Almost 10 years after the Great Recession ended, the growing threat of a new economic slowdown raises a troubling question: When the next recession strikes, what can the world’s central banks do? With interest rates low and their balance sheets still loaded with assets bought to fight the 2008 crisis, do they have the tools to respond? This column is one of six looking at that question.
When the longest-running economic expansion in US history comes to an inevitable end, the Federal Reserve will likely find itself in a peculiar quandary: With rates already close to zero, it will have few tools to spark growth.
If the next crisis is anything like the last it could compel policy makers to consider some pretty unorthodox monetary interventions. One of those has been around for almost a century, even if it’s rarely been tried: money that “rusts.”
The idea traces to an unorthodox thinker named Silvio Gesell. While most monetary policy focuses on increasing the supply of money, Gesell came up with the notion of goosing a flagging economy by increasing the “velocity of money,” or the speed at which it is spent.
Gesell, a German émigré who settled in Buenos Aires, became infatuated with economic theory, devouring classic treatises while developing his own doctrines.
He published a manifesto in 1916: “The Natural Economic Order,” which wed socialist and libertarian ideals. His writings endeared him to ordinary people, but made him suspect in the eyes of most academic economists.
But not all: Two 20th century giants — Irving Fisher and John Maynard Keynes — singled out Gesell for special praise, citing his ideas and elaborating on them at some length. In his “General Theory,” Keynes
reluctantly admitted that he had initially treated Gesell’s “profoundly original strivings as being no better than those of a crank.” But on closer examination, Keynes concluded that Gesell had come to some important conclusions.
Gesell witnessed firsthand Argentina’s deflationary crisis in the 1880s, when people became reluctant to spend, knowing that the longer they held on to money, the more valuable it would become. Unfortunately, this behaviour also made debts more burdensome, worsening the downturn. Gesell argued that the hoarding of money — either out of greed or fear — was the cause of much misery in the modern era.
Rather than try and fight this by increasing the quantity of money — as modern policy makers do — Gesell sought to increase the movement of money.
Gesell argued that money, as a store of value, enjoyed an unfair advantage over goods and commodities: unlike a loaf of bread, gold always retained its value.
He wanted to short-circuit this behaviour. “Nobody, not even savers, speculators, or capitalists, must find money, as a commodity, preferable to the contents of the markets, shops, and warehouses,” he wrote. “If money is not to hold sway over goods, it must deteriorate, as they do. Let it be attacked by moths and rust, let it sicken, let it run away.”
To make this a reality, Gesell proposed that money be designed to steadily depreciate. He proposed that the rate of decline be fixed at 5 percent a year, though the rate could vary. The only way to maintain the value of the money was for the holder to buy stamps that would be affixed to the money.
The plan imposed a carrying cost on money. Anyone who possessed the new “rusting” money would have an incentive to spend it as quickly as possible, which meant that the usual responses to crisis and deflation — hoarding — would become untenable.
In Gesell’s formulation, money became a “hot potato” that note holders tried to use before it lost value. As far-fetched as they seem, his writings had practical implications because they pointed a way out of the impasse the world confronted in the Great Depression.
During that crisis, deflationary pressures magnified the burden of debts, crippling the economy. Those with money hoarded it, knowing it would grow more valuable with time. As Fisher developed his famous “debt deflation theory” to describe these dynamics, he turned to Gesell.
A few US municipalities played with stamped money in the depths of the Great Depression, but the most famous experiment took place in the town of Wörgl, Austria. The mayor, confronted with widespread unemployment and limited money in the bank, used the town’s funds to underwrite the issue of a Gesellian currency.
In recent years, the dominance of central banks has made Gesell’s ideas easier to implement. Beginning in the 1990s, several academic economists eager to find a way for central banks to circumvent the “zero bound” in interest rates began looking at whether these institutions could issue money that would steadily depreciate.
These remained fairly wild, fringe ideas — until the financial crisis of 2008. That near-death experience with deflation, coupled with the impotence of conventional monetary policy, led otherwise sober economists to revive Gesell’s ideas by implementing high-tech versions of his “stamped” money.
For the moment, no one sees a need for money that rusts. But should we sustain another brutal recession, with interest rates stuck at zero and the economy mired in a liquidity trap, don’t be surprised if you hear the name Silvio Gesell. He may be dead, but his ideas may yet find a new lease on life.
Stephen Mihm an associate professor of history at the University of Georgia, is a contributor to Bloomberg View