Mammon from Croesus (6th Century B.C.) to Gesell (1862-1930)
5th May 2003. Posted on November 12, 2004, Printed on November 19, 2004.
Auri Sacra Fames (The accursed greed for gold)
Herodotus avers that King Croesus of Lydia invented money by stamping a piece of gold with his royal seal, thus guaranteeing its weight.
Be that as it may, we owe incalculable consequences to the apparently innocuous decision of having coupled what is no more than information to a scarce (and therefore precious) metal. In 26 centuries of history the consequences have ranged from the grotesque to the tragic, when not to the absurd, like the two millennia and a half that it has taken to uncover their cause.
Gesell lived during the transition from the gold standard to paper money.1 To him goes the credit for having tracked down the disorder still assailing us to Croesus' decision, baring its practical contradiction: the double function of money as medium of exchange and store of value. Spending, or saving, are contradictory alternatives without a third possibility.
How such practical contradiction forms the basis of usury, and with it of oppression, poverty in the midst of plenty, economic and political crises, war economy, revolutions, the class struggle, etc. Gesell goes on to explain in the 500-odd pages of his magnum opus Die Nat¨rliche Wissenschaftordnung (Natural Economic Order) first published about 100 years ago.
The unnatural coupling of the two functions grants demand, backed by money, an undue advantage over supply, backed by no more than the ravages of time, passing fashion, woodworm, dampness, fungi, rodents, thieves and what have you.
The undue advantage is embodied in a tribute that supply is obliged to pay to demand. Either supply lowers prices to the level imposed by demand, or pays interest to get a loan of money. Gesell identifies usury with this tribute, and not with theories of "fecundity," "productivity," "profit," "missed gain," "money that works," "excess interest," or "exploitation." Usury is a form of power. From this primary imposition it gets transferred to everything that demand and supply exchange, from capital to consumer goods.
When demand is not satisfied with the amount of tribute expected, as happens in time of prosperity, it withdraws from the market, causing economic stagnation, deflation, unemployment and depression, as happened in the years 1932-39. This is the reason for the economic cycles, not the sun spots as Prof Jevons (1835-82) in all seriousness proposed, or other queer reasons offered by conventional wisdom.
At the end of the Great War Gesell predicted:
In spite of the holy promise of all people to banish war, once and for all, in spite of the cry of millions "Never a war again," in spite of all the hopes for a better future, I have this to say: If the present monetary system, based on compound interest, remains in operation, I dare to predict today that it will take less than 25 years before a new and even worse war. I can foresee the coming development clearly. The present degree of technological advancement will quickly result in a record performance of industry. The build-up of capital will be rapid in spite of the enormous war losses, and its over-supply will lower the interest rate. Money will then be hoarded. Economic activity will diminish and an increasing number of unemployed will roam the streets... within the discontented masses, wild, revolutionary ideas will arise, and the poisonous plant called "Super-Nationalism" will proliferate. No country will understand the other, and the end can only be war again.2
His radical solution, inspired in Henry George's (1839-97) land theory, consists in removing demand's undue advantage over supply. Proudhon (1809-65) had proposed to make supply rise to the level of demand; Gesell proposed to make demand climb down to the level of supply by making it deteriorate just as supply does.
How? First, by separating the idea of money from that of a precious metal.3 The second step separates the monetary unit from the object representing it, depreciating the latter at the rate of 0.1% per week or 5.2% per year.
Money would thus become pure medium of exchange, and no longer store of value. Gesell called it Freigeld (Free Money) meaning free from usury, and therefore from deflation or inflation.
Against both ideas there exist formidable obstacles, but before tackling them let us give a look at the practical, albeit short-lived success, of Freigeld.
The Firing Line
The first experiment took place at Schwanenkirchen, Germany, in 1930. Herr Hebecker, a coal mine owner, managed to keep his establishment open by issuing Wära as medium of exchange. His workers got 90% of their pay in Wära, and whoever accepted Wära in payment of anything could redeem them in coal at Hebecker's mine. Every Wära coupon depreciated monthly according to Gesell's recommendations. The arrangement was so successful as to attract Mammon's attention, officially represented by Chancellor Heinrich Brüning (1885-1970). He lost no time in scotching Schwanenkirchen and in issuing emergency decrees, in force to this day, against the issue of any type of non-official money.
The protagonist of the second story is Michael Unterguggenberger (1884-1936), mayor of Wörgl, a small town on a railway junction in the Vorarlberg, Austria.
In 1932 money was scarce, industries closed one after another and unemployment was rampant. Wörgl had 1 500 unemployed, in vain knocking at the mayor's door for help.
Unterguggenberger had read Gesell's work during the semi-poverty caused by the crises of 1907-08 and 1912-14, during which he had contracted the TB that would lead him to the grave at 52. But he knew the remedy, and went into action.
After patiently introducing the idea to small entrepreneurs, shopkeepers and professionals of the town, on 5th July 1932 he declared:
Slow circulation of money is the principal cause of the faltering economy. Money as a medium of exchange increasingly vanishes out of working people's hands. It seeps away into channels where interest flows and accumulates in the hands of a few, who do not return it to the market for the purchasing of goods and services, but withhold it for speculation.
The municipality issued its Bestätigter Arbeitswerte (Work Certificates) at par with the official Schilling. But every certificate (the object representing the monetary unit) expired after a month, unless a stamp worth 1% of its nominal value was affixed to it to keep it in circulation.4 The stamps could be purchased at City Hall, which in turn accepted Work Certificates in payment of taxes.
No one was obliged to accept the certificates. The alternatives were:
The municipality printed 32,000 units of certificates, but in practice issued less than a quarter. Circulation averaged 5 300 units, i.e. a derisory 2 Schillings or less per person, which however gave work and prosperity to Wörgl and environs far more than the 150 Schillings/person issued by the National Bank of Austria. As Gesell had predicted, velocity of circulation was what mattered: changing hands some 500 times in 14 months, against the 6 to 8 times of official money, 5 300 units of certificates moved goods and services for 2.5 million. City Hall, by emptying its coffers as fast as citizens' taxes filled them, built a bridge on the Inn, tarmacked four streets, repaired sewerage and electric installations, and even constructed a ski-jump. To have an idea of purchasing power, the mayor's salary was 1 800 Schillings monthly.
At the beginning some smiled, others cried foul or suspected counterfeiting. But prices were not going up, prosperity increased all round and taxes were being paid promptly, and immediately re-invested in public works and services.
Sneering expressions soon turned into ones of amazement, and jests into desire to imitate. Early in 1933 the 300 000 citizen of Vorarlberg were about to extend the experiment to the whole province. In the meantime Wörgl had become a centre of pilgrimage for macro-economists from Europe and America. All were eager to see the "miracle" of local prosperity defying global unemployment and stagnation. Did they go to learn? It is doubtful, given the most complete silence about Gesell in the faculties of economics.
Mammon did not sleep. Unterguggenberger had wisely refrained from calling his certificates "money," for he knew that by doing so he would have incurred the ire of the National Bank.
On 19th August 1932 Dr Rintelen received a delegation of 170 mayors headed by Unterguggenberger on behalf of the Austrian government. He had to admit that the National Bank had deliberately reduced the emission of official money from an average of 1 028 million Schillings in 1928 to one of 872 million in 1933. He also had to admit that the certificates made sense and that there were no valid reasons to interrupt the experiment.
But Mammon had his own "scientists" at the National Bank, intent on "proving" that the experiment had to be verboten. Here are their "scientific" reasons:
Although the issue of relief money appeared fully covered by an equal amount of official Austrian notes, the supervising authorities, starting with the area administration in Kufstein and following with the government office of Tyrol, must not allow themselves to be satisfied. As a matter of record the borough of Wörgl has exceeded its powers, since the right to issue money in Austria is a privilege of the National Bank. This is stated in Art. 122 of the bylaws of the Austrian National Bank. Wörgl broke that law.
The prohibition went into force on 15th September 1933. Wörgl appealed. The case reached the Supreme Court, which faithful to Mammon quashed the appeal and ended the experiment.
Unemployment, poverty and hunger returned. An obscure Austrian immigrant had begun to attract attention in the Bavarian Bierhallen: Adolf Hitler. It is impossible to affirm, or to deny, that the Second World War could have been avoided by listening to Gesell. It is a fact that Hitler rose to power with the votes of the unemployed.
Mammon was on the watch elsewhere. On 24th May 1933 Unterguggenberger had given a conference before an audience of 1,000 at Winterthur, in super-democratic Switzerland. He had been invited to repeat it on 3rd September, but Mammon, in the guise of State Procurator, denied him an entry visa. Long live democratic freedom of expression!
Vix Pervenit of Benedict XIV (1745) had been the first (and last) encyclical to confirm its prohibition and to distinguish between interest (a fee for the service) from usury (the price of money lent). 70 years later, the multi-medalled and multi-feathered plenipotentiaries at the Congress of Vienna, were all without exception the representatives of an army defeated by debt and in chains behind Mammon's triumphal chariot.
Mammon financed wars, revolutions, political assassinations and increasing poverty throughout the 19th century. Lincoln paid with his life having dared refusing a usurious loan when the 450 million greenbacks issued to finance the Civil War had eloquently proved that the State was in a position to issue its own debt-free money. Bismarck got out of it with the Kulturkampf. It was the pound of flesh demanded by Mammon for having financed Sedan.
The superstition of Croesus ensnared the intellect of politicians, economists and military men to such an extent, that the Sedan war chest, in gold ingots valued at 5 billion marks, stayed locked in the Julius Tower of Spandau, under armed guard, for over 40 years. It was the heritage of times when a king, after defeating another, rushed to get possession of his treasure which, as Gesell remarks, did nothing more than allowing him to govern over a nation of beggars.
The Great War administered Mammon its first serious blow. All the gold in the world could have financed no more than a few weeks of fighting, let alone the four years of carnage and destruction.
One after another, the belligerents dropped the gold standard in the face of Mammon, who had taken 14 years to re-impose it on the United States after Lincoln's death. At the end of the war Mammon demanded its reinstatement. The United Kingdom obeyed, with the usual results: unemployment, reduction of wages, hunger. The revolt exploded in the Great Strike of 1926. With a government not knowing which way to turn, King George V convinced Prime Minister Ramsay MacDonald to dump the gold standard once and for all. He did so, as noted earlier, on 25th September 1931, a date that deserves to be engraved in history as a victory of the forces of freedom.
John Maynard Keynes (1883-1946) was one of the participants of Bretton Woods in 1944. He knew Gesell:
In the post-war years his devotees bombarded me with copies of his works... Like other academic economists, I treated his profoundly original strivings as being no better than those of a crank... The purpose of the book as a whole may be described as the establishment of an anti-Marxian socialism, a reaction against laissez-faire built on theoretical foundations totally unlike those of Marx in being based on a repudiation instead of an acceptance of the classical hypotheses, and on an unfettering of competition instead of its abolition. I believe that the future will learn more from the spirit of Gesell than from that of Marx.8
Mammon's representatives at Bretton Woods prevented Keynes from expounding on, or from canvassing, Gesell's radical proposals. Keynes fell back on the only remedy that avoided adopting them, since to accept them would have meant the collapse of usury. The "remedy" was State deficit. Money hoarded by usurers and speculators would be replaced with liquidity created by the State. This would keep a certain degree of employment and avoid the social disorder that traditionally broke into war in the long run.
One cannot deny Keynes' success. But 60 years later the chickens are coming home to roost: devaluation, 'stagflation' and now the systematic relocation of industrial plant to "low-wage" countries, which hides a general lowering of wages. Add to it economic depression, unemployment, the homeless, and war "to save the economy:" every Tomahawk hitting its target (at times) in the Iraq war meant employment for thousands of American workers who would have had to tighten their belts instead.
What about gold? Mammon succeeded in keeping its standard by a conjurer's trick. In 1944 he obliged the United States to transfer gold on demand for Eurodollars, a kind of stray paper money imposed on the rest of the world as "reserve" currency. At the same time he managed to keep the price of gold high by hoarding hundreds of tonnes of ingots in bank vaults, thus creating artificial scarcity.
For centuries there had been attempts at separating money from gold, starting with the Mongols in the 13th century. John Law (1671-1729) had tried it during the Regency governing in the minority of Louis XV, but without completing the necessary separation. The prince of Conti, one of the many people ensnared by Croesus' superstition, tried to withdraw his deposits in gold coins. There weren't enough and the system collapsed.
In the 20th century it was De Gaulle who played the role of Prince of Conti, thus forcing President Nixon to declare the final collapse of the gold standard on 15th August 1971. There was not enough gold in Fort Knox to "redeem" French Eurodollars. The world is now on a dollar standard, but for how long?
For as long as Gesell's work remained buried in musty libraries and obscure publications, Mammon could sleep in peace (conscience permitting). But the information explosion of the past 20 years is giving him headaches if not ulcers. What's happening?
Beginning in 1982, the personal computer and Internet have caused the mushrooming of communities successfully liberating themselves from two of Croesus' superstitions: first, that money issue should be State monopoly; and second, that money ought to "exist" before spending it.
And so it is that some 20,000 communities have begun to do, more or less successfully, what Herr Hebecker did in Schwanenkirchen 70 years ago. By a variety of methods and picturesque names for their units,9 these communities are in a position to nullify any global attempt at deflation.
Mammon is trying to confront the dollar (in inverse relation with gold) to the Euro (in direct relation). This attempt could spell the ruin of both, at which Mammon would come out of his vaults with his gold ingots and triumphantly cry: "We told you so! Money not backed by gold is worthless! You needed 90 years to understand it!"
The so-called gold "free" market is not free at all: if it were, gold would not be worth 300+ dollars an ounce, but much less. Jewellers, dentists and chip makers would have to lower their prices drastically.
In the country of the blind, the one-eyed man is king. If we live long enough we shall see, but seeing with one eye will be better than not seeing at all.
1 On 25th September 1931 a tearful Prime Minister Ramsey Mac Donald announced to the whole world that Britain was no longer in a position to back its currency with the yellow metal. Letter to Zeitung am Mittag, Berlin 1918. back
2 Letter to Zeitung am Mittag, Berlin 1918. back
3 After the 1931 Mac Donaldıs announcement, it took another 40 years before the gold standard would be abandoned by the United States. President Nixon announced it on 15th August 1971. back
4 The depreciation was 12% per year, more than twice what Gesell had in mind. back
5 Put it another way, the bank was forced to tell the truth by lending its depositors' money. The current system allows banks to pass off money creation as "loans." back
6 The State had thrown the sponge with Henry VIII of England, unaware that his successor Charles I would pay with his head. back
7 For more information consult www.apfn.org/apfn/reserve in Internet. back
8 General Theory Book VI Chapter 23 back
9 Consult www.ccdev.lets.net for more information. back