The Natural Economic Order/Part III/Chapter 13

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Part III, Chapter 12 The Natural Economic Order
Part III. Chapter 13. Reform of the Note-Issue
written by Silvio Gesell, translated by Philip Pye
Part III, Chapter 14
1929.



Demand and supply determine prices: and economic life needs a fixed level of prices to prosper and to enable the splendid possibilities of progress inherent in money to unfold themselves. If during three thousand years or more, civilisation had not been again and again forced by economic crises down the slope it had so laboriously climbed, if the widespread pauperism left behind by each crisis had not made a pauper philosophy part of our flesh and blood, capitalism[1] would long ago have been a thing of the past. The German workers would have ceased to tolerate the treatment they receive from their employers and from the State if the demand for their wares appeared as regularly on the market as supply. And our German landowners would not have exposed their sores to excite public sympathy, and begged for wheat-duties from emaciated workmen's wives, if they themselves had not been ruined by the fall of prices caused by the gold standard.

The pangs of hunger and pressure of debt are pernicious educational influences.

Mankind would have scaled heights as yet unknown in science, art and religion if the promising culture called into life by gold (even though bloodstained and plundered) at Rome, had not been petrified and annihilated in the economic glacial period, fifteen hundred years in length, which was created by lack of money.

Solomon wrought miracles because the money-material he received from Ophir made possible the regular exchange of wares and the division of labour. But everything he wrought was lost with the passing of the supplies of gold.

The growth of culture has always been blasted by a fall of prices. For culture means the division of labour, and the division of labour means supply. But supply cannot result in exchange if prices are sinking from want of demand, from want of money.

Money and civilisation rise and fall together. For this reason the mercantilists, who regarded gold as synonymous with wealth and culture, and planned a constant increase of the stock of gold by means of import-duties, were not so very far wrong. A sound principle was foolishly applied. It is a fact that science, trade and art flourish when the stock of money is increasing. But the mercantilists confused money with gold; they thought that gold performed the miracle by means of its "intrinsic value". They overlooked money; they had eyes for nothing but gold. Money and gold meant the same thing to them. They did not know that money, not gold, carries out the exchange of wares, and that wealth is created by the division of labour which money, not gold, makes possible. They ascribed the progress resulting from the division of labour to the characteristics of gold, instead of to the characteristics of money.

Many of those who have learnt to separate money from gold, who have renounced the heresy of "intrinsic value" and convinced themselves of the importance of stable prices will now be inclined to argue as follows: Why not simply manufacture paper-money and bring it into circulation as soon as supply has overtaken demand or, in other words, when prices begin to fall ? And conversely: Why not withdraw paper-money from circulation and burn it when demand begins to exceed supply, that is, when prices begin to rise ? This is merely a question of quantity: a lithographic press and a fireplace put it in your power to adapt demand (money) so exactly to supply (the wares) that prices remain constant.

So says among others Michael Flürscheim[2], a zealous propagandist of this idea, who counts me among the first who have formulated and popularised it. This honour I must, however, decline, since at the outset[3] and ever since I have denied that paper-money as we know it (without direct, material compulsion to circulate) could ever be as closely adapted to supply as a regular exchange of wares, national and international, requires.

I deny this possibility and intend to prove in black and white that if the State controls the amount of money issued, but neglects to control its circulation, all the anomalies we have revealed in the functioning of the present form of money will continue to exist.

As long as money, regarded as a ware, is superior to wares in general, as long as savers prefer money to wares (their own products), as long as speculators can with impunity misuse money for manipulating the market, money will not mediate the exchange of wares without exacting a special tribute over and above the legitimate profit of commerce. But money should be "the key to open the gates of the market, not the bolt to close them"; it should be a road and not a toll-gate; it should assist and cheapen exchange, not impede and burden it. And it is clear that money cannot be simultaneously the medium of exchange and the medium of saving - simultaneously spur and brake.

In addition to State control of the quantity of money in circulation (only possible by means of a paper-money standard) I therefore propose a complete separation of the medium of exchange from the medium of saving. All the commodities of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money ? Money was not made to be saved!

Supply is under a direct compulsion inherent in the nature of wares, and for this reason I propose a similar compulsion for demand. In the process of settling the price, supply would then no longer be at a disadvantage in comparison with demand.[4]

Because of this compulsion, supply is a simple measurable object not dependent upon the will of the possessor of wares. Demand must therefore also be separated from the will of the possessor of money, demand must become an object capable at all times of measurement. If we know the amount of wares produced at any time we know the amount of supply. Similarly if we know the quantity of money in circulation at any time we should be able to foretell the quantity of demand.

This reform can be attained by the introduction of a medium of exchange subject to a material, inherent compulsion to circulate, and it can be attained only in this way. (See Part IV, Free-Money).

The material compulsion liberates money from all the hindrances to circulation caused by greed of gain, speculation and panic, and sets the whole mass of money issued by the State in constant, uninterrupted circulation which creates a constant, uninterrupted demand.

Regularised demand eliminates the stagnation of sales and the congestion of wares. The immediate result of a regular demand is a regular supply influenced only by the production of wares, just as the flow of a river becomes regular when the fall is evenly distributed.

If money were under compulsion to circulate, minute changes in the quantity of money would suffice to make demand fit like a glove the natural variations of production.

Without this forced circulation of money we are at once back again to the present confusion. Demand eludes the power of the State, and the only fixed factor in the present chaos, the fact that money exacts a tribute for its services, causes money to be withdrawn from the market by private individuals as soon as it is scarce, and to be again brought into circulation as soon as it is offered in superfluity.

To test the correctness of what has just been said, I shall examine more closely Flürscheim's proposal.[5] This is all more necessary since Argentina[6], Brazil, India and other countries have succeeded in keeping their currencies at par with the gold standard by regulating the issue of money other than gold. This has called attention to paper-money and awakened the belief that this medium of exchange is capable of further perfection. But advocates of a paper-money standard can do their cause no greater injury than to attempt the introduction of reforms which do not exclude the possibility of failure, for each failure strengthens the position of those who defend a metallic monetary system and postpones for decades the discussion of a paper currency.

The simple reform of the note-issue, here described as inadequate, proposes to empower the State to issue or withdraw paper-money in quantities to be determined by the general level of prices. The State is to estimate the demand for money solely by the average price of the wares. The quantity of money in circulation is to be increased when prices fall, and to be decreased when prices rise. Money is not to be redeemable in gold or any other particular product; for redemption the holder of money is directed to the market. But in every other respect this paper-money is to be indistinguishable from ordinary paper-money; it may be used or misused for saving, or as a reserve for speculation. Demand is left in possession of all the privileges it possesses over supply. Demand is to remain what it is today, an action willed by the holder of money, and therefore the plaything of money-magnates.

Nevertheless the reform professes to eliminate the recurring periods of over-production and unemployment, to make economic crises impossible and to suppress interest on capital.

The fate of this reform would be determined by the behaviour of persons in a position to save. We must here recall our words about saying. A person who saves produces more wares than he purchases, and his surplus, bought by employers with money from the savings banks, is worked up into new real capital. But no one parts with money-savings unless promised interest, and the employer can pay no interest if what he constructs does not bring in at least as much interest as is demanded for the use of savings. And if work upon the building of houses, factories, ships, etc. continues for a time, the interest on such things of course falls. The employer cannot then pay the interest demanded for the use of savings. The money remains in the savings-banks, and as this is the money with which the surplus wares of the savers are bought, the sale of these wares is interrupted and prices fall. This means a crisis.

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 %.

The proposal is simple and sounds reasonable. But it only sounds reasonable to the layman. The trained ear can detect a discord.

For money exists to facilitate exchange, and here capitalists, speculators and money-savers are permitted to use money for purposes foreign to the exchange of wares. Money was made to help the producer of wares to exchange his products for the products of other producers. Money is a medium of exchange and nothing more. Money makes exchange possible, and exchange is complete only when two producers have exchanged their products. When a producer has sold his product for money, exchange is not yet complete; someone is in the market waiting for him. The purpose of money demands that the sale of a product for money shall immediately be followed by the purchase of a product with money, to complete the exchange. Anyone hesitating with his purchase leaves exchange incomplete and interrupts a sale for another producer. This is a misuse of money. Without purchase there can be no sale, therefore, if money is to fulfil its purpose, purchase must follow step for step on the heels of sale.

We are told that the man who has sold his products for money and does not set free his money by further purchases of products is ready to lend his money if offered interest. But this condition cannot in justice be permitted. The man must lend his money unconditionally, or be compelled to purchase wares, or to re-purchase his own products. No private individual can be allowed to make conditions of any kind about the circulation of money. Those who have money have the right of immediately purchasing wares, and no other right. A right to interest is incompatible with the conception of money, for this right would resemble a tax upon the exchange of wares for the benefit of private individuals and sanctioned by the power of the State. The right to interest is the right to interrupt the exchange of wares by holding back money, to embarrass the owners of wares waiting for this money, and to exploit their embarrassment for the purpose of extorting interest. The conditions upon which money can be lent are the private affair of the savers, with which the State has no concern. The State, to which money is purely a medium of exchange, says to the saver: You have sold more wares than you have bought and you are consequently in possession of a surplus of money. This surplus must in all circumstances be brought back to the market and exchanged for wares. Money is not a feather-bed. it is a moment's halting place by the road-side. If you have no personal need of wares you can buy bills of exchange, promissory notes, mortgage-deeds and so forth from persons who are in need of wares and have no money. The conditions upon which you can buy bills of exchange are your affair; only on one point the State insists upon absolute obedience; that your money shall immediately be brought back to the market. If you fail to put your money in circulation voluntarily, the State, by punishment, will compel you to do so, since your delay is detrimental to the common interest.

The State builds roads for the transport of wares and provides a currency for the exchange of wares. The State insists that no one shall interrupt the traffic of a busy street by slow-moving ox-carts, and should also insist that no one shall interrupt or delay exchange by holding back money. Such inconsiderateness invites punishment.

Reformers of the note-issue with youthful enthusiasm pass over these fairly obvious conditions of an efficient monetary system, yet hope to realise their aim. It is a vain hope!

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 - even if the fall in the rate of interest is only from 5% to 4% or 3%. The small sums thus hoarded would, added together, amount to many hundred million dollars. The State replaces this amount by the issue of new money. Crisis is thus averted and work proceeds upon houses, ships, factories, the interest upon which would steadily, and probably quickly, fall. But the fresh fall in the rate of interest will still further check the flow of savings into the savings-banks. Soon even the larger class of savers will begin to find it scarcely profitable to bring money to the savings-banks; they will certainly hesitate about bringing money wanted at short notice to a savings-bank some distance away. Some persons will also consider their money safer in their own possession than under the control of strangers. All the forces preventing the re-entry of saved money into circulation, which were counterbalanced by the high rate of interest, will now be set free, and a stream of money, paper-money, will flow from the National Currency Office or Bank of Issue into millions of savings-boxes. The lithographic press of the National Currency Office will ceaselessly replace what is here withdrawn from the market. A mighty stream of paper-money, of demand due from day to day, will be lost to sight.

The more the rate of interest falls, the more the stream swells. Finally, before the market is saturated with real capital, when interest has fallen to about 1%, no one will bring his savings to the savings-banks; everyone will prefer to keep the money under his own supervision. At this stage the savings of the whole nation, huge sums amounting annually to many billions of dollars, will flow into the savings-boxes. These sums will be increased by the absence of economic crises and by the fall in the rate of interest which will make saving easier. The savings of last year will not be consumed by this year's unemployment. If interest falls to 1%, the income of the workers will be doubled, and if income is doubled savings can be increased ten-fold. It is the last addition to the income which is saved, and this addition will be equivalent to the whole amount of the income hitherto.

All this money is to be annually replaced by the State! A whole nation is to convert its savings into money, into what should be demand falling due from day to day, into scraps of paper which have some use only because a fraction of them is required for the exchange of wares. A strange state of affairs !

Billions of dollars are lent on mortgage. But if mortgages bring in no interest they will be foreclosed and the money hoarded. The State must replace these billions by new issues. Bills of exchange to a total of over 30 billions of marks circulate regularly in Germany and at the same time serve as a medium of exchange. But if interest disappears, no one will any longer discount a bill. Bills of exchange therefore become useless for trade purposes, and the State will have to issue an equivalent amount of money. Many hundreds of billions will be necessary. With a hundred lithographic presses printing $1000 notes day and night the State will hardly keep pace with the requirements of currency. Hundreds of billions of demand, due in the market from day to day, lying buried in the hoards !

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.

Flürscheim indeed denies such a possibility. He asserts that the thought of a rise of prices could never occur to the savers, that is, to the holders of the billions of demand, since it is known that the State would immediately counteract the slightest tendency to rising prices by withdrawing the surplus money.

But here we meet the second contradiction in this reform. The first contradiction was the toleration by the State of the use, or rather misuse, of money as a medium of saving, with the result that it was forced to manufacture more money than was necessary for the true purpose of money, namely the exchange of wares.

The second contradiction lies in the fact that the State, when issuing money to employers, was itself not using the money as a medium of exchange. The money was not given for wares but for bills of exchange, mortgages and other securities. But money is a medium of exchange, and as such should be issued only against wares, that is, given out in accordance with its purpose. If the State had issued money only for wares (and if these wares had not in the meantime fallen into dust and decay), it would have no reason to fear the avalanche of demand caused by the return to circulation of the hoarded savings. As it is, the State holds only mortgages, promissory notes and bills of exchange which bear no interest, and with such instruments no ready money can be recalled.

The State misunderstood the function of money when it advanced the employers the money refused them by the savers. The State misused its power; and money wreaks a sharp and sudden vengeance for every misuse to which the State subjects it. Here appears the third contradiction inseparable from this reform. Different qualities are demanded of money according to whether it is used for the purpose of saving or for the purpose of exchange. As consumer the saver pays $100 for a certain quantity of wares, but as saver he does not pay this price. He prefers his $100. Thus $100 considered as a medium of saving are more than the wares that can be bought for $100. Savings can never be brought back to circulation by wares.

The State has here treated money for exchange and money for saving as equivalents; it has replaced the money withdrawn from the market in the form of savings, by purchasing bills of exchange, mortgages, and so forth. When the time comes for the State to exchange these things for savings, the impossibility of doing so becomes apparent.

This becomes still clearer if we think of two different kinds of money, say gold and tea, in circulation together. To those who use money as a medium of exchange it would be a matter of indifference which kind of money they received, as they would immediately pay it out again. But to those who wish to save money, it is by no means a matter of indifference whether they receive gold or tea, since gold is durable and tea spoils. A person who wishes to save will not give $10 of gold for $10 of tea; indeed, if he reckons with long periods of time, he will not deem gold and tea equivalent at any ratio of exchange. For him gold and tea are simply quantities that cannot be compared.

Further, the State must act promptly. The slightest rise of prices would immediately bring speculators for a rise of prices upon the scene, and once they had pocketed their first gains from the differences in price-levels there would be no holding back the flood of paper-money. Any action by the State would then come too late. Let us picture the situation of the State. Ten billions are necessary for the regular exchange of wares, 100 billions have been issued and the difference hoarded as savings. If a fraction of the surplus 90 billions reaches the market, prices rise, and the moment prices rise, the rest of the 90 billions are flung upon the market. The sequence of events would be as follows: The merchants who believe prices are about to rise buy more than they immediately require. They obtain the money for these purchases by offering interest to the savers of money. These savings, coming into circulation, now make the rise of prices a reality. This stimulates new borrowing and new speculative purchases. So the process would proceed, step by step, until all the money from the savings-boxes had been drawn into circulation by the upward movement of prices.

The slightest want of confidence in the power of the State to prevent a rise of prices would instantly bring the billions of savings into the market, into the shops, just as the slightest doubt as to the solvency of a bank of deposit immediately brings all the depositors to the counters of the bank. They would race to market, at double-quick speed, in motor-cars, in aeroplanes. That is the inevitable result of a monetary reform that leaves untouched the misuse of the medium of exchange as a medium of saving.

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.

The reform which we are here examining can be effective only as long as the interest which the employer receives, and can therefore afford to pay the savings-banks or capitalists, is sufficient to induce the majority of savers to put their money into circulation again. But does not Flürscheim claim that interest, if it once begins to fall, and if economic crises can be averted, must soon fall to zero?

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.[7]

To me it seems preferable to make the work of reform thorough at the outset, and to add to the reform of the note-issue, just described, a change in the form of money which would dissolve the material connection between medium of exchange and medium of saying, a change which would cause the disappearance of all private stores of money, which would break the lids of all savings-boxes and force the locks of all money-chests-a change which, in war and peace, in good years and in bad, would keep exactly as much money in circulation as the market, without fluctuations in the general level of prices, could absorb.

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.


  1. Capitalism — An economic condition in which the demand for loan-money and real capital exceeds the supply and therefore gives rise to interest.
  2. Michael Flürscheim, The Economic and Social Problem.
  3. Silvio Gesell, Nervus Rerum, p. 36-37, Buenos-Aires, 1891.
  4. Those who are not yet free from the "value" superstition will not understand the justice of this claim.
  5. See also Arthur Fonda, Honest Money: Professor Frank Parsons, Rational Money.
  6. Silvio Gesell, La Cuestion monetaria argentina, Buenos-Aires, 1898; La pletora monetaria, Buenos Aires, 1907.
  7. Throughout the foregoing analysis it is assumed that the reform is adopted universally. If only one country, or a few countries, adopted the reform, the fall in the rate of interest would be checked by the export of savings which would be sent abroad to gain the higher rate of interest. In this case the reform would not result in a catastrophe, but neither would it eliminate interest.