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


Let us now consider Free-Money more closely. What can its possessor or holder do with it ? On January 1st its value in the markets, shops, pay-offices, public treasuries and courts of justice is $100 and on December her 31st it is only $95. That is to say, if the holder of the note intends to employ it at the end of the year to pay $100, on a bill of exchange, invoice or demand note, he has to add $5 to the note.

What has occurred? Nothing but what occurs with every other commodity. Just as a certain egg steadily and rapidly departs from the economic conception "egg" and is not comparable to it at an on completion of the rotting process, similarly the individual dollar note drifts away from what the dollar stands for in the currency. The dollar as the currency unit is permanent and unchanging; it is the basis for all calculations; but the dollar as a money-token has only the starting point in common with it. Nothing has occurred, then, but what occurs with everything about us. The species, the conception is unalterable; but the individual, the representative of the species is mortal and moves steadily onwards towards dissolution. All that has occurred is the separation of the object of exchange from the unit of currency, the individual from the species, and the subjection of money to the law of birth and decay.

The holder of this perishable money will beware of keeping the money, just as the egg-dealer will beware of keeping the egg any longer than he must. The holder of the new money will invariably endeavour to pass on the money, and the loss involved by its possession, to others.

But how can he do so? By selling his products he has come into possession of this money. He was forced to accept it, though well aware of the loss its possession would cause him. His products were from the first intended for the market; he was forced to exchange them, and exchange, under the given conditions, could be effected only through the medium of money; and this is the only money now produced by the State. Hence he was compelled to accept this odious Free-Money in exchange for his products if he was to dispose of them at all and so attain the object of his labour. Perhaps he might have deferred the sale, say until he was in immediate need of other goods, but meanwhile his own products would have deteriorated and become cheaper; he would have incurred a loss, perhaps greater than that involved in the possession of the money, through the diminution in quantity and the deterioration in quality of his products, and through the cost of storage and care-taking. He was under constraint when he accepted the new money, and this constraint was caused by the nature of his own products. He is now in possession of the money which steadily depreciates. Will he, in his turn, find a purchaser, will he find anybody willing to let the loss arising out of the possession of such money be passed on to him ? The only person who will accept this "bad" new money from him, is someone like himself under constraint, someone who has produced commodities and is now anxious to dispose of them in order to avoid the loss incident to their possession.

We thus at the very outset, note a remarkable fact, namely that the buyer has a personal desire, arising immediately out of the possession of his money, to pass it on to the possessor of commodities, and that this desire equals in strength the seller's eagerness to pass on his commodities to the buyer. The gain from the immediate completion of the bargain is the same for both parties, and the effect, of course, is that during the negotiations about price the buyer can no longer refer to his invulnerability (gold), and threaten to withdraw should the seller not submit to his terms. Buyer and seller are both poorly armed; each has the same urgent desire to strike the bargain. Under such conditions, obviously, the terms of the bargain will be fair and the transaction will be accelerated.

But let us now suppose that the Free-Money note which we have just been considering has come into the possession of a saver, merchant or banker. What will they do with it ? In their hands also, the money-token steadily shrinks away. They came into possession of Free-Money by exchanging their former gold coins. No law constrained them to make the exchange; they might have kept the gold, but the State proclaimed that after a certain date it would refuse to give Free-Money for gold, and what could they then have done with their gold ? They could have had it manufactured into gold ornaments, but who would have bought these ornaments, and at what price ? And with what would the gold ornaments have been paid for? With Free-Money !

So they found it advisable not to let the term for exchange slip by. And now they are considering the new money, their property. The uselessness of the demonetised gold forced them to consent to exchange it for Free-Money, and the loss inseparable from possession of the new money now forces them to get rid of it in order to transfer the loss as quickly as possible to others.

But since as savers and capitalists they have no personal demand for goods, they now seek a market for their money with people who wish to buy goods, but at present have no money. That is, they offer the money as a loan - just as they used to do in the case of gold. There is, however, a difference. Formerly they were free to lend the money or not, and they only lent it as long as they were satisfied with the conditions of the loan. Now they are forced to lend the money, whatever the conditions of the loan. They now act under compulsion. By the nature of their property (commodities), they were compelled to accept Free-Money, and now they are compelled by the nature of Free-Money to lend it. If they are not satisfied with the interest offered, let them buy back their gold, let them buy goods, let them buy wine which is said to become better and dearer in the course of time, let them buy bonds or Government securities, let them become employers of labour and build houses, let them enter commerce, let them do anything they please that may be done with money-one thing only they cannot do: they cannot now lay down the conditions upon which they are willing to pass on their money.

Whether they are satisfied with the interest offered by the debtor or the yield promised by the projected house; whether the securities selected are favourably quoted; whether the price of the wine and precious stones which they intend to hoard has been forced up too high by the great number of buyers with the same ingenious idea; whether the selling price of the matured wine will cover the cost of storage, caretaking, etc., makes no difference, for they are compelled to dispose of the money. And that too immediately, today and not tomorrow. The longer they stop to think, the greater the loss. Supposing, however, that they find somebody willing to take the money, the loan-taker can have only one intention, namely to invest the money at once in goods, in enterprises or in some other manner. For no one will borrow money simply to put it in a box, where it depreciates. He will endeavour to pass on the loss connected with the possession of money by passing on the money.

In whatever way the money is invested, it will immediately create demand. Directly, through purchasing, or indirectly through lending, the possessor of money win be obliged to create a demand for commodities exactly proportionate to the quantity of money in his possession.

It follows that demand no longer depends on the win of the possessors of money; that price-formation through demand and supply is no longer affected by the desire to realise a profit; that demand is now independent of business prospects and expectations of a rise or fall of prices; independent too, of political events, of harvest estimates; of the ability of rulers or the fear of economic disturbance.

The supply of money, just like the supply of potatoes, hay, lime, coal and so forth, will be weighable, measurable, and without life and volition. Money, by an inherent natural force, will steadily tend towards the limit of the velocity of circulation possible for the time being, or rather it will in all conceivable circumstances tend to overleap this limit. Just as the moon, calm and unaffected by what may be going on here below, moves in its orbit, so Free-Money, detached from the wishes of its holders, will move through the market.

In all conceivable circumstances, in fair weather and in foul, demand will then exactly equal: -

  1. The quantity of money circulated and controlled by the State. Multiplied by:
  2. The maximum velocity of circulation possible with the existing commercial organisation.

What is the effect upon economic life ? The effect is that we now dominate the fluctuations of the market; that the Currency Office, by issuing and withdrawing money, is able to tune demand to the needs of the market; that demand is no longer controlled by the holders of money, by the fears of the middle classes, the gambling of speculators or the tone of the Stock Exchange, but that its amount is determined absolutely by the Currency Office. The Currency Office now creates demand, just as the State manufactures postage stamps, or as the workers create supply.

When prices fall, the Currency Office creates money and puts it in circulation. And this money is demand, materialised demand. When prices rise the Currency Office destroys money, and what it destroys is demand.

Thus the Currency Office controls the tone of the market, and this means that we have at last overcome economic crises and unemployment. Without our consent the price-level can neither rise or fall. Every movement up or down is a manifestation of the will of the Currency Office, for which it can be made responsible.

Demand as an arbitrary act of the holders of money was bound to cause fluctuations of prices, periodic stagnation, unemployment, fraud. Free-Money makes the price-level dependent on the will of the Currency Office which uses its power, in accordance with the purpose of money, to prevent fluctuations.

Confronted with the new money everyone will be forced to conclude that the traditional custom of storing up reserves of money must be abandoned, since reserve money steadily depreciates. The new money, therefore, automatically dissolves all money hoards, those of the careful householder, of the merchant and of the usurer in ambush for his prey.

And what does this change further signify for economic life ? It signifies that henceforward the population will never be in possession of more than the exact amount of the medium of exchange necessary for the immediate requirements of the market -an amount regulated so as to eliminate fluctuations of prices caused by too much or too little money. It signifies that henceforward no one can frustrate the policy of the Currency Office by flooding the market with money drawn from private reserves at a time when the Currency Office considers a drainage of the market opportune, or by draining off money into private reserves when the Currency Office wishes to replenish the stock of money. It signifies consequently that, to enforce its policy, the Currency Office need issue or withdraw only insignificant quantities of money.

But with the new form of money no one needs to provide for a money reserve, since the regularity of the circulation makes reserves superfluous. The reserves were a cistern, that is, merely a receptacle, whereas the regularity of circulation of the new money will make it a perennially-welling spring.

With Free-Money demand is inseparable from money, it is no longer a manifestation of the will of the possessors of money. Free-Money is not the instrument of demand, but demand itself, demand materialised and meeting, on an equal footing, supply, which always was, and remains, something material. The tone of the Stock-Exchange, speculation, panic and collapse cease from now on to influence demand. The quantity of money issued, multiplied by the maximum velocity of circulation possible with the existing commercial organisation, is in all conceivable circumstances the limit, the maximum and also the minimum, of demand.

Money, anathema throughout the ages, will not be abolished by Free-Money, but it will be brought into harmony with the real needs of economic life. Free-Money leaves untouched the fundamental economic law which we showed to be usury, but it will cause usury to act like the force that seeks evil but achieves good. By eliminating interest Free-Money will clear away the present ignoble motley of princes, rentiers and proletarians, leaving space for the growth of a proud, free, self-reliant race of men.


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