Understanding Silvio Gesell's Concept of Free-Money

What is Money for Silvio Gesell?

The human mind is baffled by the abstract, and money hitherto has been wholly abstract. There was nothing with which to compare it. There were, indeed, various kinds of money, metal and paper; but as regards the most important aspect of money, namely the forces regulating its circulation, these different varieties were identical, and this brought the mind of the monetary theorist to a standstill.

S. Gesell. The Natural Economic Order, Peter Owen Limited, p. 265

Money is an instrument of exchange and nothing else. Its function is to facilitate the exchange of goods, to eliminate the difficulties of barter. Barter was unsafe, troublesome, expensive. and very often broke down entirely. Money, which is to replace barter, should secure, accelerate and cheapen the exchange of goods.

S. Gesell. The Natural Economic Order, Peter Owen Limited, p. 266

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The criterion of good money, of an efficient instrument of exchange, is:1. That it shall secure the exchange of goods-which we shall judge by the absence of trade depressions, crises and unemployment. 2. That it shall accelerate exchange-which we shall judge by the lessening stocks of wares, the decreasing number of merchants and shops, and the correspondingly fuller storerooms of the consumers.3. That it shall cheapen exchange-which we shall judge by the small difference between the price obtained by the producer and the price paid by the consumer.

S. Gesell. The Natural Economic Order, Peter Owen Limited, p. 267

Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money.

So we must make money worse as a commodity if we wish to make it better as a medium of exchange.

S. Gesell. The Natural Economic Order, Peter Owen Limited, p. 269

We introduced this post with some quotes from the seminal work, The Natural Economic Order of Silvio Gesell, a German-Argentine economist who introduced the concept and functioning of "Free-Money". As we can appreciate from the quotes, Gesell advocates for a rethinking of money's role and characteristics to better serve its primary function as a facilitator of exchange, suggesting innovative ideas like making money perishable to prevent its accumulation and promote economic activity.

Gesell discusses the nature and function of money in economic systems:

1. Abstract nature of money: Gesell highlights the complexity and abstract nature of money, noting that its intangible qualities make it difficult to theorize about.

2. Function of money: Money is described as a tool to facilitate the exchange of goods, simplifying and improving upon the inefficient system of barter. It is meant to make transactions safer, less cumbersome, and cheaper, thereby enhancing economic efficiency. Good money should effectively facilitate the exchange of goods, which can be measured by the absence of economic downturns and unemployment, the speed of transactions, and the reduction in costs between production and consumption. These factors indicate a healthy, efficient economy.

3. Degradable money: Gesell argues for the concept of money that deteriorates over time, similar to perishable goods. This type of money would discourage hoarding and ensure that money is used primarily as a medium of exchange rather than as a store of value. The goal is to make money a less desirable commodity to improve its function as a medium of exchange.

Based on these key ideas he developed the concept and functioning of Free-Money.

What is Free-Money?

Free-Money, according to Gesell, is a form of currency designed to eliminate the hoarding of money and ensure its continuous circulation. The primary goal is to stabilize the economy by preventing the accumulation of wealth in the form of idle money, which can lead to economic stagnation and crises.

Key Features of Free-Money:

1. Depreciation over time: Unlike traditional money, Free-Money loses value over time. This depreciation compels holders to spend or invest their money rather than hoard it.

2. Stamps to maintain value: To keep the money at its face value, holders must periodically attach stamps to the currency. This process incurs a cost, further discouraging hoarding.

The figures shown below are visual representations of how Free-Money would function in practice, specifically for American and British currencies.

Figure 4. Free-Money, American Currency. (Or any other decimal currency)

This figure illustrates a $100 Free-Money note from the Federal Currency Office in Washington, dated January 1, 1960. The note is designed to depreciate by 5.2% annually, which is managed through the attachment of weekly stamps.

• Weekly Stamps: Each week, a ten-cent stamp must be attached to the note to maintain its value. Over the course of a year, 52 stamps (totaling $5.20) are required.

• Depreciation: The note shows spaces for stamps from January to December, indicating the continuous need to attach stamps to prevent depreciation.

Figure 5. Free-Money, British Currency

all those engaged in the transport of goods

Similarly, this figure depicts a £4 Free-Money note from the British Currency Office in London, also dated January 1, 1960.

• Weekly Stamps: The note requires the attachment of one-penny stamps each week to maintain its value.

• Depreciation: Like the American note, the British note has spaces for stamps throughout the year, ensuring a steady depreciation rate of 5.2% annually.

Context and Implications of Free-Money

Economic Stability

Gesell's Free-Money aims to create a more stable economic environment by ensuring that money is always in circulation. This continuous flow of money is expected to:

• Prevent economic crises: By eliminating the hoarding of money, Free-Money reduces the likelihood of economic downturns caused by sudden drops in spending.

• Encourage investment: Since holding onto money incurs a cost, individuals and businesses are more likely to invest in productive activities, fostering economic growth.

Social Justice

Gesell believed that Free-Money would lead to a fairer distribution of wealth. By removing the ability to earn interest simply by holding money, Free-Money reduces the income disparity between the wealthy and the working class.

Practical Implementation

The practical implementation of Free-Money involves several methods, including:

• Stamped Free-Money: As shown in the figures, this method requires the attachment of stamps to maintain the currency's value.

• Serial Free-Money: Different series of notes are issued, with periodic exchanges to account for depreciation.

• Supplementary Free-Money: Legal depreciation is compensated in each transaction, similar to a sales tax.

Some final remarks on Gesell's Free-Money

The concept of Free-Money presents a radical departure from traditional monetary systems. By ensuring that money continuously circulates and depreciates over time, in Gesell's thought Free-Money aims to stabilize the economy, encourage investment, and promote social justice. The figures of the American and British Free-Money notes provide a clear visual representation of how this system would function in practice, highlighting the innovative approach to economic reform proposed by Gesell.