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It must be noted, however, that Gesell acknowledged that contractual interest rates contain risk and inflation premiums (Gesell, 1958, pp. 431-436), but he maintained that these would only be slightly above zero. Risk premium, understood as the marginal costs of lending, will be low, because most savers will invest their money in life insurance, which, in turn, will invest in real assets that act as securities (Gesell, 1958, pp. 407-408). The inflation premium will eventually be reduced to zero, because under Gesell’s scheme, price stability will be ensured (Gesell, 1958, pp. 278-285).
exchange (Gesell, 1958, pp. 376-380). With rising interest rates, the benefits of conducting transactions with money decrease, and the demand for money will gradually decline to zero. There is, therefore, a prohibitive rate of interest at which producers of goods no longer demand money and at which transactions are either suspended altogether or conducted only by barter. Empirically, Gesell gathered from what he called ‘thousands years of experience’ that basic interest amounts to 5 % per annum (Gesell, 1958, pp. 374-375), but he fails to provide convincing evidence for this claim (Clerc, 2002, p. 95).
Besides constituting unjust unearned income, in Gesell’s framework the existence of money interest also exerts a considerable influence on the capital endowment of the real economy. In his analysis he distinguished between the monetary rate of interest and the marginal productivity of capital (see also Dillard,  1997, pp. 165-169). Concerning the latter, Gesell argued in line with his above argued about the determination of the general price level that ‘Interest on real capital is determined by demand and supply; it is subject to the laws of competition and can be eliminated by a simple change in the ratio of demand to supply’ (Gesell, 1958, p. 417).
Consequently, he postulated that excess demand for real capital such as machinery and equipment is the reason why it has a positive marginal productivity and thus yields interest.
‘The ratio of houses to tenants, of ships to freights, of workmen to factories is regularly, artificially and inevitably so constituted by the present form of money that demand (tenants and workers) is always faced with an insufficient supply’ (Gesell 1958, pp. 390-391).
Under the assumption of a perfect capital market, any investment in real capital must yield at least the same rate of interest as money. Gesell stated that ‘Basic interest is the point of equilibrium about which interest on all forms of real capital oscillates’ (Gesell, 1958, p. 394). 41 Thus, only those investments are carried out that yield basic interest, hence the monetary rate of interest sets a lower limit to real capital productivity. Real capital stock increases until its marginal productivity equals basic interest. Any further increase in real capital will cause a downward deviation of marginal productivity from the basic rate of interest, causing disinvestment. The monetary rate of interest is hence the reason why the supply of real capital always falls short of
‘Money takes jealous care that its creatures shall not degenerate; it is given only for the construction of as many houses as can be built without causing the yield of interest to fall below basic interest’ (Gesell, 1958, pp. 390-391).
Consequently Gesell denied the existence of real capital:
‘So-called real capital is therefore anything rather [other] than ‘real’. Money alone is true real capital, basic capital. All other capital objects are completely dependent upon the characteristics of the existing form of money; they are its creatures; [….]’ (Gesell, 1958, p. 391).
In this framework, capital accumulation leads to crisis because if the capital stock, including the amount of commodities, rises, their prices begin to fall, lowering marginal capital productivity, while deflation raises the real interest earned on money. This leads to a crisis in the manner depicted above with further disinvestment until capital’s marginal productivity equals once again basic interest. Hence, his theory of effective demand and interest are connected to each other. However, that Gesell offers a distinct theory of crisis is visible in the fact that besides the reduction in the Gesell does not distinguish between real capital and commodities. According to Gesell, commodities have to yield interest as well as real capital. ‘[…] wares must necessarily always find the market conditions which permit them to appear as interest-exacting capital - at least to the consumer, since he pays the price which the producer receives, plus interest’ (Gesell, 1958, p. 388).
marginal productivity of real capital, he argues that a crisis is triggered every time the price level falls, for example if the amount of money becomes too small in comparison to aggregate supply, either because the stock of money shrinks or the aggregate supply outgrows the amount of money (Gesell, 1959, p. 242). For Gesell, ‘any of the tree causes of falling prices is sufficient alone to produce a crisis;
[…]’ (Gesell, 1958, 243).
Given the above depicted analysis, Gesell assumed that his stamped money would stabilize effective demand, avert crisis and end exploitation by those possessing money. In addition, it would also have a positive effect on the real capital endowment of the economy. Its stock would increase, because the prohibitive rate of marginal productivity, formerly determined by basic interest, would
elaborate theory of effective demand – or lack of it – and his stamping system was designed to tackle
both problems, while serving his socialist goals of ending capitalist exploitation:
‘More than that [stamped money] 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’ (Gesell, 1958, p. 272).
The implication of Keynes appraisal of Gesell As soon as the Keynes published his General Theory, controversy erupted, not only about the merits of his thinking, but also on what it actually meant. 44 This Keynes vs. Classics debate ended in This constitutes the ‘unleashing’ (Suhr, 1983, p. 46) of productive forces of society that his followers claim would result from Gesell’s scheme.
Nevertheless, the introduction of depreciative money will not eliminate interest all of a sudden. As long as there is excess demand for capital, interest will be paid. However, with the monetary rate of interest reduced to zero, the capital stock will expand and demand for it will equal supply and the scarcity premium will vanish. This process will take time and thus free money will only gradually eliminate the scarcity of real capital (Gesell, 1958, p. 415; see also Dillard ( 1997, pp. 170See for example the various mathematical interpretations discussed in Darity & Young (1995).
the mid-1950s with the neoclassical synthesis, where (neo) classical microeconomics and Keynesian macroeconomics could co-exist. Macroeconomics became in fact dominated by Hick’s IS-LM model in what has become known as ‘orthodox’ Keynesianism (Snowdon & Vane, 2005, pp. 101-102). 45 While its dominance in economics was broken by the new classical economics of the 1970s, it has remained an important part of most economic textbook. The model’s success is astonishing, given its inadequate representation of chapters 3, 16 and 17 of the General Theory, the latter containing important aspects of Keynes interest rate theory, and Keynes’s personal criticism of the model (Darity & Young 1995, pp. 12-14). 46 One possible explanation might be that, rather than being an exclusive interpretation of the General Theory, the model incorporated many key features of the body of economic thought of the interwar years in a consistent, albeit simple model (Laidler, 1999, pp. 23-24).
the 1940s and 1950s therefore becomes understandable. Those economists that rejected neoclassical synthesis and recognized the importance of liquidity preferences and effective demand have been called Post Keynesians (Davidson, 2005, p. 453). Although a very heterogeneous group,
that the essential properties of money and savers want for it are ultimately responsible for a lack of effective demand. Indeed, it was Keynes’ notion of the principle of effective demand and his Minsky (1975) argues that the reason that Hick’s interpretation became accepted as the conventional wisdom was due to the fact that (1) Hicks (1937) offered a formalized and simplified model while Keynes (1937a) is his response to Viner used a rather complicated informal model which included uncertainty and (2) that Keynes fell ill at the beginning of 1937 and did not fully recover before the war, in which he served as a government advisor, dying shortly afterwards. Therefore, the socalled Keynesians failed to grasp the concept of liquidity and monetary contracts.
Advocates of the orthodox school assumed the contradictions away by declaring them simple ‘detours’ or reducing their complexity (Darity & Young, 1995, p. 6).
The term ‘bastard Keynesian’ was coined by Joan Robinson (1965, pp. 100-101).
According to Davidson (2007, pp. 30-35) Keynes rejected two further axioms: (i) the gross substitution axiom, and (ii) the ergodic axiom (see also Fazzari, 2009, for a concise introduction into the Post Keynesian school).
rejection of classical interest rate theory – developed in the above mentioned chapters of the General Theory – that marked his departure from classical thought (Snowdon & Vane, 2005, p. 58; p.
62).49 In fact, a handful of Post-Keynesian authors cite Keynes’ positive remarks on Gesell as an implicit proof of their interpretation (Cowen and Krozner, 1994, pp. 387-388; Argitis, 2008, pp. 251Davidson, 2000, p. 49).
Such an approach is not entirely new. In his doctoral dissertation in 1940 and two subsequent articles in 1942, Dillard was the first economist to demonstrate the close kinship between the monetary theories of Proudhon, Gesell, and Keynes. Dillard established striking theoretical similarities between Keynes, Gesell and the anarchist Proudhon (Dillard, 1942b, pp. 75-76), with Gesell ‘primarily interesting as the link between the other two’ (Dillard,  1997, p. 6). In a further article on Keynes’ political economy, Dillard (1946, p. 149) argued that ‘Keynes’ judgement of the relative merits of Marx and Gesell, [...], would seem to reveal much more about Keynes than it does about either Marx or Gesell’ and in his book on Keynes, Dillard (1948, pp. 322-323) maintained that studying Gesell indeed furthers the understanding of Keynes’s theoretical innovations. However, as Gischer (1997, p. 5) pointed out, Dillard’s pioneering research concerning link between Proudhon, Gesell and Keynes went mainly unnoticed, probably because academic debate about Keynesian ideas took off considerably later and maybe because it held an inconvenient truth for classical economist.
Still, a handful of authors have taken up Dillard’s lead. For example, Michel Herland (1977) traced the issue of hoarding running from Keynes over Gesell to French economist Boisguilbert (1646-1714) and elaborated in another article on Gesell’s connection to Knut Wicksell, arguing that despite considerable theoretical differences Gesell took up parts of the Swede’s analytical apparatus (Herland, 1992, p. 68). William Darity (1995) demonstrated the close kinship between Gesell and Keynes, not only in their economic theory making, but also in their political economy. The most ‘In the General Theory the interest rate is a purely monetary phenomenon determined by the liquidity preference (demand for money) of the public in conjunction with the supply of money determined by the authorities’ (Snowdon & Vane, 2005, p. 62). See also Davidson (2006, p. 6). See for further references Koutsobinas (2002, p. 1850).
radical view was put forward by Guido Preparata (2002), who stated in an article called ‘On the art of innuendo: J. M. Keynes’ plagiarism of Silvio Gesell’s monetary economics’, that ‘Keynes stole the idea [of interest as a monetary phenomenon]’ but stripped it of its radical implications as to preserve the existing capitalist order (Preparata, p. 2002, p. 219). However, their research was also hardly noticed in mainstream economics.
In what follows, I hope to convey the message that Keynes’ appraisal of Gesell indeed supports the Post Keynesian rejection of orthodox Keynesianism and highlights those parts of his analysis where Keynes departed from classical thought. For it is obvious that Keynes himself explicitly praised those parts of Gesell’s theory he – at least partly – agreed with. In doing so, I will draw on my own reading of both Gesell and Keynes as well as Dillard’s rather forgotten work.
As was demonstrated above, monetary or effective demand is an important, albeit often neglected aspect of Gesell’s theory. Nevertheless, Keynes recognized it clearly in Gesell’s work as it is
stated in his own deliberations on the subject:
‘The great puzzle of effective demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas’ (Keynes, 1936, p. 32).
Apart from this passage, there are no further references to Gesell’s concept of monetary demand in the General Theory. One can only speculate why, but the most likely explanation is that, while Keynes believed Gesell theory of interest to be his original work, he credited Malthus for the concept of effective demand (Keynes, 1936, p. 32). Consequently, it is Gesell’s original and idiosyncratic theory of interest he praises in particular.