Silvio Gesell's Plan for Negative Nominal Interest Rates

One of best known proposals for avoiding massive paper currency storage when nominal interest rates are negative is Silvio Gesell’s proposal for stamped currency. Although I think a crawling peg exchange rate between paper currency and electronic money (or what Robert Eisler, who initially proposed this plan, called bank money) is a much more convenient way to avoid massive paper currency storage, Silvio’s plan would get the job done of eliminating the zero lower bound. (See my own proposal in “How Subordinating Paper Money to Electronic Money Can End Recessions and End Inflation” and see  “More on the History of Thought for Negative Nominal Interest Rates” and “Marvin Goodfriend on Electronic Money” together with its links.) In Chapter 23, Section VI of The General Theory of Employment, Interest and Money, John Maynard Keynes gives this account of Silvio Gesell’s proposal, which means that no one who has read The General Theory carefully has any excuse for talking about the zero lower bound as if it were a law of nature, rather than a policy choice:

Gesell was a successful German merchant in Buenos Aires who was led to the study of monetary problems by the crisis of the late ’eighties, which was especially violent in the Argentine, his first work, Die Reformation im Münzwesen als Brücke zum socialen Staat, being published in Buenos Aires in 1891. His fundamental ideas on money were published in Buenos Aires in the same year under the title Nervus rerum, and many books and pamphlets followed until he retired to Switzerland in 1906 as a man of some means, able to devote the last decades of his life to the two most delightful occupations open to those who do not have to earn their living, authorship and experimental farming.

The first section of his standard work was published in 1906 at Les Hauts Geneveys, Switzerland, under the title Die Verwirklichung des Rechtes auf dem vollen Arbeitsertrag, and the second section in 1911 at Berlin under the title Die neue Lehre vom Zins. The two together were published in Berlin and in Switzerland during the war (1916) and reached a sixth edition during his lifetime under the title Die natürliche Wirtschaftsordnung durch Freiland und Freigeld, the English version (translated by Mr. Philip Pye) being called The Natural Economic Order….

The incompleteness of [Silvio Gesell’s] theory is doubtless the explanation of his work having suffered neglect at the hands of the academic world. Nevertheless he had carried his theory far enough to lead him to a practical recommendation, which may carry with it the essence of what is needed, though it is not feasible in the form in which he proposed it. He argues that the growth of real capital is held back by the money-rate of interest, and that if this brake were removed the growth of real capital would be, in the modern world, so rapid that a zero money-rate of interest would probably be justified, not indeed forthwith, but within a comparatively short period of time. Thus the prime necessity is to reduce the money-rate of interest, and this, he pointed out, can be effected by causing money to incur carrying-costs just like other stocks of barren goods. This led him to the famous prescription of “stamped” money, with which his name is chiefly associated and which has received the blessing of Professor Irving Fisher. 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 retaintheir 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 month, equivalent to 5.4 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.

The idea behind stamped money is sound. It is, indeed, possible that means might be found to apply it in practice on a modest scale. But there are many difficulties which Gesell did not face. In particular, he was unaware that money was not unique in having a liquidity-premium attached to it, but differed only in degree from many other articles, deriving its importance from having a greater liquidity-premium than any other article. Thus if currency notes were to be deprived of their liquidity-premium by the stamping system, a long series of substitutes would step into their shoes — bank-money, debts at call, foreign money, jewellery and the precious metals generally, and so forth. As I have mentioned above, there have been times when it was probably the craving for the ownership of land, independently of its yield, which served to keep up the rate of interest; — though under Gesell’s system this possibility would have been eliminated by land nationalisation.

A version of stamped money was briefly tried in the town of Woergl, in 1932. See the Wikipedia article on Woergl and the article “The Woergl Experiment with Depreciating Money.”  (The title “The Woergl Experiment with Depreciating Money” refers to the fact that unstamped paper money would gradually be valued less and less over time, relative to all other forms of money.) 

I recommend the Wikipedia Article on Silvio Gesell. I love its selection of quotations about Silvio, which I will take the liberty to reproduce here:

Free money may turn out to be the best regulator of the velocity of circulation of money, which is the most confusing element in the stabilization of the price level. Applied correctly it could in fact haul us out of the crisis in a few weeks … I am a humble servant of the merchant Gesell.
—Prof. Dr. Irving Fisher, economist at Yale University New Haven/USA[3]
Gesell’s chiefwork is written in cool and scientific terms, although it is run through by a more passionate and charged devotion to social justice than many think fit for a scholar. I believe that the future will learn more from Gesell’s than from Marx’s spirit.
John Maynard Keynes, Economist, Fellow of King’s College, University of Cambridge/England[4]
Gesell’s standpoint is both anticlassical and antimarxist… The uniqueness of Gesell’s theory lies in his attitude to social reform. His theory can only be understood considering his general point of view as a reformer … His analysis is not completely developed in several important points, but all in all his model shows no fault.
—Prof. Dr. Dudley Dillard, economist at the University of Maryland /USA [5]
We would especially like to certify our great esteem for pioneers such as Proudhon, Walras, and Silvio Gesell, who accomplished the great reconciliation of individualism and collectivism that the economic order we are striving for must rest upon.
—Prof. Dr. Maurice Allais, economist at the University of Paris/France[6]
Academic economists are ready to ignore the ‘crackpots’, especially the monetary reformers. Johannsen, Foster and Catchings, Hobson and Gesell all had brilliant contributions to make in our day, but could receive no audience. It is hoped, that in the future economists will give a sympathetic ear to those who possess great economic intuition.
—Prof. Dr. Lawrence Klein, economist at the University of Pennsylvania/USA[7]
Economic science owes Silvio Gesell profound insights into the nature of money and interest, but Silvio Gesell has always been considered a queer fellow by economic circles. To be sure, he was no professor, which already raises suspicion… The decisive fact is that Silvio Gesell’s fundamental ideas with regard to an economic order are correct and exemplary. Exemplary is furthermore, that in the creation of a functional monetary order he should see the ‘nervus rerum’ of a functional economic and social order.
—Prof. Dr. Joachim Starbatty, economist at the University of Tübingen/Germany[8]
Silvio Gesell managed to write clearly and make himself understood, a gift that most pure theorists and reformers as well as many practical experts of today lack. The Natural Economic Order makes worthwhile reading even in our days… Gesell developed brilliant concepts and was forgotten, while his less brilliant contemporaries … dazzled several generations before the realization of their falseness could break through.
—Prof. Dr. Oswald Hahn, economist at the University of Erlangen-Nuremberg/Germany[9]
Gesell is a smart outsider, who … treated the subjects of money and interest, the right to full proceeds from labor and suggestions for remedies, in a very original way… The ideas he conceived regarding his problems and what he deemed appropriate for the crises of his times are worth considering with respect to a fundamental improvement of monetary conditions in general.
—Prof. Dr. Dieter Suhr, jurist at the University of Augsburg/Germany[10]
Gesell is the founder of the free economy, an economic outsider who nevertheless was recognized by Keynes, in a certain sense, as his forerunner. He is therefore still considered to be above all a Keynesian economist, even a kind of hyper-Keynesian, that is to say, an advocate of a school that propagates the lowest (nominal) interest rate possible as a means of avoiding crises. Gesell, however, also recognized that the problem of a crisis cannot be solved solely by reducing the rates of interest… Gesell suggests, therefore, as the necessary correlative to the introduction of ‘free money’ … the introduction of ‘free land’… Gesell’s chief work thus carries the title ‘A Natural Economic Order Through Free Land (!) and Free Money’. It proves that the real aspects of an economy – that is to say, the claim on land or resources – must never be lost from view, even if primary importance is attached to monetary factors. This was recognized more clearly by Gesell than by Keynes.
—Prof. Dr. Hans C. Binswanger, economist at the College of Economic and Social Sciences Academy at St. Gallen/Switzerland[11]