Private currencies as a cure for deflation? If they were good enough for keynes... | thearticle

Record unemployment and savings rates have been stoking fears of deflation. Topping up balances at the bank makes sense when job prospects are poor, but if we are to avoid a slide into

deflation those savings need to turn into spending. The economist, Silvio Gesell, recommended an unconventional antidote to deflation; it was trialled during the 1930s Depression, worked

well, and drew praise from Irving Fisher and John Maynard Keynes. This remedy consisted of issuing private currency. Silvio Gesell (1862 – 1930) had experienced deflation in Argentina, one

of the world’s fastest-growing economies until the Barings Crisis of 1890. Within a year, Argentine GDP contracted by 11 per cent and shopkeepers had to slash prices and increase their

borrowing. Meanwhile, high interest rates encouraged consumers to hoard rather than spend money. Argentina was in the grip of deflation, and Silvio Gesell was puzzled about why banks could

prosper while the general economy languished. The French economist, Pierre-Joseph Proudhon, offered an answer. For Proudhon, the impact of depreciation explained why an economic crisis

shifted wealth from the real economy to the financial sector. Depreciation, he argued, made the value of tangible goods decay over time, whereas money, on the other hand, remained

unaffected. Proudhon inferred that this imbalance enriched bankers in a recession, at the expense of everyone else, and he proposed a remedy: namely to advance loans that were interest-free.

  Silvio Gesell followed Proudhon’s premise, but modified his prescription. Gesell suggested making depreciation apply also to money, by issuing a new currency that had its nominal value

decrease over time. A depreciating currency simulated the effect of inflation, thus creating an incentive for money to be spent rather than hoarded. Gesell died in 1930, too early to see his

vision trialled in Europe and in the United States. As in 1890 in Argentina, the 1930s Depression made work hard to find and money was hoarded rather than spent. In 1932, the mayor of a

village in Austria, Wörgl, decided to try out Gesell’s proposal: he commissioned public works where salaries were paid in scrip (a scrip entitles the bearer to receive something in return or

can act as an alternative currency) that depreciated each month by one per cent. Holders of scrip had an incentive to spend it before the month was out or end up losing one per cent of the

original value. The implication of money with a limited shelf life was not lost on the people of Wörgl – hoarding money no longer made sense. Spending picked up and so did employment. The

deflationary cycle was broken.  The Wörgl experiment caught the eye of a leading American economist, Irving Fisher (1867–1947). His book _Booms and Depressions: Some First Principles _(1932)

praised Silvio Gesell, and his next book, _Stamp Scrip _(1933), commended the issuance of stamped scrip in Wörgl. Fisher discussed an American example of issuance of scrip, in Hawarden,

Iowa, where conditions were very much like those in Wörgl: the population was small, unemployment was high, and the issuance of scrip came through a grassroots initiative by a local

entrepreneur, who wrote in the local newspaper: “We are at war now, at war with each other. We are trying to hang on to money and property with a deathgrip, but do not seem to realise that

it is our friend’s throat of which we have hold and the harder we squeeze the more difficult it becomes for this friend to supply us with the necessary food and manufactured supplies.” 

Fisher continued his campaign on several avenues. In November 1932 he commented in the _Christian Science Monitor_ that Hawarden was undertaking “the most interesting experiment being tried

in the United States that I know of to combat the depression.” In May 1933, he argued the case for stamped scrip in testimony to the Committee of Ways and Means in the House of

Representatives. Irving Fisher later proposed scaling up the issuance of scrip throughout the entire country; “Prosperity Dollars” were to give every unemployed American $150 in scrip.

Indeed, stamped scrip gained traction in many quarters. Fourteen more towns in Iowa followed Hawarden’s example, and by early 1933 more than 200 city councils and five states were in the

process of preparing stamp scrip bills. Upton Sinclair — a radical progressive, now better known as a writer — included issuance of stamped scrip when he ran for Governor in California in

1934. But, ultimately, efforts to issue scrip were destined to founder, once government authorities moved to close them down. In Austria, courts held that the issuance of legal tender was a

government monopoly. In the United States, Franklin Roosevelt in March 1933 outlawed the issuance of money substitutes, and once the Civil Works Administration and Public Works

Administration began to create jobs and pay workers in dollars, the game was up. New Deal policy had no room for monetarists. John Maynard Keynes, however, in the _General Theory_ (1936),

cited Silvio Gesell in the context of his analysis of the liquidity trap. As Keynes set out, the more uncertain the outlook for business, the lower the inclination to spend: a dysfunctional

dynamic that exacerbates business contractions. Keynes endorsed stamped scrip: “Thus, those reformers, who look for a remedy by creating artificial carrying costs for money through the

device of requiring legal-tender currency to be periodically stamped at a prescribed cost in order to retain its quality as money, or in analogous ways, have been on the right track; and the

practical value of their proposals deserve consideration.” Post-2008, preventing deflation was the top objective of US Federal Reserve Governor Ben Bernanke. Today, with the economy in a

deeper slump than in 2008, and after a decade of quantitative easing and of near-zero interest rates, central banks are thinking of pushing interest rates below zero. Indeed, such an action

would simulate inflation. But in search of alternatives, monetarists might take a fresh look at issuance of scrip. Alternative currencies, as it happens, are quite common. The Lewes Pound

has been in circulation since 2008. Retailers in Lewes, a town near Brighton with a population of some 30,000, donate 5 per cent of their takings in Lewes Pounds to charity. This feature

appeals to shoppers who want to combine consumerism with charity and to shopkeepers who want to see spending channelled into the local economy. The Lewes Pound is a currency only in name. In

reality, it is a voucher-with-donations-scheme. However, it would not be infeasible to add time-dependent features and thereby resurrect Silvio Gesell’s proposal. There is no reason why

concepts endorsed by Irving Fisher and John Maynard do not deserve at least to be considered. A MESSAGE FROM THEARTICLE _We are the only publication that’s committed to covering every angle.

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