Silvio Gesell on Money: The Problem and the Solution

Abstract

Most discussions about money begin by identifying three core functions that money performs—i.e., medium of exchange (MoE), unit of account (UoA) and store of value (SoV). Silvio Gesell's revolutionary insight was that the MoE and SoV functions are inherently incompatible. Regardless of the specific design of money—whether backed by gold, unbacked fiat or crypto—any form of money that is intended to be used as a vehicle for saving will systematically fail to perform the MoE function. As Gesell put it, “money cannot be… simultaneously spur and brake.” If we must choose between money's functions—and Gesell told us we must—clearly the MoE function is the one we should choose, since it is the fundamental precondition of an advanced division of labor system, upon which all of our lives depend. Therefore, Gesell said, including the SoV function in money's design is a fundamental mistake that gives rise to a variety of harmful consequences. After laying out a clear, logical analysis explaining how this flaw in the design of money is the root cause of problems including poverty, ever‐increasing wealth inequality, inflation and deflation and recurring economic crises—Gesell offered a simple yet radical solution: “I therefore propose a complete separation of the medium of exchange from the medium of saving.” His proposed methodology for accomplishing this is demurrage —a planned, consistent, gradual decline of the purchasing power of money. The purpose of this reform is to make money unsuitable for use as a vehicle for saving and thereby make it a reliable MoE that will perform its essential function without causing all of the aforementioned problems. He explained how doing so will completely transform the economy, finally allowing the free‐market system to deliver on its promises of robust wealth creation, equitable distribution of wealth and economic stability.