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«April 2011 Cordelius Ilgmann Centrum für angewandte Wirtschaftsforschung University of Muenster Am Stadtgraben 9 D-48143 Münster Germany ...»

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‘Gesell's specific contribution to the theory of money and interest is as follows. In the first place, he distinguishes clearly between the rate of interest and the marginal efficiency of capital, and he argues that it is the rate of interest which sets a limit to the rate of growth of real capital. Next, he points out that the rate of interest is a purely monetary phenomenon […], and that forms of wealth, such as stocks of commodities which do involve carrying charges, in fact yield a return because of the standard set by money’ (Keynes, 1936, pp. 355-356, [my emphasis]).

Both contested the view that interest is a premium for a temporary renunciation of consumption, and defined interest rather as a premium for parting with money (Keynes, 1936, pp.

166-174 and pp. 222-244), which checks capital accumulation. However, while Gesell’s theory was based on the rather simple idea that money does not have carrying costs, Keynes introduced the rather complex notion of liquidity preference, which is caused by our inability to predict the future accurately, rendering investments in capital assets risky (Keynes, 1937a, pp. 215-216). Consequently, according to Keynes, the main failure of classical economics was the failure to recognize interest as a monetary phenomenon.

‘Now I range myself with the heretics. I believe their flair and their instinct move them towards the right conclusion. [….] There is, I am convinced, a fatal flaw in that part of orthodox reasoning […] due to the failure of the classical doctrine to develop a satisfactory and realistic theory of interest’ (Keynes, 1935, p. 36).

As Dillard (1948, p. 316) put it, by the 1930s, Keynes had become a ‘self-acknowledged heretic’ and his endorsing reference to Gesell are strong evidence for that claim. Indeed, in three articles appearing after the publication of the General Theory, he strongly defended his idea of interest as a purely monetary phenomenon, apparently believing in 1938 that his theory of interest was beginning to be accepted by mainstream economist (Dillard, 1946, p. 140). 50 In fact, Keynes radical rejection of classical notion of interest is not only evident in his praise of Gesell, but also in his own remarks on


‘It is much preferable to speak of capital as having a yield over the course of its life in excess of its original cost, than as being productive. For the only reason why an asset offers a prospect of yielding during its life services having an aggregate value greater than its initial supply price is because it is scarce; and it is kept scarce because of the competition of the rate of interest on money. If capital becomes less scarce, the excess yield will diminish, without its having become less productive at least in the physical sense.

I sympathise, therefore, with the pre-classical doctrine that everything is produced by labour, […]’ (Keynes, 1936, p. 213 (my emphasis]).

As with Gesell, the monetary rate of interest has a determining influence on real capital.

‘It seems, then, that the rate of interest on money plays a peculiar part in setting a limit to the level of employment, since it sets a standard which the marginal efficiency of a capital-asset must attain if it is to be newly produced’ (Keynes, 1936, p. 222 [italics in the original]).

In short, concerning the amount of real capital, Keynes postulated that ‘the rate of interest on money is a kind of institutional monopoly which leads to an artificial scarcity of capital assets’ (Dillard, 1948, p. 194). As with Gesell, Keynes thought that real capital yields interest because of

excess demand:

Besides the already quoted Keynes (1937a), he also defended his view in an article in The Economic Journal where he stated ‘[…] the rate of interest is that rate at which the demand and supply of liquid resources are balanced. Saving does not come into the picture at all (Keynes, 1937b, p. 668). Concerning the perceived acceptance of his theory, Keynes (& Robertson, 1938, pp. 318-319) wrote: ‘Now that we have got away from the idea of the rate of interest being depended on saving and have reached the idea of its being in some sense a monetary phenomenon, the remaining difference of opinion cannot be fundamental and agreement should be within reach.’ This argument was explicitly restated by Keynes (1937a, pp. 222-223): ‘Thus, instead of the marginal efficiency of capital determining the rate of interest, it is truer (tho not a full statement of the case) to say that it is the rate of interest which determines the marginal effiency of capital’.

‘The owner of capital l can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But, whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital’ (Keynes, 1936, p. 376).

These comments led Dillard (1948, pp. 195-196) to conclude that Keynes’s view of capital and interest implied a fundamental criticism of the existing social order, as the money possessors received unearned income, while impeding full employment and the growth of real capital, a view strikingly similar to Gesell’s vision as laid out above, and therefore Dillard (1948, p. 333) positioned Keynes’ close to utopian socialism. Even more, Darity (1995, p. 27) argued that in large parts of the General Theory, ‘Keynes was a mere Gesellist’. To what extent this is correct remains a matter of debate, but what is certain is that Keynes and Gesell shared the same goal of finding a middle path between Marxism and what they regarded as rentier capitalism (see also Darity, 1995, p. 39), a fact

Keynes himself highlighted in his conclusion to the General Theory:

‘Thus, I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the 'Manchester System', but to indicate the nature of the environment which the free play of economic forces requires if it is to realize the full potentialities of production’ (Keynes, 1936, p. 379).

Many of Gesell’s followers consider such an endorsement by probably the most prominent economist of the 20th century as proof of the importance of Gesell (Onken, 2008, p. 109). 52 However, they tend to ignore that Keynes also put forward some direct criticism, stating that ‘there is a great defect in Gesell’s theory’ because ‘the notion of liquidity-preference had escaped him’, calling Gesell’s theory only ‘half a theory of interest’ (Keynes, 1936, p. 356). Obviously this criticism is grounded on Gesell’s failure to understand the role of uncertainty in determining liquidity preference and hence the demand for money (Meltzer, 1988, p. 197). Consequently, Keynes rejected Gesellian Further references include Betz (2005, pp. 13-18), Flik (2004, p. 127), Senf (2007, p. 241).

currency reform. Even if Gesell had correctly described that the rate of interest on money limits capital accumulation, depreciative currency would not solve the issue at hand, because Keynes recognised that money was not unique in having a liquidity premium attached to it, but that it had only a greater premium than any other article (Keynes, 1936, pp. 357-358). He was well aware that taxing currency would create substitutes which would then serve as medium of exchange, at least in the long run, and would, therefore, not be sufficient to secure full employment (Keynes, 1936, p.

358; see also Darity, 1995, p. 38). Therefore, Keynes, albeit praising the theoretical concept of interest being a monetary phenomenon, dismissed the practical feasibility of negative interest rates

and social reform as proposed by Gesell:

‘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‘ (Keynes, 1937, pp. 356-357 [my emphasis]).

Given the above depicted interpretation of the General Theory, I maintain that the ‘essence’ Keynes refers to is in fact the gradual reduction of the monetary determined rate of interest to zero,

which Gesell hoped to achieve via money tax. In Keynes’ (1936, p. 221) own words:

‘If I am right in supposing it to be comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism.’ Concerning the practical implementation, Keynes advocated rather moderate changes to reduce interest rates and to secure full employment. Dillard (1948, pp. 327-329) counts three immediate proposals: (1) progressive taxation, raising the propensity to consume, (2) lowering money interest rates through expansive monetary policy, and (3) the partial socialisation of investment, the latter being the most important measure contained in the proposal: 53 ‘In some other respects, the foregoing theory is moderately conservative in its implications. [.…] I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; […]. I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work’ (Keynes, 1936, pp.

377-378 [my emphasis]).

Thus, Keynes did not adhere to the anarchist ideals of Gesell, even though he shared Gesell’s rejection of interest as unjustified income. On the contrary, in Keynes’ framework, the state would be essential in stimulating investment and a simple change in the monetary regime as advocated by Gesell, would not be sufficient. However, as Dillard (1948, p. 333) pointed out, Keynes did not live long enough to offer his own solution to the shortcomings of capitalism, as he readily admitted


‘But I consider that my suggestions for a cure, which, avowedly, are not worked out completely, are on a different plane from the diagnosis. They are not meant to be definitive; [...]’ (Keynes, 1937a, p. 221).

In sum, given the above presented analysis, Keynes’ praise for Gesell’s theory that ‘the idea behind stamped money is sound’ is not an endorsement for Gesell’s idea of stamping money. The sound idea Keynes refers to is the concept of interest as a purely monetary phenomenon and the consequences for the capital endowment of the economy. Thus, by endorsing a world famous monetary heretic, Keynes tried to highlight the parts of his analysis where he had strayed from classical thought: that due to uncertainty there would be a liquidity driven interest rate that would keep the economy from reaching the optimal (full employment) capital stock where its marginal On this point see also Meltzer (1988, p. 305).

productivity and hence the interest rate would be zero (Meltzer, 1996). This situation was what he labelled the ‘special’ case of classical economics (Dillard, 1948, pp. 3-4). The link between Gesell and Keynes was fist clearly seen by Dillard during the 1940s but is today mainly forgotten. Indeed, Pigou (1936, p. 124) in one of the first responses to the General Theory saw the implications of Keynes

appraisal of Gesell clearly:

‘For example, on p. 355, he seems to agree with Gesell that "the rate of interest is a purely monetary phenomenon." If this were in fact his view, Mr. Keynes' divorce from classical thought would be complete.’ Conclusions In his discussion of the merits of Gesell, Keynes (1936, p. 355) famously stated the following: ‘I believe that the future will learn more from the spirit of Gesell from that of Marx’. So nearly 100 years after Silvio Gesell, are there any lessons to be learned from his contribution to economic theory? From a theoretical perspective, I believe that Gesell’s theoretical insights, although intellectually challenging, offer little cure for today’s economic problems. For example, since the world has left the gold standard, most countries have struggled with sometimes considerable rates of inflation, which as a matter of fact is a ‘tax’ on money, a fact that Gesell, living in the heydays of the Gold Standard, was seemingly unaware of. Moreover, Gesell’s analysis is limited to money and does not take into account other (liquid) financial instruments such demand deposits, bonds, and precious metals and, as Keynes stated, a tax on money would lead to the appearance of money substitutes in the long run. However, the recent discussion of Gesell’s stamped money proposal as a way for removing the zero bound to interest rates clearly demonstrates that his practical proposal can – in the absence of inflation – help to stimulate in the economy once nominal interest rates are near the lower bound.

For scholars of the history of economic thought, Gesell’s theory nevertheless yields valuable insights into the General Theory. Keynes’ repeated embracing comments on Gesell speak in favour of the Post Keynesian interpretation of Keynes’ liquidity theory of interest – and to a lesser extent his principle of effective demand – as one of the central issues of the General Theory. However, critics may claim that Gesell appears only in a supplementary chapter and is therefore of little relevance for Keynes economics thinking. This argument is in fact a reversal of the burden of proof. If Keynes took the pain to read about and write five pages on the life and work of a well-known monetary heretic in such an embracing manner, those who deny their importance must provide evidence for that claim, especially since Keynes also mentions Gesell in a very positive tone in two key parts of the General Theory: the chapter on effective demand and the conclusion.

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