Freigeld (German for free money) or Schwundgeld (depreciative money) is a monetary (or exchange) unit, which follows the
economic concept of Freiwirtschft (free economy). The concept was invented by Silvio Gesell.
The Freigeld has several special properties. It is
- maintained by a monetary authority to be spending power stable (no inflation or deflation) by means
of printing more money or withdrawing money from circulation
- cash flow safe (a scheme will be put in place to ensure that the money is returned into the cash
flow - for example, by requiring stamps to be purchased and attached to the money to keep it valid)
- convertible into other currencies
- localized to a certain area
The name results from the idea that there is no incentive to store the money, as it will automatically lose
its value after some time (depreciate). It is claimed that as a result, interest rates will drop to almost zero, preventing any
form of Inflation.
Gesell argued that saved money will keep its value, while goods - which are not consumed - will loose value by getting
old, rot or deteriorate. To keep the value of the money and goods synchronised, the issued money should loose value
in regular intervals. Therefore the holder of the money has an incentive to spend the money before it depreciates, which
will foster consumption and economic growth.
Wörgl and the practical use of Freigeld
Freigeld has been tried several times during the 1930s. However, most famous is the use of Freigeld in the Austrian community
of Wörgl.
During the Great depression in 1929 Austria and Germany was hit by a deflation, preventing economic growth and prosperity.
The effects were also felt in Wörgl - a place of 4600 people, out of which more than 400 were unemployed. Since no help
seemed to be available from the central bank the local council decided to try and tackle the problem themselves.
It printed money worth 32,000 Schillinge - it deposited the same amount of real money at a local bank - and used it to pay
the community workers. Before, it had been agreed with local businesses that they would accept the new money.
The money lost 1% of its value each month, which was controlled by stamps that had to be glued onto the bills. Thus the
holder of the money had an incentive to circulate the money as quickly as possible. The deflation was mainly caused
by the extra-ordinary saving and hoarding of money, due to the expectation of continuously falling prices. This vicious
circle was disrupted by the new money.
As the money was flowing again the businesses began to prosper, the town got tax income, which it used to employ more
people and repair and improve streets and communal property and equipment. This lead to further economic activity.
The experiment was so successful that neighbouring villages started to accept and use the new money as well. The unemployment
increased during 1932 and early 1933 by 10%, while in Wörgl it dropped by 25%. The "Miracle of Wörgl" was widely publicised
in the press and many delegates came to the area to see it work. Many other regions were interested in adopting the system.
In Summer 1933 the Austrian Central Bank (Österreichischen Nationalbank), who was the only instance to legitimately issue
money in Austria, decided to forbid the Schwundgeld in Wörgl from 15. September 1933. The council of Wörgl complaint against
the decision using all legal instances up to the highest (Verwaltungsgerichtshof Wien), which finally supported the
decision of the central bank on 18. November 1933.
Today the economists are still divided about the effect of Freigeld. However, there seems to be a consensus that in a crisis
situation - like the depression of the 1930s - the money can have stimulating effects on the economy. In normal and stable
free market conditions there are many negative side effects (e.g. tendency to discriminate on imports), which make the
Freigeld unsuitable for general use.
Silvio Gesell (1862-1930)
Silvio Gesell (1862-1930) |
Silvio Gesell was born at St. Vith on the German-Luxembourg frontier to a German father and a French mother. In 1886 Gesell
moved to Argentina to become a successful merchant. During the depression of 1873-96 he became interested in the theory of
money and currency. In his first work, "Currency Reform as Bridge to the Social State" (1891), Gesell made the celebrated
proposal for unhoardable money. Further studies on the disastrous effects of deflation and the necessity for stabilizing
the purchasing power of money followed. Retiring to Switzerland, Gesell brought out a periodical for currency and land
reform and in 1906 wrote his main book "The Natural Economic Order", which described the concept of the Freiwirtschaft.
In 1919 Gustav Landauer, one of the chief figures of the German Revolution of 1918-19, invited Gesell to become finance
minister in the short-lived Bavarian Republic. Both men were arrested and charged with treason. Landauer was murdered in
prison; Gesell was acquitted. He continued to publish actively in Berlin where he died in 1930.
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