C H A P T E R 4
Some Lessons from History
THE MONETARY SYSTEM we have inherited is more than 2,000
years old. The German word for money, which is "Geld,"
links it rather precisely to its origin which was gold. Gold,
a fairly useless metal except for jewelry and ornaments,
became the preferred exchange medium around 700
B.C. in the Roman Empire. Money always meant
coinage. This was the concept which was incorporated in
the U.S. Constitution. Gold and silver coins (or their
depository receipts) were the only fully legal tender in the
U.S.A. until 1934. To this day, many people - mainly
those who see the disadvantages of the practically
unlimited possibilities for creating paper money- favor a
return to the gold standard for money.
When Silvio Gesell published his book "Die Natürliche
Wirtschaftsordnung" (The Natural Economic Order) in
1904, about three-quarters of the book dealt with this issue.
(26) Against all the established economists of his time he tried
to prove theoretically and with practical examples that the gold
standard was not only unnecessary but detrimental
to a well-functioning monetary system based on interest
free money.
Today, we know that the gold standard is not a nec-
essary precondition. There is no money system in the world
now which is based on the gold standard. John Maynard
Keynes, who was well acquainted with Silvio Gesell's work,
helped to eliminate this barrier to a well-functioning
economy in the 1930s. What he forgot to advocate, how-
ever, was the other essential ingredient: the replacement
of interest by a circulation fee. This is largely why we are
in trouble now and will be at regular intervals until we
have learned the lesson.
In order to show how difficult a deep understanding
of monetary issues really is, I would like to sketch out a
few historic examples to illuminate this point.
BRAKTEATEN MONEY IN MEDIEVAL EUROPE
Between the 12th and the 15th century in Europe a
money system was used called "Brakteaten." Issued by the
respective towns, bishops and sovereigns, it not only helped
the exchange of goods and services but also provided the
means of collecting taxes. Every year the thin coins made
from gold and silver were "recalled," one to three times
re-minted and devalued on an average about 25 % in the
process.
Since nobody wanted to keep this money, people in-
stead invested in furniture, solidly built houses, artwork
and anything else that promised to keep or increase its
value. During that time, some of the most beautiful sa-
cred and profane works of art and architecture came into
existence. "For while monied wealth could not
accumulate, real wealth was created." (27)
We still think of this time as one of the cultural
culmination points in European history. Craftsmen
worked a five-day week, the "blue" Monday was
introduced and the standard of living was high. In
addition, there were hardly any feuds and wars between
the various realms of power.
However, people obviously disliked the money which
lost so much at regular intervals. Finally, towards the
end of the 15th century, the "eternal" penny was
introduced and with it came interest and accumulation
of wealth in the hands of increasingly fewer people, as
well as the accompanying social and economic
problems. The lesson here is that taxes should be levied
separately and not connected with the circulation fee on
money.
THE WEIMAR REPUBLIC AND THE GOLD STANDARD
During the Weimar Republic (1924-33), the central
bank's president, Hjalmat Schacht, had the desire to
create an "honest" currency in Germany which - in his
understanding meant a return to the gold standard. Since
he could not buy enough gold on the world market
adequate to the amount of money in circulation, he
began to reduce the latter. The shorter supply of money
resulted in rising interest rates, thereby reducing the
incentives and possibilities for investment, forcing
firms into bankruptcy, and increasing unemployment,
which led to the growth of radicalism and finally helped
Hitler to gain more and more power. Figure 17 shows the links between growing
poverty and radicalism in the Weimar Republic.
Figure 17
This development had been foreseen by Silvio Gesell
- although for different reasons. Already in 1918,
shortly after World War I, when everybody talked about
peace and many international organizations were created
to secure that peace, Gesell published the following
warning in a letter to the editor of the newspaper "Zeitung
am Mittag" in Berlin:
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 interest and compound
interest, remains in operation, I dare to predict today, that it will
take less than 25 years for us to have 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 buildup of capital will be
rapid in spite of the enormous losses during the war, and
through its over-supply will lower the interest rate. Money will
then be hoarded. Economic activities will diminish and
increasing numbers of unemployed persons will roam the streets
... within the discontented masses, wild, revolutionary ideas will
arise and also the poisonous plant called "Super-Nationalism"
will proliferate. No country will understand the other, and the
end can only be war again. (28)
Seen historically after the facts, money was made to
be in short supply by the central bank and hoarded by
private people. The effects were disastrous. Yet up to
this day, central bankers seem to be ignorant of the
fundamental cure for problems they face every day.