the Power of Demurrage: the Wörgl Phenomenon « Real Currencies

 

I found this very interesting post about the importance of keeping money flowing to encourage economic activity, about a little town in austria during the thirties depression, and its extraordinary succes!

 

The velocity of money is a badly neglected aspect of monetary theory. It is far more important than people realize and both in past and in the present depression, sluggish circulation played a major and negative role. The most obvious way of increasing the velocity of money is Silvio Gesell’s demurrage, a negative interest rate, in effect a tax on holding money. This is not just theory. There is a famous case in which it was implemented. The Wörgl experiment showed truly extraordinary results and is legendary in Interest-Free Economics.

Wörgl is a small town in the Austrian Tyrol that would be completely inconspicuous, were it not for an amazing event that transpired almost 80 years ago.

At the height of the Great Depression some 4500 people lived in the village. It was suffering badly from the catastrophic policies of the Austrian Central Bank, which had brought down the money supply from 1067 million Schillings in 1928, to 997 million in 1932 and 872 million Schillings in 1933. Unemployment stood at 1500 and 200 families were completely destitute.

The town owed 1,3 million Schillings to the Innsbruck Savings Trust and had to pay 50,000 per year in interest over that debt. The council was owed 118,000 in taxes, but it was all but impossible to get at it, with the result that the town was lagging on its own obligations to the regional government.

Meanwhile, there were plenty of public works that needed to be done. Roads had to be repaved, Street lights were necessary, water distribution needed to be extended and trees had to planted along the streets.

Enter Michael Unterguggenburger, the burgomaster (mayor) of Wörgl. He had been studying economics for the better part of his life and lived through the difficult times of the 1907 depression, the Great War, the associated inflation and now this massive deflation. He believed in Socialism’s big idea of ‘ending exploitation of men by men’, but not in their methods, most certainly not their nationalization of the means of production.

AM: the total amount of trade financed by the certificates amounted to the equivalent of 2,5 million Schillings. While only about 5,500 worth of certificates were circulating on average. Meaning that the small demurrage of 12% made the certificates circulate at least a hundred times faster than the Schilling.An eye witness report by Claude Bourdet, master engineer from the Zürich Polytechnic.“I visited Wörgl in August 1933, exactly one year after the launch of the experiment. One has to acknowledge that the result borders on the miraculous. The roads, notorious for their dreadful state, match now the Italian Autostrade. The Mayor’s office complex has been beautifully restored as a charming chalet with blossoming gladioli. A new concrete bridge carries the proud plaque: “Built with Free Money in the year 1933.” Everywhere one sees new streetlights, as well as one street named after Silvio Gesell. The workers at the many building sites  are all zealous supporters of the Free Money system. I was in the stores: the Bills are being accepted everywhere alongside with the official money. Prices have not gone up. …… One cannot but agree with the Mayor that the new money performs its function far better than the old one. I leave it to the experts to establish if there is inflation despite the 100% cover. Incidentally price increases, the first sign of inflation, do not occur.”AftermathAs a result of the incredible success of Unterguggenberger’s experiment, hundreds of Austrian towns planned on implementing the scheme. As a result the Austrian National Bank panicked and forbade the experiment. Vienna crushed the resentment with the threat of military intervention. Within a short while Wörgl was suffering again.Famous men noticed the experiment. John Maynard Keynes and Irving Fischer payed homage to Gesell. French Prime Minister Edouard Daladier visited the place to check the experiment for himself. And Ezra Pound visited Unterguggenberger twice, the last time just before the good Burgomaster died in 1936.ConclusionTo this day the Wörgl case stands out as the classic example of the need for monetary reform. It vindicates Silvio Gesell’s powerful analysis of the monetary and his demurrage.A notable aspect of demurrage is that it offers a clear incentive for interest free loans. Sitting on it would lose value, value maintained by lending it out.The simple fact is that even today a demurrage instead of interest on the money supply would radically transform our economies overnight.Related:Don’t hoard the Means of Exchange! Part 1Don’t hoard the Means of Exchange! part 2Regional Currencies in Germany: the ChiemgauerHere is in interesting interview with FOFOA on the differences between the store of value and means of exchange functions of money. He offers a number of interesting insights Thanks Transparent Unicorn:Interview with FOFOAAfterthought on Sluggish circulationIt seems that deflation is closely linked to sluggish circulation. Consider, for instance, this graph:Quite a catastrophic decline in circulation and good proof that hoarding cash is detrimental. And also that a deflationary crash is closely related to hoarding. This is not an attack on those who save money. In the way the system works, it’s rational behavior. It just shows that the system is not working properly.Although I don’t have figures about the velocity of money in the thirties, Michael Unterguggenburger most definitely assumed that hoarding was the problem, because he had this printed on his certificates:“To all whom it may concern! Sluggishly circulating money has provoked an unprecedented trade depression and plunged millions into utter misery. Economically considered, the destruction of the world has started. – It is time, through determined and intelligent action, to endeavour to arrest the downward plunge of the trade machine and thereby to save mankind from fratricidal wars, chaos, and dissolution. Human beings live by exchanging their services. Sluggish circulation has largely stopped this exchange and thrown millions of willing workers out of employment. – We must therefore revive this exchange of services and by its means bring the unemployed back to the ranks of the producers. Such is the object of the labour certificate issued by the market town of Wörgl : it softens sufferings dread; it offers work and bread.”

via the Power of Demurrage: the Wörgl Phenomenon « Real Currencies.

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