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Abstract
This article discusses previously unpublished correspondence between Keynes and the German economist Franz Hochstetter, a strong supporter of Silvio Gesell. The correspondence debates the reasons why Keynes deemed Gesell’s theory of the rate of interest as incomplete, and his plan of stamped money as impractical. The issue is analysed by referring to the more general theme of the inconsistencies in Keynes’s interest theory, and the unsuccessful attempts he made to strengthen its foundations.
Acknowledgement
I would like to thank the staff of the Archive Centre, King's College, Cambridge, for their help. I am also grateful to Giancarlo de Vivo and Massimo Pivetti for several valuable comments, and to two anonymous referees for useful obervations and suggestions.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Correction Statement
This article has been corrected with minor changes. These changes do not impact the academic content of the article.
Notes
1 Commenting on the exclusion of these–as of many other–items from the Collected Writings, Donald Moggridge and Austin Robinson point out that “some volumes of any such complete publication might consist solely of such materials as rejection letters for submissions to The Economic Journal, courtesy replies to the innumerable letters he received from monetary cranks, or marginal annotations or comments on the letters, minutes or papers of civil servants or ministers” (Keynes Citation1971–89, XXX, xi–xii). As the reader will see, Keynes does not simply give cranks the courtesy of a reply. Of the relations Keynes kept both in Europe and in the U.S. with the variegated world of monetary cranks and under-consumption theorists before and after the publication of the General Theory there is little trace in the CW, other than that left by the correspondence with Hobson. Henceforth Keynes (Citation1971–89) will be referred to as JMK CW.
2 See Walker (Citation1954, 18–20).
3 The drafts of this chapter had not failed to elicit very negative reactions from Harrod. On 3 September 1935 Keynes writes to Joan Robinson: “Roy strongly objects to Chapter 26 [ultimately Chapter 23] as a tendentious attempt to glorify imbeciles” (JMK CW, XIII, 650). See also Harrod (Citation1951, 460).
4 According to Gesell’s stamping system, notes could preserve their face value only by attaching to them currency stamps that monetary authorities would have sold through the post-office. The depreciation rate was to be fixed at one thousands of value every week (5.2% annually). This is what he calls Schwundgeld, “vanishing money” (“rusting money” in the English translation of The Natural Economic Order). Keynes, on the other hand, often defines the stamping system as “demurrage”, which, in the law of merchant shipping, is the sum payable by the freighter to the ship-owner for detention of the vessel in port beyond the number of days agreed for the purpose of loading or unloading. This choice by Keynes is probably due to the fact that in Great Britain, under gold standard conditions, the term “demurrage” was also used to indicate the costs of exchanging Bullion for coin. Although those who sent Bullion to be coined were charged with no seignorage, there was a “loss of interest” during the detention period of their gold in the Mint. The Bullion Report estimates this loss at 1%. Due to the superiority of coin over Bullion, the value of the former could rise above that of the latter within that premium, arbitrage only taking place above it. Cf. House of Commons ([Citation1810] Citation1919, 12–13).
5 On the Keynesian underemployment equilibrium as based on the denial of the existence of well-behaved marginal productivity schedules, not on the notion of preference for liquidity, see Garegnani (Citation1964–Citation1965). See also Eatwell and Milgate (Citation1983) for an account of the first phase of the debate sparked by the 1978–79 English translation of Garegnani’s work of 1964–65.
6 On the instrumental role of the theory of interest in the General Theory, see Garegnani (Citation1978–Citation1979), in particular pp. 67–70.
7 Cf. Keynes (Citation1936, 203).
8 Cf. Keynes (Citation1936, 203).
9 Cf. JMK CW, XIII, 201–15.
10 When discussing the limitations on the capability of the monetary authority to establish any desired interest rate for debts of different terms and risk (Keynes Citation1936, 207), Keynes distinguishes between: (a) limitations arising out of monetary authority practices in restraining its willingness to deal to debt of particular types; (b) not self-imposed limitations arising out of a virtually absolute preference for liquidity (an actual loss of control over the rate of interest). Keynes states that he knows no examples of limitations (b), and because of limitations (a), there has been not much opportunity for a test. Certainly, the policies implemented since 2008 constitute that type of test, and in the face of their outcomes, one could only conclude that limitations (b) in practice never operate. As a matter of fact, this is precisely the conclusion that Keynes reached in 1945 before the National Debt Enquiry Commission, where he states that “the monetary authorities can have any rate of interest they like” (JMK CW, XXVII, 390) by offering a wide variety of bonds according to the investor’s inclination and resorting to the “tap issue” technique. “The authorities”, Keynes notes, “are only fettered in their policy if they themselves have a counter-liquidity preference. If they are indifferent about funding they can make both the short and the long-term whatever they like” (ivi, 391). It is important to underline that Keynes, in that context, refers to the General Theory to support the idea that the monetary authority has a full control of the interest rates. Evidently, in discussing the problem of public debt management, he did not feel conditioned by any “minimum threshold”, showing no embarrassment in presenting his theory of the interest rate as a theory in which the psychological component played no significant role.
11 “I believe that the future will learn more from the spirit of Gesell than from that of Marx” (Keynes Citation1936, 355). This sentence is printed on the front wrapper of the English translation of The Natural Economic Order.
12 “It may well be true, as Böhm-Bawerk states, that those who have reason to expect a less abundant satisfaction of their needs in the future can always hoard present goods–at least in societies where durable objects such as those made of the precious metals are generally accepted as means of exchange or payment. But this cannot by itself lead to a positive superiority (agio) for the present goods; it can only ensure that the difference of value in the negative direction does not fall below the costs or risks of storing these objects” (Wicksell Citation1911, 181).
13 In the event that hoarding is not put back into circulation, but continues from period to period, the discrepancy between the monetary interest rate and the natural interest rate would generate not a fall in the value of money with respect to goods, but the well-known Wicksellian deflationary spirals. In this circumstance, the behaviour of the banking system, even if it were aimed at eliminating the downward pressure on prices, could never bring the monetary interest rate in terms of goods to the level of the natural rate. If, for example, a monetary rate higher than a natural rate at 2% gave rise to a change in prices of 3%, even setting the monetary rate in terms of money at zero, the lowest level that the monetary rate in terms of goods can reach is 3%. In this case, the convergence between the monetary and the natural rate cannot take place, whatever the behaviour of the banks. At a natural rate of 0%, any deflation rate would prevent the adjustment process.
14 On the circularity of Fisher’s argument see Mandler (Citation1999, 181).
15 “Suppose our sailors were left not with a stock of hard-tack, but with a stock of figs which, like the hard-tack, can be used at any time as desired, but which, unlike the hard-tack, will deteriorate. The deterioration will be, let us say, at a fixed and foreknown rate of 50 per cent annum. In this case (assuming that there is no other option available, such as preserving the figs) the rate of interest in terms of figs would be necessarily minus 50 per cent annum, as may be shown by the same reasoning that established the zero rate in the hard-tack case” (Fisher Citation1930, 191). Let us apply this reasoning to Gesell’s parable. The Robinsons own the figs, which they can lend to the Strangers at a rate of minus 50 per cent annum (it can be assumed that without the assistance of the Strangers all the figs rot, while with their work, it is possible to keep half of the stock, net of the Strangers’ consumption of figs). As an alternative case, suppose that the loan does not take place in figs, but in shells, and that a shell buys a fig. The Robinsons lend the shells to the Strangers, with which the latter buy the figs from the former. After the loan has expired, the Strangers sell the figs to the Robinsons and pay off the debt with the proceeds of the sale. The shells do not deteriorate and therefore the lenders will only agree to lend if they get back at least an equal number of shells. But since a shell will buy half a fig, the rate of interest in figs can only be minus 50 per cent annum, this being the only possible intertemporal exchange with nature.
16 “He [Böhm-Bawerk] here puts forward the doctrine that interest is originally an exchange phenomenon (and thus no longer exclusively the result of production and distribution)–it is the agio which arises in the exchange of present against future goods. This treatment may be justified, in so far interest is undoubtedly a broader concept than productive capital itself. It can arise in a mere exchange of present against future goods or service without any intervening production and thus without any real accumulation or employment of capital. But the proof is not convincing…The difficulty clearly arises that both the supply (of future goods) and the period of consumption is indeterminate… [Moreover, the first reason]–the existence of an, objectively, more abundant future satisfaction of needs–is evidently not general in its application… [it] cannot, in itself, be a guarantee of a positive rate of interest, but only implies that interest cannot fall lower in a negative direction than would correspond to the risks and costs associated with the storing of these objects” (Wicksell Citation1901, 169–70). For an attempt to argue that Wicksell instead attributed concrete relevance to the possibility that the central banking policy was limited by a very low or negative natural rate, see Boianovsky (Citation2017).
17 To return to Gesell’s example, it must be remembered that Crusoe cannot take care of his stock because he is building a canal, which will certainly allow him to increase future production.
18 For a critical analysis of the notion of a negative natural rate of interest in the context of the modern debate on the zero lower bound (also developed in connection with the first formulations of the marginal theory of capital and interest), see Di Bucchianico (Citation2020, 8–12). More on the same issue in Serrano, Summa, and Garrido Moreira (Citation2020, 371–76).
19 “Freedom from interest can be realized only by years of dogged and uninterrupted toil. Lasting freedom must always be striven for; freedom from interest must also be striven and fought for. Bathed in sweat the people must cross the threshold of their first interest-free dwellings, their first interest-free factories; bathed in sweat they must organize the interest-free State of the future” (Gesell Citation[1916] 1958, 415).
20 Of course, it is neither with Gesell nor with Keynes that the theme of the end of the scarcity of capital arises. As we have seen, for the early marginalist theorists, denying the possibility that the rate of interest become zero had always been a pressing theoretical problem, towards which they took two different attitudes: some of them used this possibility to underline the socially progressive character of capitalism; others considered it an aberration, which would have rather weakened the theory. Marshall, although only in his typical allusive fashion, is a representative of the former tendency (Marshall [Citation1890] 2013, 483, no. 2), Cassel of the latter (Cassel Citation1903, 152–57). Wicksell is much closer to Cassel than to Marshall about what he calls “the long-prophesied ideal of economists” (Wicksell [Citation1901] 1935, 211). Keynes takes Marshall’s side with an important qualification: the “prophesied ideal” could be achieved in a generation or two if only the monetary interest rate (the financial rentier) did not hinder the fall of the natural rate.
21 Cf. Gesell (Citation[1916] 1958, 383–386).
22 Cf. Gesell (Citation[1916] 1958, 436–442).
23 Gesell’s considerations on the bills of exchange also restates a theme widely discussed by quantitative theorists. The demand for money was seen as a function of the price level, of transaction volume, and of other substitutes for money that could be used as a medium of exchange. The role of these substitutes was integrated into the quantity theory either by increasing money supply, or by maintaining a narrow notion of money supply and by varying the velocity of circulation. But in both cases the central point was that the substitutes for money in circulation exerted their influence exclusively on the price level.
24 Böhm-Bawerk, commenting on Gesell’s inversion of the relationship between the monetary rate and the natural rate, states: “nor should I have any greater desire to go into detail concerning the views of Silvio Gesell, who is the author of numerous polemics aimed at the promotion of neo-physiocratic doctrines. In these he sets forth a sort of naïve exploitation theory in which interest is represented as a bit of extortion practiced upon the possessors of goods by the possessors of money” (Böhm-Bawerk [Citation1884] Citation1959, 363). The reference to neo-physiocratic doctrines would seem to concern authors such as Sonnenfels: “Influenced by Forbonnais, [Sonnenfels] finds that interest originates in a damming of the circulation of money by hoarding capitalists, out of whose hands it can be attracted only by paying tribute in the shape of interest. He ascribes to it many injurious effects, claiming that it makes commodities dear, reduces the profits of industriousness, and allows the owner of money to share in those profits” (ivi, 26). Gesell quotes Böhm-Bawerk’s opinion on Sonnenfels in the Natural Economic Order adding: “for us a man advancing such opinions is an attractive personality” (Gesell Citation[1916] 1958, 421). Fisher is also very critical of Gesell’s interest rate theory. “Medicine”, Fisher notes, “owes much to minds untrained in medicine …and the laryngoscope was perfected–some say actually invented– by a great singing master, one Manuel Garcia, of Spain” (Fisher Citation1933, 17). Like Garcia, the “quasi-economist” Gesell would then have formulated a useful proposal while completely misunderstanding the nature of interest: “there is much in Gesell’s philosophy to which, as an economist, I cannot subscribe, especially his theory of interest; but Stamp Scrip, I believe, can, in the present emergency, be made at least as useful an invention as Manuel Garcia’s laryngoscope” (Fisher Citation1933, 17).
25 “The relatively large stock of money would not reduce interest, since, as we have proved, competition between money lender is impossible” (Gesell Citation[1916] 1958, 395).
26 The most interesting theoretical aspect of the Hurzins arouses no interest in Keynes, as it is extraneous to the marginal theory of distribution. In explaining the way in which the Hurzins determines the “exploitation of the producer”, in fact, Gesell develops the idea that the monetary interest rate should be considered as an element of cost. The “transfer of basic interest to the wares” occurs because “if a commodity is to be burdened with basic interest, it must of course be capable of bearing this burden; that is, it must meet with market conditions permitting the payment of its cost price, plus basic interest, out of its selling price” (Gesell Citation[1916] 1958, 387). In this way, “wares collect basic interest from the consumer, not for the producer but for the possessor of money (medium of exchange), somewhat as a postman collects the price of a cash-on-delivery parcel” (ivi, 388). In the Natural Economic Order, the wage-earner rarely appears, as Gesell prefers to refer to the indistinct entity of the producer = consumer. But it is evident that from the notion of the interest rate as an element of cost, Gesell concludes that a given monetary interest rate determines the real wage. Gesell then moves on to “the transfer of basic interest to so-called real capital”. At this point, his analysis loses the distributive openness of the transfer of basic interest to the wares, falling back into the marginalist fold. “Houses, ships and factories, in short all so-called real capital, must yield interest equal to the tribute which money can impose as basic interest upon the exchange of wares” (ivi, 390). The reason why this happens is that if houses or factories do not return as much as the interest on money, “building is suspended and the consequent scarcity of houses raises rent; just as the scarcity of factories reduces wages” (ibid.). On the interest rate as an element of cost, see Pivetti (Citation1991, 20–40).
27 “That interest on real capital can at any time deviate in an upward or downward direction from basic interest is easily proved as follows. Let us suppose that three-quarters of mankind are carried off by the plague. The present ratio between proletariat and real capital would fundamentally change; to every tenant there would be four houses, to every farm four ploughs, to every gang of workmen four factories. Under these circumstances real capital would no longer yield interest; the competition of house owners would depress rents, and the competition of employers would reduce profits to such an extent that probably not even the full costs of upkeep and amortisation could be recovered” (Gesell Citation[1916] 1958, 394).
28 Something similar to the plague would happen in the opposite case: if a large mass of German workers emigrated to the United States, capital in the United States would become scarce, its return would grow above the Hurzins, capital formation would be stimulated and as a result the return would fall back to its equilibrium level.
29 Cf. Gesell (Citation[1916] 1958, 236).
30 Gesell believes that as accumulation proceeds, the reduction in the interest rate should always lead to an increase in the share of labour in total income, since he does not take into account the reduction of labour employed per unit of output (cf. Gesell Citation[1916] 1958, 398). From this premise, he comes to the conclusion that the propensity to save should decrease as interest falls since “the capitalist finds it easier to save the whole increase of his income, but the worker’s impulse to save only comes after the satisfaction of many other needs” (Gesell Citation[1916] 1958, 398). He then begins to worry about the possibility that savings will decrease too much, resulting in a halt to accumulation before the interest rate cancels out. To this end, he endeavours to argue that when interest is reduced, savings would not be reduced to the extent determined by the reduction in the capital income share as “the capitalist’s impulse of self-preservation and the fact that he must assure the future of his children force him to provide a surplus and, what is more, an interest-bearing surplus. He must provide this surplus even if his income decreases…If interest rises, capitalists can save; if interest falls, they must save” (ivi, 400). In any case, whatever Gesell’s ideas about the effect on savings of a reduction in the interest rate, what is missing in his analysis is a clear perception of the difference between intended and actual levels of saving and investment, as well as the idea that as income decreases, savings relative to income can also decrease, thus re-establishing the equilibrium between intended and actual magnitudes.
31 In the General Theory, the long-term interest rate balances the desire to hold wealth in liquid and illiquid forms, and the amount of wealth present in one form or another. Although there are two monetary assets, the liquid one (money) and the illiquid one (bonds), the equilibrium conditions are not independent, and they are therefore able to determine a single interest rate, that on bonds, which bears all the weight of the adjustment. This does not mean, however, that an interest rate on the liquid asset does not exist. It could be zero, as in the General Theory; it could be negative, if a demurrage fee is applied to money. What matters is that this rate is a given. The theory can explain only the differential between a given interest rate on money and the interest rate on bonds. Whatever this differential is, i.e., whatever the degree of substitutability between money and bonds is, demurrage cannot fail to reduce the interest rate on bonds. On the mechanics of the asset account of the Keynesian system, with particular reference to the role played in it by the “hidden” return on the liquid asset, see, for example, Tobin (Citation1961, 28–30).
32 See also Keynes (Citation1936, 234).
33 Hochstetter misuses the term “investment” for the purchase of gold, jewellery, land, and other stores of value. In his first answer Keynes does not fail to point out the error (GTE/2/2/364). Hochstetter’s reply acknowledges this, while at the same time stressing that the error does not touch the substance of the argument: no matter how many purchases and sales of the store of value take place (which obviously are not investment), sooner or later there will be those who buy consumer goods or invest with the proceeds of the sale (GTE/2/2/365).
34 Cf. JMK CW, XIX, 86.
35 In a country where the only legal tender money is an unconvertible paper currency, “if a demurrage is charged on the currency according to Gesellian principles, the desired result will not be achieved if the population then hold that part of their hoard which is not required for immediate transactions in the shape of gold; and, if a similar tax is applied to holdings of gold, then in silver and diamonds and so on; unless, indeed, it happens that gold, silver etc. can be freely produced in the country in question” (GTE/2/2/368).
36 It is worth dwelling in more detail on the adjustment process suggested by Keynes, as this will help to clarify similarities and divergences with Gesell’s analysis. In Keynes, the desire to save in a situation of zero investment reduces output and employment, and variations in the latter are able to re-establish an equilibrium at a lower level of labour, capital and output. In Gesell, on the other hand, the process takes place in terms more similar to those of the Treatise than to those of the General Theory. In the “banana parable” of the Treatise, after the reduction in consumption caused by the “thrift campaign”, entrepreneurs stick to the full-employment levels of output and make good their windfall losses by borrowing. The interest rate cannot change, since the additional supply of savings calls forth an additional demand for savings of corresponding amount. At this point, according to Keynes, entrepreneurs, unable to operate at a loss, will reduce production costs (by cutting nominal wages or the number of employees), and purchasing power will decrease by the same amount as production costs, to the point where production ceases altogether. This way of posing the question generates two problems: the first is that the only possible equilibrium is the total collapse of economic activity; the second is that the real and nominal reduction of income tends to reduce the interest rate. The General Theory solves the first problem with the “fundamental psychological law” of the consumption function and the second problem with the “liquidity preference”. In the NEO both problems do not arise: instead of the under-employment equilibrium there is the commercial crisis; instead of the liquidity preference there is the Hurzins. On the role the “banana parable” plays in the process that leads Keynes to the principle of effective demand, see Barens (Citation1987, 111–132).
37 Robinson (Citation1936) generalizes Keynes’s argument, referring it to whatever level of interest has persisted long enough in time to make capital and labour decrease in step with each other to the extent necessary for zeroing net saving. She then proceeds to compare this unemployment equilibrium with a different equilibrium resulting from a reduction in the interest rate, concluding that there is no reason why the unemployment rate should be lower in the second equilibrium than in the first, because of the uncertain effect on the propensity to save caused by the change in distribution. Garegnani (Citation1996) critically discusses Robinson’s theses, first noticing that she admits the flexibility of the interest rate, and then arguing that it is not clear why that flexibility– whether determined by the reduction of wages and prices or more likely driven by the monetary authority –should intervene after and not before the capital and labour adjustment takes place.
38 On the notion of the marginal efficiency of holding and its relationship with the liquidity premium and the marginal efficiency of investing the main references are Kaldor (Citation1939) and Lerner (Citation1952). See also Conard Citation1959, 119–154, Kaldor (Citation1960), and Robinson (Citation1961). For some more recent contributions on this issue see, for example, Mongiovi (Citation1990) on the origin of Chapter XVII, Naldi (Citation2012) as regards the relationship between the marginal efficiency of holding and Sraffa’s commodity rate of interest, and Hayes (Citation2018) as regards, in particular, the role of money and uncertainty.
39 Keynes defines the marginal efficiency of holding an asset in term of the asset itself. To this he adds the expected percentage appreciation or depreciation of the asset in terms of money. For the wealth-owner there is nothing to be gained by moving among different assets if the total return in terms of money will be equal for each asset. The choice of measuring the return of every commodity in terms of itself as the standard, to then turning everything into money through an additional percentage component (which is different for each different asset), has been a source of considerable confusion, being at the origin of the tedious nomenclature of the chapter and of many misunderstandings connected to the alleged relationship with the Sraffian notion of a commodity rate of interest. A significant simplification can be obtained by indicating the total return directly in terms of money as a common standard, or in terms of some composite commodity. When using the composite commodity as the standard, all returns on assets that are not money must be understood as being indexed to price changes, while the return of money has to be valued net of price changes. As a matter of fact, the latter component will not play any significant role in Keynes’s analysis, as he assumes that monetary prices are stable. If price variability is then admitted, the theoretically relevant case is that in which the money-rate of interest rate is greater than the natural rate, i.e., the case of falling prices. In this circumstance, the liquidity premium of money would be reinforced by price variability as it would appreciate relative to the composite commodity. Demurrage through inflation is possible only when it is not needed.
40 In a “non-monetary economy”, “there exists nothing, that is to say, but particular consumables and particular capital equipments…all of which, unlike cash, deteriorate or involve expense, if they are kept in stock, to a value in excess of any liquidity-premium which may attach to them” (Keynes Citation1936, 239).
41 Discussing the meaning of the “desire” for land, Keynes adds some considerations which seem to lead the liquidity premium in an even different direction. A forward price for land which is strictly comparable with the rate of interest on money debt does not exist. However, “there have been sales of lands to tenants against mortgages effected by them, which, in fact, come very near to being transactions of this character” (Keynes Citation1936, 241, no. 2). The mortgagor here is the aristocrat who borrows from the tenant and repays the loan with the real estate placed as collateral. This has nothing to do with the marginal efficiency of holding land. Keynes is trying here to oppose to the natural rate of interest the interest rate on consumer loans. This is a dead end. In the marginal theory the demand for consumer loans coexists with the demand for investing without creating any particular problems. It only slows down capital formation. Moreover, repaying consumer loans with assets is only possible as long as the borrower owns some assets. Keynes’s considerations would therefore be limited to the phase of decline of the aristocracy, during which the conspicuous consumption of the leisure class is no longer supported by rent, but by eating capital. The practice of buying land from gentlemen finds, according to Robinson (Citation1961), a counterpart in ripe economies in the take-over bids financed out of the profits of successful businesses. In her view, even if the whole income of the sellers of the shares was not consumed but held as wealth, the take-over would transfer the ownership of liquid wealth from retained profits to “widows and orphans”, to whom the risk premium required to invest is much higher: “to put the point in another way, in so far as the own finance of firms is absorbed by buying second-had equipment, new equipment has to be financed by borrowing, which is more expensive and less eligible than an expenditure of own finance” (Robinson Citation1961, 599–600). For a revival of similar arguments, see Palley (Citation2019, 158–63).
42 Sraffa, in his tight criticism on Chapter XVII, notes about this specific point: “It is only liquidity preference in the case of the standard of value that has any importance for employment: and not for anything (such as land) as K. says p.241_ If people, as they save, wanted to hold more land, for the sake of the prestige + independently of its return in product, this would have no important effects: the price of land would rise, but prices, employment + investment would be unaffected” (Sraffa papers I/100/8v). For an analysis of Sraffa’s annotations in Chapter XVII, see Kurz (Citation2014).
43 Discussing the reasons why gold or land could cause the same problems as money, Reddaway questions how this can happen “because the price of these is free to rise to infinity, so that the effective quantity is unlimited” (JMK CW, XIV, 66).