At the end of nineteenth century, a German economist Silvio Gesell noticed some interesting feature during observing price fluctuations. People buy things more willingly, when interest rates are lower and don’t buy, when they are high. The reason of changes in amount of money in trade is will or reluctance of money owners to lend it. Lower rates make them keep money, which leads to reduction of capital investments, firm’s bankruptcy and working places losses. Sometimes, later borrowers are able to pay more for lender’s money usage and they gladly give it. Then the situation is getting better. That’s how a new economic cycle starts. Gesell explains given circumstances through the fact that apart from other goods and services, money could be kept almost without expenditures. If a person has an apple and the other one has a dollar, the apple owner must sell it as fast as they can because apple is not fresh for eternity. At the same time, the dollar owner easily can wait till the price becomes the most profitable for him. Money has no need in storage costs and gives liquidity benefits. Summarizing these statements, if we create a monetary system, which makes money require storage costs, economy would be liberated from rises and falls through money speculations. This is the main idea of “free money”.
The Concept Itself
The concept is replacing interest rates with circulation fees. Instead of paying interest to money owners, people should pay a tiny tax analogue for money withdrawal from circulation. Such payment is useful not only for separate individual, but for the all economy members. If interest rates are private profit, circulation fees are society profit. Such fees may become a source of public revenue designed to cover issue expenditures and money exchange costs. Surplus revenue goes for debts payments. The simple changes given are the solution of many social problems generated by the effect of interest. In this situation, money is free from interest and that’s why it is called “free money”, it serves all and does not give anyone unilateral advantages, as it does in modern monetary system.
Local Experiments with Interest-Free Money
In the thirties of the twentieth century, Gesell’s theory followers set up few experiments, which proved Gesell’s rectitude. Switzerland, Germany, Austria, USA, France and Spain tried to run free money in order to address unemployment. The most prosperous experiment was conducted in Austrian town called Worgl. In Worgl, which population then numbered 3 thousand people, the idea of monetary reform prevailed in 1932 - 1933. Mayor of the city convinced traders and governance that no one will lose, but rather acquire a lot of money due to experiment in the manner as described in the book of Silvio Gesell called "Natural Economic Order". Circulation fees was 1% per month or 12% per year. Charges should apply to a banknote owner at the end of every month. A stamp with 1% par served as a charge. It has to be stuck to the back of the banknote. A banknote without stamp is considered invalid. Such a small fee has meant that any person who receives free shillings as payment tried to spend them as soon as possible before moving on to pay their usual money. Worgl residents payed their taxes in advance to avoid payment for the money usage. During a year, 5 thousands of free shillings were traded 463 times, goods and services were produced worth about 2.3 million shillings (5000 x 463) while usual shilling was traded only 213 times.
At the moment when Europe was fighting with increasing unemployment, its rate in Worgl decreased over the year by 25%. The fee reached by the town magistrate that ensured rapid transition of money from one hand to another, accounted for only 12% of the 5 thousand free shillings (600). They were spent on social needs that were for the good of the community, rather than enriching its individual members. That is the straight evidence of Gesell’s theory efficiency and a good basement for today’s monetary system reformations.