Silvio Gesell: The Natural Economic Order
Part 4: Free-Money or Money as it Should Be


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.

That is what we demand of money. The degree of security, rapidity and cheapness with which goods are exchanged is the test of the usefulness of money.

If, in addition to this, we ask that money shall cause a minimum of trouble by its physical properties, we make a claim that is valid only if the purpose for which money exists is not thereby defeated.

If security, acceleration and cheapening of the exchange of goods can be achieved by means of a form of money which cannot be harmed by moth and rust and which besides, can be conveniently hoarded, then let us, by all means, have such money. But if this form of money diminishes the security, rapidity and cheapness of the exchange of goods, we say: Away with it!

Knowing that the division of labour, the very foundation of our civilisation, is here at stake, we shall select whatever form of money is suited to its necessities, quite regardless of the wishes or prejudices of individuals.

In order to test the qualities of money we shall use no scales, crucibles or acids; neither shall we scrutinise some coin or consult some theorist. We shall consider, instead, the work done by the money. If we observe that a certain form of money seeks out goods and conveys them by the shortest route from the workshop to the consumer; if we notice that goods cease to congest the markets and warehouses, that the number of merchants diminishes, that commercial profits shrink, that no trade depressions occur, that producers are assured of a ready disposal of all they can produce while working at full capacity, we shall exclaim: This is an excellent form of money! - and we shall hold to this opinion even if, on closer examination, we find that the money in question is physically unattractive. We shall consider money as we consider, say, a machine, and form our judgement exclusively on its efficiency, not on its shape or colour.

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. (Among producers we here include all those engaged in the transport of goods).

How inefficiently the traditional form of money functions as an instrument of exchange has been demonstrated in the previous part of this book. A form of money that necessarily withdraws when there is lack of it, and floods the market when it is already in excess, can only be an instrument of fraud and usury, and must be considered unserviceable, no matter how many agreeable physical qualities it may possess.

Judged by this criterion, what a disaster was the introduction of the gold standard in Germany! At first a boom, fed by the millions taken from France, and afterwards the inevitable crash!

We introduced the gold standard because we expected an advantage from it, and what other advantage could we expect from a change of our monetary system than greater security, cheapening and acceleration of the exchange of goods ?

But if such was the purpose, what was the justification for the introduction of the gold standard to achieve it ? Gold coins, neat round shining toys, were expected to facilitate, accelerate and cheapen the exchange of straw, iron, limestone, hides, petroleum, wheat, coal, etc., but how that was to be done nobody was able to explain; it was simply a matter of faith. Everybody - even Bismarck - relied on the judgement of the so-called experts.

After the establishment of the gold standard, just as before it, the exchange of goods consumes 30, 40, and sometimes perhaps 50% of the entire output. Trade depressions are just as frequent and just as devastating as in the days of the thaler and the florin; and by the increased number of dealers we observe how slight is the mercantile power of the new money.

The reason why the mercantile power, the power of exchanging goods, of this money is so slight, lies in the fact that it has been over-improved - improved, that is, exclusively from the view-point of the holder. In fixing upon the material for mousy, only the buyer, only demand was considered. The goods, supply, the seller, the producer of the goods, were entirely overlooked. The very finest of materials, a precious metal, was chosen for the manufacture of money - just because it offered certain conveniences to the holders of money. Our experts did not pause to consider that the holders of goods in selling their products had to pay for these conveniences. By the selection of gold as money-material, the buyer has been allowed time to choose the most favourable moment for the purchase of goods, and in granting this freedom the devisers of the gold standard forgot that the seller would be forced to wait patiently in the market till the buyer chose to appear. Through the choice of the money-material, demand for goods was placed at the discretion of the owners of money and delivered up to be the sport of caprice, greed, speculation and chance. Nobody saw that the supply of goods, owing to its material nature, is at the mercy of this arbitrary will. Thus arose the power of money which, transformed into financial power, exercises a crushing pressure on all producers.

In short, our worthy experts when considering the currency question forgot the goods - for the exchange of which the currency exists. They improved money exclusively from the point of view of the holder, with the result that it became worthless as a medium of exchange. The purpose of money evidently did not concern them, and thus as Proudhon put it, they forged "a bolt instead of a key for the gates of the market". The present form of money repels goods, instead of attracting them. People do, of course, buy goods, but only when they are hungry or when it is profitable. As a consumer everyone buys the minimum. No one desires to have stores, in planning a dwelling house the architect never includes a storeroom. If every householder were today presented with a filled storeroom, by tomorrow these stores would be back on the market. Money is the thing people want to own, although everybody knows that this wish cannot be fulfilled, since the money of all mutually neutralises itself. The possession of a gold coin is incontestably more agreeable than the possession of goods. Let the "others" have the goods. But who, economically speaking, are these others ? We ourselves are these others; all of us who produce goods. So if, as buyers, we reject the products of the others, we really all reject our own products. If we did not prefer money to the products of our fellows, if instead of the desired yet unattainable reserve of money, we built a storeroom and filled it with the products of our fellows, we should not be obliged to have our own products offered for sale in expensive shops where they are, to a great extent, consumed by the cost of commerce. We should have a rapid and cheap turnover of goods.

Gold does not harmonise with the character of our goods. Gold and straw, gold and petrol, gold and guano, gold and bricks, gold and iron, gold and hides ! Only a wild fancy, a monstrous hallucination, only the doctrine of "value" can bridge the gulf. Commodities in general, straw, petrol, guano and the rest can be safely exchanged only when everyone is indifferent as to whether he possesses money or goods, and that is possible only if money is afflicted with all the defects inherent in our products. That is obvious. Our goods rot, decay, break, rust, so only if money has equally disagreeable, loss-involving properties can it effect exchange rapidly, securely and cheaply. For such money can never, on any account, be preferred by anyone to goods.

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.


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

This $100 note (bill) is shown as it will appear during the week August 4th - 11th, thirty-one ten-cent stamps ($3.10) having been attached to it by its various holders on the dated spaces provided for the purpose, one stamp for each week since the beginning of the year. In the course of the year 52 ten-cent stamps ($5.20) must be attached to the $100 note, or in other words it depreciates 5.2% annually at the expense of its holders.


Figure 5. Free-Money, British Currency.

Free-Money, British Currency, is issued in 1-shilling, 5-shilling, 10-shilling, 1, 4, 10, and 20 currency notes and in perforated sheets of stamps resembling small postage stamps, value 0.5 d., 1d., 2.5d., and 5d., which are used for attaching weekly to the notes, to keep them at their face value. A penny stamp must, for example, be attached weekly by the holder to the above 4 currency note which is divided into 52 dated sections for this purpose. The note is shown as it will appear during the week August 4th - 11th., 31 penny stamps having been attached to it by its various holders, one stamp for each week from the beginning of the year. In the course of the year 52 penny stamps (value 4s. 4d.) must be attached to this 4 note, or in other words it depreciates 5.4% annually at the expense of its holders.

As the owners of goods are always in a hurry for exchange, it is only just and fair that the owners of money, which is the medium of exchange, should also be in a hurry. Supply is under an immediate, inherent constraint; therefore demand must be placed under the same constraint.

Supply is something detached from the will of owners of goods, so demand must become something detached from the will of owners of money.

If we decide to abolish the privileges enjoyed by the owners of money and to subject demand to the compulsion to which supply is by nature subject, we remove all the anomalies of the traditional form of money and compel demand to appear regularly in the market, independently of political, economic or natural conditions. Above all, the calculations of speculators, the opinions or caprices of capitalists and bankers will no longer influence demand. What we term the "tone of the Stock-Exchange" will be a thing of the past. As the law of gravity knows no moods, so the law of demand will know of none. Neither the fear of loss nor the expectation of profit will be able to retard or accelerate demand.

In all conceivable conditions demand will then consist of the volume of money issued by the State, multiplied by whatever velocity of circulation is permitted by existing commercial organisation.

All private money reserves are automatically dissolved by such compulsory circulation. The whole volume of money issued is in uninterrupted, regular and rapid circulation. No one can any longer interfere with the public monetary administration by putting into circulation or withdrawing private reserves of money. And the State itself is under obligation at all times rigorously to adapt demand to supply - an obligation which it can fulfil by issue or withdrawal of trifling sums of money.

More than that is not needed to protect the exchange of goods against any conceivable disturbance, to render crises and unemployment impossible, to reduce commercial profits to the rank of a wage, and in a short space of time to drown capital-interest in a sea of capital.

And what do the priceless advantages of compulsory monetary circulation cost us, the producers, who create the money through the division of labour ? Nothing but renunciation of the privilege of infecting demand with our arbitrary will, and, through it, with greed, hope, fear, care, anxiety and panic. We need only abandon the illusion that we can sell our produce without someone else's buying it. We need only pledge ourselves mutually to buy, at once and in all possible circumstances, exactly as much as we have sold. And in order to secure reciprocity for this pledge, we must endow money with properties that will compel the seller of goods to comply with the obligations incidental to the possession of money; we must compel him to convert his money into goods again - personally, if he has any need of goods, or through others, to whom he lends his money, if he has not.

Are we then willing to break the fetters that enslave us as sellers of our produce, by renouncing our despotic privileges as buyers over the produce of our fellows ? If so, let us examine more closely the unprecedented and revolutionary proposal of compulsory demand. Let us examine a form of money subjected to an impersonal compulsion to be offered in exchange for goods.

Description of Free-Money

  1. Free-Money is a stabilised paper-money currency, the currency notes being issued or withdrawn in accordance with index numbers of prices, with the aim of stabilising the general level of prices.
  2. Free-Money, decimal currency (* For Free-Money, British currency, see Figure 5.), is issued in 1 - 5 - 10 - 20 - 50 - and 100 dollar (franc, mark) notes (bills). The monetary authority also sells, through the post-office, currency stamps value 1 - 2 - 5 - 10 - 20 and 50 cents.
  3. Free-Money loses one-thousandth of its face value weekly, or about 5% annually, at the expense of the holder. The holder must keep the notes at their face value by attaching to them the currency stamps mentioned above. A ten-cent stamp, for example, must be attached every Wednesday to the $100 note illustrated (Figure 4), which is shown as it will appear during the week August 4th - 11th, 31 ten-cent stamps ($3.10) having been attached to it, on the dated spaces provided for the purpose, by its various holders, one stamp for each week since the beginning of the year. In the course of the year 52 ten-cent stamps must be attached to the $100 note, or, in other words, it depreciates 5.2% annually at the expense of its holders.
  4. For small change up to one dollar (1 - 2 - 5 - 10 - 20 - 50 cents) the currency stamps themselves could be used, in which case they would not be reissued when paid in at public offices, but replaced by fresh stamps. The currency stamps would be sold in small perforated sheets resembling a page from a postage-stamp booklet, the total value of each sheet being one dollar.
  5. At the end of the year the fully-stamped currency notes are exchanged for fresh notes, for circulation during the following year.
  6. Everyone of course tries to avoid the expense of stamping the notes by passing them on - by purchasing something, by paying debts, by engaging labour, or by depositing the notes in the bank, which must at once find borrowers for the money, if necessary by reducing the rate of interest on its loans. In this way the circulation of money is subjected to pressure.
  7. The purpose of Free-Money is to break the unfair privilege enjoyed by money. This unfair privilege is solely due to the fact that the traditional form of money has one immense advantage over all other goods, namely that it is indestructible. The products of our labour cause considerable expense for storage and caretaking, and even this expense can only retard, but cannot prevent their gradual decay. The possessor of money, by the very nature of the money-material (precious metal or paper) is exempt from such loss. in commerce, therefore, the capitalist (possessor of money) can always afford to wait, whereas the possessors of merchandise are always hurried. So if the negotiations about the price break down, the resulting loss invariably falls on the possessor of goods, that is, ultimately, on the worker (in the widest sense). This circumstance is made use of by the capitalist to exert pressure on the possessor of goods (worker), and to force him to sell his product below the true price.
  8. Free-Money is not redeemed by the Currency Office. Money will always be needed and used, so why should it ever be redeemed? The Currency Office is, however, bound to adapt the issue of money to the needs of the market in such a manner that the general level of prices remains stable. The Currency Office will therefore issue more money when the prices of goods tend to fall, and withdraw money when prices tend to rise; for general prices are exclusively determined by the amount of money offered for the existing stock of goods. And the nature of Free-Money ensures that all the money issued by the Currency Office is immediately offered in exchange for goods. The Currency Office will not be dormant like our present monetary administration which with indolent fatalism expects the stability of the national currency from the mysterious so-called "intrinsic value" of gold, to the great advantage of swindlers, speculators and usurers; it will intervene decisively to establish a fixed general level of prices, thereby protecting honest trade and industry.
  9. The great importance of external trade makes it desirable that there should be an international agreement to stabilise the international exchanges. In the meantime we shall have to decide whether the monetary administration, when regulating, the issue of money, is to stabilise home prices, or to stabilise the foreign exchanges. It cannot of course do both, for stabilising the exchanges means conforming to the price levels of other countries. And these price levels, in countries with metallic standards, constantly fluctuate.
  10. The exchange of metal money for Free-Money will be entirely optional. Those who cannot bear to part with their gold may keep it. Gold, however, like silver formerly, will lose the "right of free coinage", and the coins will be deprived of their quality as legal tender. After the expiration of the legal period for exchange, the coins will no longer be accepted by the courts of justice or other public institutions.
  11. For payments abroad use can be made as heretofore of bills of exchange offered for sale by merchants who have shipped goods abroad. For small amounts Post Office Money Orders may be employed, as is the custom at present.
  12. Anyone wishing to purchase national products for export and having only gold at his disposal, that is, if he has not been able to buy any import bills, can sell his gold to the Currency Office. Anyone needing gold for the import of foreign goods, because there are no export bills on offer, can buy the gold at the Currency Office. The price of this gold will depend on how the question left open in (9) is answered.
  13. The sale of the currency stamps creates a regular annual revenue for the Currency Office, amounting to 5% of the value of the currency notes in circulation, or 200 - 300 million marks in Germany before 1914.
  14. This revenue of the currency administration is an accidental by-product of the reform, and is comparatively insignificant. The disposal of this revenue will be specially provided for by law. (*For other methods of applying the principle of Free-Money see page 245.)

[ - Home] ; online since April 2000