Journal of the History of Economic Thought, Volume 39, Number 3, September 2017 THE GESELL CONNECTION DURING THE GREAT DEPRESSION BY ROSARIO Patalano In the current recession, the proposal of negative nominal interest has received wide- spread attention, not only in the academic world. The negative interest rate issue was originally developed by Silvio Gesell (1862–1930), a German merchant, self-taught economist, and social reformer. In his main work, The Natural Economic Order, Gesell offered a theoretical basis for the practical implementation of the negative interest rate. This proposal, generally known as the “stamped money plan,” was favorably commented upon by two outstanding twentieth-century economists, Irving Fisher and John Maynard Keynes, and put into practice during the Great Depression. In this paper I propose a reading of Gesell’s theory of money from the point of view of quantity theory, giving prominence to elements of affinity with Fisher’s monetary theory. This re-examination entails revision of the opinion on the analytical contribu- tion made by Gesell, who was generally tagged as a typical monetary crank, and proves that his place in the history of economic thought is less marginal than previ- ously thought, reinforcing critical appreciation of him. I. INTRODUCTION In the current recession, economists are showing a renewed interest in the problem of the “liquidity trap,” and the proposal of negative nominal interest has received widespread attention, not only in the academic world, but also among policymakers and monetary authorities.1 Particularly interesting is the position taken by Gregory Rosario Patalano, University of Naples Federico II, Department of Law, Via Mezzocannone, 16, 80100, Naples, Italy; e-mail: [email protected]. I owe a debt of gratitude to Giovanni Pavanelli for his suggestions on this research project. I am especially grateful to two anonymous referees and to the editor, Steve Meardon, for incisive comments, which I have followed closely. 1In April 2017, the central banks of Japan, Sweden, Norway, Denmark, Switzerland, Hungary, and the European Central Bank of Euro Area (countries representing almost a quarter of the world’s GDP) have ISSN 1053-8372 print; ISSN 1469-9656 online/17/03000349-379 © The History of Economics Society, 2017 doi:10.1017/S1053837216000250 Downloaded from https://www.cambridge.org/core. Columbia University Libraries, on 27 Aug 2017 at 23:01:35, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/S1053837216000250 350 JOURNAL OF THE HISTORY OF ECONOMIC THOUGHT Mankiw, who, in an article in the New York Times, reflected on the negative interest proposal as a possible way to get through the present credit crisis (Mankiw 2009, 2015; see also Goodfriend 2000; Buiter and Panigirtzoglou 2003; Buiter 2009; Fischer 2016). Recently, some local money initiatives have been activated in Germany (Regionalgeldexperiment Chiemgauer), in Austria (Waldviertler), France (Abeille), and the United Kingdom (Stroud Pound) as practical applications of this idea, in the context of complementary currencies (Godschalk 2012; Lucarelli and Gobbi 2016). The negative interest rate issue (also called “demurrage”; i.e., reduction over time in the intrinsic value of a currency) has a long tradition in the history of economic thought (Godschalk 2012). In this respect, we owe an original formulation to Silvio Gesell (1862–1930), a “strange unduly neglected prophet” (Keynes 1936, p. 353), a German merchant, self-taught economist, and social reformer. In his main work, The Natural Economic Order, Gesell offered a theoretical basis for the practical imple- mentation of the negative interest rate. This proposal by Gesell, generally known as the “stamped money plan” (also called “taxing of money”), was favorably commented upon by two outstanding twentieth- century economists, Irving Fisher and John Maynard Keynes, and put into practice with some positive results during the Great Depression. In particular, some significant similarities can be found between Gesell and Fisher in terms of their views on the effects of hoarding and deflation as major characteristics of economic crisis. This affinity between the two authors is shown by their common adhesion to quantity theory and the mainstream approach to the function of money as a medium of exchange. The theoretical affinity between Fisher and Gesell has been neglected by historians of economic thought.2 Since the 1940s, the focus of research on Gesell has concen- trated on the relationship with Keynes, in an attempt to stress theoretical affinities, particularly with the ’liquidity trap’ (Seccareccia 1987, 1988) and political philosophy (Darity 1995). Pursuit of this angle followed two main routes of analysis: through the Pierre-Joseph Proudhon–Gesell–Keynes connection,3 proposed by Dudley Dillard and Charles Rist (Dillard 1940, 1942a, 1942b; Rist 1955; see also Schumpeter [1954] 2006, pp. 1118, 1131; Allais 1977, p. 275; Chick 1987; Ferreira 2010), and through the analytical forerunners of Keynesian monetary theory, particularly Knut Wicksell (Herland 1987, 1992), and the influence of Frederick Soddy (Daly 1980) and Nicholas adopted unconventional monetary policy, moving their interest rate on bank reserves below zero, to provide additional monetary stimulus against deflationist pressure. See McAndrews (2015), Bech and Malkhozov (2016), Jobst and Linand (2016), and Draghi (2016). For a critical view, see Palley (2016). 2Gerardo della Paolera and Alan Taylor recognize that Gesell “anticipated Fisher’s ideas on tight money, interest rates, and the problem of the debt-deflation trap, and even the ideas of later scholars such as Robert Mundell and Thomas Sargent on the importance of regime changes, expectations, and the impact of monetary policy via the real interest rate” (della Paolera and Taylor 2001, p. 31), but they do not provide analytical support for this thesis. An attempt in this direction has been recently made by Minozzi and Parisi (2012), but the comparison is limited to analysis of the consequences of Fisher’s and Gesell’s stamped plan proposals in the theoretical framework of IS-LM model. Another analytical attempt, merely outlined, is made by Comelli (2012). 3Gesell presented himself as a follower of Pierre-Joseph Proudhon, the French economist and libertarian socialist. In particular, Gesell followed Proudhon’s anti-Marxist social philosophy, re-proposing the central theme of interest coercion in the monetary economy (Proudhon 1840). Downloaded from https://www.cambridge.org/core. Columbia University Libraries, on 27 Aug 2017 at 23:01:35, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/S1053837216000250 THE GESELL CONNECTION 351 A. L. A. Johannsen (Seccareccia 1987; Rühl 2000). Recently, this perspective of research has been outlined by Guido Preparata, according to whom Keynes’s theory of money was strongly inspired, if not borrowed, from the early insights of Silvio Gesell (Preparata 2002). However, despite these similarities, two main features of Gesell’s thought—the nature of money as a medium of exchange and the quantity theory—are totally extraneous to Keynes’s monetary theory. This paper aims to make an in-depth re-examination of Gesell’s stamped money scheme and its influence on Fisher’s policy proposal during the Great Depression. We propose a reading of Gesell’s theory of money from the point of view of quantity theory, giving prominence to elements of affinity with Fisher’s monetary theory. Also, as will be shown below, re-examination of the theoretical roots of stamped money, as well as policy implications, may cast further light on the working of the monetary system and the evo- lution of monetary theories during the 1930s. This re-examination entails revision of the opinion on the analytical contribution made by Gesell, who was generally tagged as a “typical monetary crank” (Garvy 1975, p. 392), and proves that his place in the history of economic thought is less marginal than previously thought, reinforcing critical appreciation of him (see, above all, Cahiers de Decta 1987; Ilgmann 2009). The next section provides an overview of Gesell’s thought on the nature of money and crisis; section III outlines the stamped plan and its implementation in Europe and America; sections IV and V discuss the connection among Gesell, Fisher, and Keynes. Finally, the conclusions show the centrality of Gesell’s monetary thought during the Great Depression. II. THE NATURE OF MONEY AND CRISIS IN SILVIO GESELL’S THOUGHT By the end of the nineteenth century, when Silvio Gesell4 wrote his first contributions, economic science had achieved broad agreement on the nature and the function of money, although other theoretical elements of monetary orthodoxy, inherited from classical economics, were subjected to thorough critical revision (Laidler 1991, p. 7). 4Silvio Gesell was born in 1862 in St. Vith, Germany, but lived for many years in Argentina, where he successfully ran an import-export firm. His interest in economic and social reform developed in the 1890s, after he had witnessed the consequences of a severe depression largely caused by monetary deflation (Baring Crisis in Argentina, 1890–91), after a period of foreign investment boom (on the Baring Crisis in Argentina, see della Paolera and Taylor 2001; and Mitchener and Weidenmier 2006). His first work, Die Reformation im Münzwesen als Brücke zum sozialen