1. Interpreting a decaying dollar note

The US-dollar note with the image of George Washington is a symbol that allows for diverse interpretations. Each observer will select his own. The choice, of course, will be influenced by the age and nationality of the observer. In addition historical circumstances, his life experiences and political attitudes also play a significant role.

A stained dollar note, eaten away by liquid acid, in the first place stands for the sullied image that the world has of the US since the war in Vietnam. For a patriotic American, this picture is the expression of a wide-spread anti-Americanism and it reminds him of the American flag, that was burnt over and over again in various parts of the globe. For an American with an interest in monetary history, on the other hand, the image is a symbol for the decay and loss of the domestic value of the dollar. After all, the US currency has lost 85% of its domestic value over the past 50 years.

My own preferred interpretation of the „Dollar-Image“ is that of a symbol for the downfall of the post war international monetary system. The Bretton-Woods system of pegged exchange rates ended in April 1973 with the transition of the major industrial countries of the Western world to flexible exchange rates. The world was no longer prepared to let itself be swamped by American dollars. The flood was the result of the special financing of the Vietnam war and the consequent deficits of the American balance of payments. An inflationary wave spread from the US affecting the whole world. This was the high time of international monetarism. Economists were talking of a dollar-caused world inflation and constructed the concept of world quantities of money, in order to explain world inflation. The monetary base of the world quantity of money was the quantity of US-dollars put into circulation by the US.

The resistence that developed around the globe against the exchange of mere “paper” dollars for real goods and interest earning assets may also be traced back to the fact that in 1971, two years before the breakdown of the Bretton-Woods system, the convertibility of dollars into gold, which had existed for non-American central banks, was formally eliminated by President Nixon (closing of the Gold window). De facto, gold convertibility had been abolished and the world had already settled on a pure Dollar standard some years before. The formal gold convertibility was no longer effective and had become a mere window dressing for the international monetary system. The end of the Bretton-Woods system was the end of the Dollar standard.

Yet, actual historical developments are not always perfectly in line with pronounced symbolic objectives. Since the end of the Bretton-Woods system the dollar has not disappeared from the international economic scene. As an international currency the US-dollar is still important. We have just gotten a feeling of it again. The crude oil market uses the dollar as a contractual currency. Any appreciation of the dollar drives up our gasoline and oil-heating prices.

In recent years the dollar has taken a surprising upswing. Several countries have abolished their own national currencies and have introduced the US-dollar as a legal means of payment. Panama has been using the US-dollar as a national currency since 1904. Ecuador made this step just last year, i.e. in 2000. El Salvador, Argentina and other countries, among them some eastern countries like the Ukraine, who in the recent past have suffered from strong home-made inflations, are likewise considering the transition to the US-dollar as a legal means of payment in their own country.

American politicians are already dreaming of a dollarisation of the whole world and try to sell the US-dollar as a solution for all stability problems. (Among the more active participants in this dream we find the American senator Connie Mack. Well known academic economists, like Richard Cooper, also support this idea.) It goes without saying that this would be a really profitable development for the US: virtually worthless paper or simple entries in computer files would be exchanged against real goods and interest bearing promises to pay. Future seignorage gains would accrue in Washington. This result would correspond to the well known dictum: Those who have, shall be given more. To a certain extent such activities on the part of the US are a reaction to the introduction of the Euro in Europe. (In former communist countries, we see a competition between the DM (now Euro) and the US-dollar.)

2. Paolo Monti’s relation to some problems in monetary theory

Inflation and failures of monetary systems are signs of disintegration or decay, which in general are valued negatively. But there are positions in monetary theory, which consider the loss of real money value a positive phenomenon. Long before the Great Depression in the 1930’s the idea had developed that economic crises and depressions might be explained by deficiencies in the demand for commodities and that such phenomena could be eliminated and avoided by stimulating aggregate demand for economic goods.

According to some economic circles, deficiencies in the demand for commodities were caused by the hoarding of money as a result of which currency was withdrawn from active economic circulation. Theorists concluded that if hoarded money were systematically to lose value, people would consequently abstain from hoarding. In this way, unemployment and cyclical downturns could be avoided. The originator of the Schwundgeldthese, ie: “stamped” money theory, was the Austrian Silvio Gesell, a successful business man, who made his fortune in South-America. Even before his return to Europe, he was concerned with economic problems. (“Stamped” money, the term used by Keynes for Gesell’s idea, does not exactly match the connotations of Gesell’s more general German term Schwundgeld. “Stamped” money is, more specifically, money that loses its nominal value over time if not restamped periodically, against a user fee, according to a predefined programme.)

Until the Great Depression, in economic circles Silvio Gesell was considered “crazy” and an outsider. However, this suddenly changed when John Maynard Keynes published his epoch-making book “The general theory of employment, interest and money”. In the penultimate chapter (Chapter 23) of this book Keynes deals with the ideas of Silvio Gesell. According to Keynes the idea behind “stamped” money was economically sound and its application would contribute, more than the ideas of Marx, to overcome depression and to abolish unemployment. Gesell’s followers were very bucked and felt highly honoured by Keynes assessment. Today, they still pride themselves of Keynes evaluation, as can be seen by following internet-pages on which Gesellians carry on their fight for the distribution of Gesell’s ideas. (Prior to Keynes, Irving Fisher, alone among academic economists, had recognized the significance of the idea.)

How does this relate to the artistic work of Paolo Monti?

Paolo Monti is not an economist and until recently he did not know anything about “stamped” money as proposed by Silvio Gesell. Despite this in his work he has unconsciously developed a solution to a problem inherent in Gesell’s notion of “stamped” money . The chemical processes, to which Paolo Monti exposes money and by which this disintegrates and finally dissolves, represent the Geldwertschwund, ie: depreciation or decay of money requested by adherents of the Stamp Scrip concept.

According to Gesell a constant «Geldwertschwundrate», that is, rate of depreciation or decay of money would be a permanent stimulus for the demand for commodities. This conclusion represents, however, a major defect of the “stamped” money concept. Today we know that one cannot expect a permanent rise in demand for goods from a constant fall in the supply of money. If, in fact, the rate of decay of money is raised from zero to some positive value, then the demand for real money stocks will fall below the available stocks. Un-hoarding of money starts. However, this de-hoarding will only last until actual (real) money holdings have reached the targeted level corresponding to the new rate of currency decay, whereby the greater the rate of decay, the lower will be the desired quantity of money, that is, level of money hoarding. For the resulting stimulus for the demand for commodities to become permanent and not merely a transitory phenomenon, the currency decay rate cannot be held constant but must gradually increase over time.

The rate of decay of money in Paolo Monti’s work is a function of the agent’s (observer’s) behaviour. In addition it is no longer exogenous and constant but endogenous and variable. By varying his distance to the process of decay the observer accelerates or decelerates the rate of decay. A reduced distance indicates intensified hoarding and a corresponding acceleration in the rate of decay. On the other hand, a greater distance to the process of decay signifies decreased hoarding and a slower process of decay. Apart from the aesthetic considerations, Paolo Monti’s work represents the model of a servo-mechanism for the hoarding of money without the defects resulting from exogenous and constant rates of decay.

Unfortunately, the followers of Silvio Gesell have neither acknowledged the defect in their thesis nor have they come anywhere near a solution of the problem. (This defect was also unknown to J.M. Keynes. Its discovery is the result of more recent developments in macroeconomics following the revolutions of Monetarism and of Rational expectations in the late 1960s and mid 1970s, respectively.) Gesellians tend to consider the academic world as a conspiracy of evil-minded half-wits or corrupt servants of money capital, who refuse to acknowledge the positive results observed when the Stamp scrip concept has been put into practice, as in Wörgl, Austria during in the 1930s. Gesellians neglect that this empirical example actually confirms only the short term effectiveness of their policies, since the Austrian experiment was stopped after a few months. Had this not happened, the defect described above would have become apparent (The Austrian Central Bank regarded the Wörgl “stamped” money experiment as an interference in its constitutional competences and put an end to the experiment by means of an High Court order.)

Since the 70s of the last century Keynesianism has lost political ground. Together with this the “stamped” money concept has likewise lost importance. There is no doubt that Paolo Monti’s processes of decay also represent the fate of theoretical and political ideas.

Dr. Nikolaus K.A. Läufer
University of Constance,
December 17th, 2000