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.

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)