July 5, 2015


'Neglected Prophet' of Economics Got It Right (Leonid Bershidsky, 7/03/15, Bloomberg View)

[Silvio] Gesell was  born in Germany, made a modest fortune as an importer in Argentina. After he returned to Europe, he became finance minister of the short-lived Soviet Bavarian Republic in 1919, was arrested and charged with treason but acquitted. He kept publishing his works in Berlin until his death in 1930. John Maynard Keynes called Gesell "a strange, unduly neglected prophet" and described his bold idea as follows:

According to this proposal currency notes (though it would clearly need to apply as well to some forms at least of bank-money) would only retain their value by being stamped each month, like an insurance card, with stamps purchased at a post office. The cost of the stamps could, of course, be fixed at any appropriate figure. According to my theory it should be roughly equal to the excess of the money-rate of interest (apart from the stamps) over the marginal efficiency of capital corresponding to a rate of new investment compatible with full employment. The actual charge suggested by Gesell was 1 per mil. per week, equivalent to 5.2 per cent per annum. This would be too high in existing conditions, but the correct figure, which would have to be changed from time to time, could only be reached by trial and error.

This amounts to a tax meant to prevent money-hoarding. Cash would still be used as a medium of exchange, but it would lose its significance as a store of value. In a way, that's what central banks are trying to achieve when they keep lowering interest rates, sometimes breaching what is called the "zero bound." They want money to get out and work rather than languish in bank accounts, with the idea that spending will increase demand and thus inflation rather than deflation.

The Gesell tax has a side effect that is particularly relevant today: Those who still try to use "melting" money would be open to buying negative-interest bonds, as long as the interest they have to pay the issuer is lower than the stamp tax. That, apparently, is already beginning to happen in France. In a Bloomberg article, Alexandre Akhavi, chairman of the French Association of Corporate Treasurers' legal committee, said some institutional investors are still buying bonds with negative coupons because they offer security. That means these investors can't find a secure way to park their money that would offer even zero interest.

Posted by at July 5, 2015 7:11 AM

blog comments powered by Disqus