Posted by: Dirk | October 26, 2008

Silvio Gesell’s monetary theory

Silvio Gesell’s is a German-born economist with a theory of money that depreciates over time in a controlled way. This video introduces the idea, which was put into practice in the Austrian village of Wörgl during the Great Depression:

The story starts like this:

Robinson Crusoe, as is well known, built his house, from motives of health, on the south side of the mountain, whereas his crops grew on the damp but fruitful northern slopes. He was therefore obliged to carry his harvests over the mountain. To eliminate this labour he decided to construct a canal around the mountain. The time required for this enterprise which, to avoid silting, would have to be continued without interruption, he estimated at three years. He had therefore to lay in provisions for three years.

He slaughtered some pigs and cured their flesh with salt; he filled a deep trench with wheat, covering it carefully with earth. He tanned a dozen buckskins for suits and nailed them up in a chest, enclosing also the stink-glands of a skunk as a precaution against moths. In short, he provided amply and, as he thought, wisely, for the coming three years.

As he sat calculating for the last time whether his “capital” was sufficient for the projected undertaking, he was startled by the approach of a stranger, obviously the survivor of a shipwreck.

“Hallo, Crusoe!” shouted the stranger as he approached, “my ship has gone down, but I like your island and intend to settle here. Will you help me with some provisions until I have brought a field into cultivation and harvested my first crops?”

At these words Crusoe’s thoughts flew from his provisions to the possibility of interest and the attractions of life as a gentleman of independent means. He hastened to answer “yes.”

“That’s splendid ! ” replied the stranger, “but I must say at once that I shall pay no interest. I would prefer to keep myself alive by hunting and fishing, for my religion forbids me to pay, or to receive, interest.”

Continue reading here. Keynes wrote on Gesell’s theory in the General Theory:

But there is a great defect in Gesell’s theory. He shows how it is only the existence of a rate of money interest which allows a yield to be obtained from lending out stocks of commodities. His dialogue between Robinson Crusoe and a stranger is a most excellent economic parable as good as anything of the kind that has been written to demonstrate this point. But, having given the reason why the money-rate of interest unlike most commodity rates of interest cannot be negative, he altogether overlooks the need of an explanation why the money-rate of interest is positive, and he fails to explain why the money-rate of interest is not governed (as the classical school maintains) by the standard set by the yield on productive capital. This is because the notion of liquidity-preference had escaped him. He has constructed only half a theory of the rate of interest.

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Responses

  1. […] proposals to let the interest rate go negative might work in theory and practice (I have written on Silvio Gesell’s ideas on this blog in October 2008 already). However, I believe it will have huge costs on the economy […]


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