Editor’s note: This is an excerpt of Planet Money‘s newsletter. You can sign up here.
Silvio Gesell hated money. A German entrepreneur who moved to Argentina for business in the late 19th century, he witnessed a massive financial crash in 1890 that convinced him that money was behind the world’s economic problems: poverty, inequality, unemployment, stagnation.
The problem, Gesell believed, was that money served two roles that often came into conflict: It was a way for people to store wealth, and it was the thing everybody needed to conduct business. The fact that money could store wealth meant its holders had a reason to cling to it, especially in crises like the one he saw in Argentina, when opportunities to safely put that money elsewhere looked grim. It was a typical story. When people got scared, they hoarded cash and brought business to a standstill. It led, Gesell said, to a situation of “poverty amid plenty.”
Gesell wanted to create a new kind of money — a money that would “rot like potatoes” and “rust like iron” so no one would want to hoard it, a money that was “an instrument of exchange and nothing else.” And the crazy part is that he did create it. Through a series of pamphlets, articles and books, Gesell inspired a worldwide movement that introduced a completely new form of money. It’s one of the most fascinating, and largely forgotten, stories in economic history.
But after 70 years of obscurity, Gesell is making a comeback. All of a sudden, this obscure radical from another age has his name and ideas popping up in unlikely places — like speeches of leaders at the U.S. Federal Reserve, research papers of the International Monetary Fund and the pages of the Financial Times. As the industrialized world grapples with stagnation and as markets signal another recession, policymakers are struggling to figure out what to do. Could Gesell provide an answer?
Money with an expiration date
Gesell was born in 1862 to a German father and a French mother, and he was raised in what is now Belgium. Back then, it was part of the expanding Prussian empire. At 24, he moved to Buenos Aires, Argentina, where he worked as an importer and manufacturer and did well for himself. On the side, he taught himself economics.
In 1891, hoping to end the depression in Argentina, Gesell published his first work, “Currency Reform as a Bridge to the Social State.” He proposed a new kind of paper money that would have an expiration date. To avoid expiration, the bills would have to be periodically stamped for a fee. With no new stamp, they would become worthless. In this system, saving money would cost you money. Savings, in other words, would have a negative interest rate. Only by spending or investing it would you be able to avoid stamp fees.
Gesell called it “free money” (or Freigold) — “free” because he believed it would be freed from hoarding and also because it would encourage bankers to lend money without charging interest. The logic was this: If you’re holding on to something that’s dropping in value, you’ll happily part with it — even if it means that it won’t make you more money than you started with. It’s like a game of hot potatoes. You want to pass it on. Gesell believed this would keep money whizzing through the system, preventing future depressions and increasing public prosperity.
It was a completely radical idea, especially during a time when nations were on the gold standard. That system latched money to the stable value of gold, which meant currency was a pretty safe place to store wealth. Gesell was saying he didn’t want money to be like gold. He wanted it to be like most other objects, which decay and rust and go bad. Of course, many people hated this idea, especially people with a lot of money.
In 1899, Gesell began moving back and forth between Europe and Argentina, spreading the gospel of free money and writing extensively on other matters as well. He had a bunch of eccentric views, criticizing monogamous relationships and advocating free love. He lived in a vegetarian commune near Berlin for a time. He was a bohemian utopian who advocated for peace between nations. He was critical of big business and finance, but he believed in individual freedom and market competition. And he was a committed anti-racist. As fascism rose in Germany, Gesell would call the scapegoating of Jews for the nation’s problems “a colossal injustice.”
After World War I, Gesell watched Europe descend into political and economic chaos. In 1919, anarchist revolutionaries in Munich, Germany, took the helm of the short-lived Bavarian Republic, and they persuaded Gesell to become their finance minister. Led by pacifist poets and playwrights, it has been called “one of the strangest governments in the history of any country.” Gesell began pursuing a program that included land reform, a basic income for women with children and, of course, stamped money. But the job lasted less than a week — ending after another group of revolutionaries, this time led by hard-line communists, overthrew the anarchist poets and playwrights. A year later, after the German government reasserted control, Gesell was tried for treason. But, successfully arguing that his only role and purpose was to rescue the Bavarian economy, he was acquitted after a one-day trial and went back to writing.
Free money becomes real money
For decades, money that expired unless stamped was mostly a theory. It took the Great Depression to make it a reality. As the economy went into a free-fall, people scrambled to find solutions. And in towns scattered throughout Europe and the United States, they found their solution in Gesell. The money reformer, who died in 1930 of pneumonia, would not live to see it.
In 1932, in the small town of Wörgl, Austria, a town leader, Michael Unterguggenberger, got Wörgl to issue stamped money as a way to combat skyrocketing unemployment and business closures. The town used it to pay the unemployed to do public works, and by all contemporary accounts, the system worked to lift the town out of misery.
The press dubbed it the “miracle of Wörgl,” and it was one in a series of local experiments with stamped money. These experiments inspired many other struggling cities, like Hawarden, Iowa, and Anaheim, Calif., to do the same. It was around then that Gesell’s work was finally published in English. With classical economics discredited by the prolonged depression and with leading economists scrambling to figure out what to do, many were inspired by Gesell. Among them were Irving Fisher and John Maynard Keynes, two of the most influential economists of the 20th century.
In 1933, Fisher wrote a short book inspired by Gesell’s ideas called Stamp Scrip. Fisher was an economist at Yale University, and he’s now somewhat unfairly remembered for making overly optimistic predictions before the crash of 1929. He lobbied Congress to institute stamped money to provide relief to a distressed America. U.S. senators introduced a bill (S. 5125) that would have issued a billion dollars of stamped money to be distributed nationally. But it did not end up becoming law. Perhaps that’s because that year was already seeing huge changes, with newly elected President Franklin D. Roosevelt implementing the New Deal and taking the U.S. off the gold standard.
Keynes, in 1936, dedicated five pages to Gesell in a concluding chapter of his magnum opus, The General Theory of Employment, Interest and Money. While critiquing some of Gesell’s overall theory, Keynes concluded, “The idea behind stamped money is sound.”
Why do we care about this now?
After World War II, the industrialized world entered a remarkable period of economic growth. And central banks, now off a rigid gold standard, played a greater role in managing money to ease the ups and downs of the market. Negative-interest money lost its allure, and Gesell was mostly forgotten.
But the world’s central banks are now thinking about how to keep money moving again. When the economy enters a downturn, they usually cut interest rates to encourage spending. But interest rates are already close to zero, which could be a huge problem in another recession. For a long time, economists believed rates couldn’t go negative for a simple reason: If saving in places like a bank costs people money, they will instead just hoard cash, which won’t cost them money. Cash becomes a roadblock to economic stimulus. One way around this is higher inflation, which devalues or “taxes” money in real terms, but central banks like the Fed have been showing that they have much less power to increase inflation than previously thought.
Central banks in Europe and Japan have been experimenting with teeny-tiny negative interest rates as a way to stimulate the economy, but the issue still remains that people will start hoarding cash if rates go significantly negative. It’s why serious economic thinkers consider Gesell relevant again.
In our technological age, a Gesellian system of unhoardable cash wouldn’t actually have to involve stamping paper bills for a fee. It could involve high-tech physical cash, such as magnetic strips that allow the government to impose a “Gesell tax” on holding cash, as one economist proposed some years ago. Harvard University’s Kenneth Rogoff has been advocating we get rid of paper money altogether and move almost completely to a system of electronic cash. He believes it could give central banks the power to impose negative interest rates deep enough to rescue our economy from future recessions. In all of this, Gesell was a pioneer.
Silvio Gesell has been called everything from a “libertarian socialist” to an “anarchist” to a “free spirit” to a “crank.” John Maynard Keynes had a much more affectionate term for him: a “strange, unduly neglected prophet.”
Did you enjoy this newsletter? Well, it looks even better in your inbox! You can sign up here.