not again set free the money they receive for their surplus unless they are promised interest. The proposal now before us is that the crisis which is the direct result of the savers’ conduct should be resolved by the State supplying money to the employers at a lower rate of interest, this money to be new money straight from the printing-press.

The surplus production of the savers is in this case not bought with their money, but with new money. For the moment this is unimportant; with the help of the new money the building of houses, factories and ships proceeds without interruption. It is true that employers receive less and less interest from these enterprises, since building is now uninterrupted, and the supply of ships, tenements, etc. is constantly increasing. But parallel with the decrease of the interest they receive is the fall in the rate of interest they have to pay the Bank of Issue. As employers they are therefore indifferent to the amount of interest they receive on the ships or houses, as it must all be handed over to their creditors. Work proceeds without interruption, and there is therefore no interruption in saving. Many still find it advantageous to lend their savings at the lower rate of interest; but others, especially the small savers who, in any case, obtain but a trivial amount of interest, will return to tie old custom of keeping their savings at home and renouncing interest
But what if, for any reason, this demand came to life and appeared in the market ? Where would then be the corresponding supply of products ? If supply is lacking, prices rise, and rising prices cause differential profits. This prospect of gain entices money into the market ! The rise of prices, the prospect of differential profits, bursts open the savings-boxes and the billions of demand pour like an avalanche upon the market. “Sauve qui peut !” is the cry, and in the shipwreck the only lifeboats are the wares. Those who can buy wares are safe, so everybody buys wares. Demand rises to thousands of billions, and as supply is of course lacking, prices shoot up. The rise of prices annihilates savings. The peasant again uses paper-money as he used the French assignats – to paper his cowshed.”

In summary, he accurately predicts a progresive fall in interest rates caused by the state by manipulating the financial market with newly created money (and not the real savings that are increasingly hoarded as a result of the lower interests) and eventually hyperinflation.
He refers to Fl├╝rscheim, but is essentially against Keynesianism.
He adds:
“A reform of this kind would be short-lived and would bring the possibility of the greatest fraud ever practised upon mankind. After such an attempt at reform the people, as in the past, would believe that their salvation lay in the gold standard and would clamour for its re-introduction.”

How do you implement this then? If not Keynes nor Gold, what’s the desirable structure of money?

This is where I disagree with Gesell more. Let’s leave that for later. Without much detail…”[…]introduction of a medium of exchange subject to a material, inherent compulsion to circulate[…]With Free-Money the traditional connection between the medium of saving and the medium of exchange is, in conformity with the results of our inquiry, irrevocably broken. Money becomes a pure medium of exchange, independent of the will of its possessor. Money becomes materialised demand.”