Silvio Gesell: The Natural Economic Order
Part 3: Money as it is


Demand and supply determine the price of wares, and supply depends upon the existing stock of wares. If the stock increases, supply increases; if the stock decreases, supply decreases. Stock and supply are identical; instead of saying "demand and supply" we could say "demand and the stock of wares" determine price. Indeed the statement in this form brings the suppositions of the quantity theory into higher relief.

The quantity theory, which, with unimportant limitations, holds good of all wares, has been applied to money. It has been stated that the price of money is determined by the stock of money. But experience has shown that the supply of money is not so dependent upon the stock of money as this statement of the quantity theory assumes. The stock of money often remains unaltered, but the supply of money is subject to great variations. The war-chest at Spandau has not been offered as supply once in forty years, whereas other money annually changes hands 10 or 50 times. The places where money is kept (banks, safes, chests or stockings) are sometimes empty, sometimes overflowing, and accordingly the supply of money is great today and small tomorrow. A rumour is often sufficient to direct a torrent of money and demand from the market to the places where money is preserved. A telegram, perhaps forged, often makes hands in the act of closing the purse-strings scatter money broadcast upon the market.

The conditions of the market have the greatest possible effect upon the supply of money, and if we said above of wares that demand and supply determine their price, we could say with equal truth of money that "demand, for money and the mood of its holders" determine its price. The stock of money is certainly important for the supply of money, since the stock fixes the upper limit to the supply of money. More money cannot be offered than the stock allows. But whereas with wares the upper limit to supply (that is, the stock) is also the lower limit, so that supply and stock are always equivalent, with money no lower limit can be discovered, unless we regard it as zero.

When confidence exists, there is money in the market; when confidence is wanting, money withdraws - such is the teaching of experience.

But, if as experience teaches, the supply of money does not exactly and at all times correspond to the stock of money, then the price of money is independent of the stock, and the crude quantity theory cannot be applied to money.

But if the crude quantity theory is not applicable to money, neither is the cost-of-production theory. The cost of production can determine price only by its influence upon the quantity produced, that is, the stock; and the stock of money does not, as we have seen, always correspond to the supply of money.

(* "The increase of the stock of money alone cannot increase prices; the new money must also cause demand by being used for purchasing in the market. That is the first limitation to be made to this theory." Dr. George Wiebe, History of the Price Revolution in the 16th and 17th Centuries, p. 318.

"Money which is not offered in exchange for products has as little influence upon prices as if it were destroyed." Hume.)

Of products in general it is true that when the cost of production falls, production increases. With increasing production the stock and supply increase, and with increasing supply the price falls.

But with the precious metals it is by no means certain that when the stock increases supply immediately increases; still less, that supply always corresponds to the stock. Proof: the stores of silver at Washington; the war-chest at Spandau; the frequently discovered hoards of coins.

Both theories, the crude quantity theory and the cost-of-production theory, fail when applied to money, and the reason why they fail must be sought in the characteristics of the money-material. The contents of the war-chest at Spandau would long ago have fallen into dust but for certain characteristics of gold, and the silver policy of the United States would have been inconceivable but for certain similar characteristics of silver.

If gold decayed like other products, the supply of money would always correspond exactly to the stock of money. Confidence or want of confidence would have no effect upon the supply of money. In war and peace, in prosperity and adversity, money would always be offered for exchange, even when the offer meant certain loss, just as potatoes are offered for exchange quite apart from the question of profit to their owner. In short, demand and supply would determine the price of money as now they determine the price of all other products.

The price of a product like the gold at Spandau, or the silver at Washington, which, without suffering the least depreciation, can be stored for decades in damp subterranean strongrooms, the price of a product the supply of which depends not upon intrinsic necessity but upon human judgement, is as free and incalculable as the wind. The price of such a product knows no economic laws; the quantity theory and the cost-of-production theory pass it by. Its supply is determined simply by profit.

Such money, as Lassalle rightly remarked, is from the outset capital; it is offered in exchange as long as it can obtain interest, and no longer. No interest, no money!

We have now completed our investigation of money as it is, of the metal or paper-money of the present, and can turn our attention to money as it should be, to the money of the future which we have named Free-Money, that is to say, money free to circulate, money free from the anomaly of interest.


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