12 February, 2013

the Wörgl experiment

The year was 1932 ; the world was gripped by the greatest economic depression (started in 1929) that it had ever known. One man in a small town decided to try something new to help the people of his community. In doing so the town made economic history. The town was Wörgl in the Bavarian province of Austria, and the man behind it was the towns mayor (elected 1931) Michael Unterguggenberger.

What follows is a republishing of the document originally published here, enhanced by views and analyses from other sources, to give you a rough context of the experiment, and its potential application in this modern era.

This is how the story goes
As a mayor, Michael Unterguggenberger had a long list of projects he wanted to accomplish. Projects like repaving roads, street lighting, extending water distribution across the entire town and planting trees along the streets. But in the midst of the depression out of the towns population of 4,500, 1,500 were without a job and 200 families were penniless.

Michael read and re-read "The Natural Economic Order" by Silvio Gesell. He talked with people in the town and convinced the members of the Wörgl Welfare Committee to hold a session on July 5, 1932. In this session he gave a short summary and then proposed a "Distress Relief Program". He stated that slow circulation of money is the principal cause of the faltering economy. Money as a medium of exchange increasingly vanished out of working people's hands and accumulates into the hands of the few who collect interest and do not return it back to the market. He proposed that in Wörgl the slow-circulating National Bank currency would be replaced by "Certified Compensation Bills". The council would issue the Bills and the public would accept the Bills for their full nominal value. Bills would be issued in the denominations of 1, 5 and 10 shillings. A total issue of 32,000 Wörgl "Money Bills" was printed and put into circulation.

On July 31, 1932 the town administrator purchased the first lot of Bills from the Welfare Committee for a total face value of 1,800 Schillings and used it to pay wages. These first wages paid out were returned to the community on almost the same day as tax payments. By the third day it was thought that the Bills had been counterfeited because the 1000 Schillings issued had already accounted for 5,100 Schillings in unpaid taxes. Michael Unterguggenberger knew better, the velocity of money had increased and his Wörgl money was working.

Wörgl money was a stamp script money. The Wörgl Bills would depreciate 1% of their nominal value monthly. To prevent this devaluation the owner of the Bill must affix a stamp the value of which is the devaluation on the last day of the month. Stamps were purchased at the parish hall. Because nobody wanted to pay a devaluation (hoarding) fee the Bills were spent as fast as possible.

Over the 13-month period the Wörgl money was in circulation, the mayor carried out all the intended works projects. The council also built new houses, a reservoir, a ski jump, and a bridge. The people also used scrip to replant forests, in anticipation of the future cash flow they would receive from the trees.

Six neighboring villages copied the system successfully. In January 1933, the project was replicated in the neighboring city of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea.

The "economic miracle of Wörgl" was known internationally. The later French president Daladier visited Wörgl and reported in detail to the French parliament. The famous American money-theorist Irving Fisher sent an assistant to Wörgl. Fisher thought that the model would be able to overcome the US-recession. He classified himself as a "modest student of Silvio Gesell." But when hundreds of Austrian majors wanted to copy the Wörgl-model it was forbidden by the Austrian Central Bank. The bank classified the "work-confirmation bills" as money and felt its autonomy threatened. The actual positive and negative effects of the bills and of their own money were not thought worth reflecting on, neither for the officials of the Central Bank nor for most of the economists. As today, the money order was a taboo in these days. [4]

The truth is that the Central Bank panicked, and decided to assert its monopoly rights by banning complimentary currencies. The case was brought in front of the Austrian Supreme Court, which upheld the Central Banks monopoly over issuing currency. It then became a criminal offence to issue "emergency currency". Wörgl quickly returned to 30% unemployment. Social unrest spread rapidly across Austria. In 1938 Hitler annexed Austria and many people welcomed Hitler as their economic and political savior.

Germany was headed towards WWII and with the aftermath of the war much of what happened in pre war Germany just like what happened during the war was suppressed by the world. Germany was being rebuilt in the West's image. The Wörgl experiment was relegated to history.

the Good Stuff
The Wörgl experiment dramatically illustrates some of the common characteristics and major benefits of local currencies. According to  Bernard Lietaer, in his book “The Future of Money”, the following benefits are illustrated [1] :

1. increased rate of circulation – greater economic activity
Local currencies tend to circulate much more rapidly than national currencies. The same amount of currency in circulation is employed more times and results in far greater overall economic activity. It produces greater benefit per unit. The higher velocity of money is a result of the negative interest rate which encourages people to spend the money more quickly.

2. higher local resources utilisation – community booster
Local currencies enable the community to more fully utilize its existing productive resources, especially unemployed labor, which has a catalytic effect on the rest of the local economy. They are based on the premise that the community is not fully utilizing its productive capacities, because of a lack of local purchasing power. The alternative currency is utilized to increase demand, resulting in a greater exploitation of productive resources. So long as the local economy is functioning at less than full capacity, the introduction of local currency need not be inflationary, even when it results in a significant increase in total money supply and total economic activity.

3. consumption of local produce – community imports minimization
Since local currencies are only accepted within the community, their usage encourages the purchase of locally-produced and locally-available goods and services. Thus, for any given level of economic activity, more of the benefit accrues to the local community and less drains out to other parts of the country or the world. For instance, construction work undertaken with local currencies employs local labor and utilizes as far as possible local materials. The enhanced local effect becomes an incentive for the local population to accept and utilize the scrips.

Other examples
Some forms of complementary currency can promote fuller utilization of resources over a much wider geographic area and help bridge the barriers imposed by distance. The Fureai kippu system in Japan issues credits in exchange for assistance to senior citizens. Family members living far from their parents can earn credits by offering assistance to the elderly in their local community. The credits can then be transferred to their parents and redeemed by them for local assistance.

As Lietaer points out, in situations like the current economic (debt) crisis everything grinds to a halt for want of money. But he also explains that there is no reason why this money should take the form of sterling (or dollars, etc.) or be issued by the banks. Money consists only of "an agreement within a community to use something as a medium of exchange". The medium of exchange could be anything, as long as everyone who uses it trusts that everyone else will recognise its value. During the Great Depression, businesses in the United States issued rabbit tails, seashells and wooden discs as currency, as well as all manner of papers and metal tokens. In 1971, Jaime Lerner, the mayor of Curitiba in Brazil, kick-started the economy of the city and solved two major social problems by issuing currency in the form of bus tokens. People earned them by picking and sorting litter: thus cleaning the streets and acquiring the means to commute to work. Schemes like this helped Curitiba become one of the most prosperous cities in Brazil. [5]

Airline frequent flyer miles are a form of complementary currency that promotes customer-loyalty in exchange for free travel. The airlines offer most of the coupons for seats on less heavily sold flights where some seats normally go empty, thus providing a benefit to customers at relatively low cost to the airline.

While most of these currencies are restricted to a small geographic area or a country, through the Internet electronic forms of complementary currency can be used to stimulate transactions on a global basis. In China, Tencent's QQ coins are a virtual form of currency that has gained wide circulation. Though virtual currencies are not 'local' in the tradition sense, they do cater to the specific needs of a particular community, a virtual community. Once in circulation, they add to the total effective purchasing power of the on-line population as in the case of local currencies.

Give it a thought,
Society utilizes only a small portion of its resources and opportunities. Almost everyone has underutilized knowledge, skills and time that can be engaged productively. Most manufacturers and services have underutilized machinery or capacity. Complementary currencies are a creative means to enhance this untapped social potential. There has been a tremendous surge in the use of local currencies over the past two decades. Today there are over 2,500 different local currency systems operating in countries throughout the world. [1] Go there, and explore the whole article.

But also think about the Wörgl case on another level. The question is : Would the Wörgl currency have been just as effective without the demurrage feature, as with it ? Thomas H. Greco, Jr, attempts to answer on that in a lengthy article [2], where asserting that the situation was a bit more complicated than we, today, might have thought, proceeds by examining multiple sources and reports of that time, to conclude that : “…this supplemental medium of exchange had a very significant impact in improving, not only the financial condition of the local government (parish), but also the local business climate and general prosperity. Still, there can be no doubt that, being a local currency accepted only within the local economy, the Wörgl notes must have benefitted the local economy, because, unlike official currency, they could not be used to pay outsiders”.

Community Barter
In discussing these ideas, it is also important to understand the difference between community currency and community barter systems. [3]

A community barter system - like the LETSystem, which is not community currency - is usually based on voluntary organisational sharing of information about goods and services available from individuals in an area. The accounting is usually based either on time or the nationalised currency (pounds, dollars, etc). Such a system has three basic weaknesses: (a) It tends to be limited in scope to a handful of dedicated practitioners, usually in largely rural or semi-rural areas, (b) It does not cater for transactions outside the community, and (c) It encourages hoarding, rather than the circulation of wealth and energy, and can only expand by recruiting new producers - there are no 'built-in' inducements to encourage the circulation of goods and services.

A community currency, on the other hand, can be used by anyone in the community as a 'means of payment' for any commodity or service. The only limit to the expansion of its circulation is its acceptability, so it encourages all forms of economic activity. If suitable provision is made for 'convertibility', it can facilitate transactions with people and organisations outside the community, and indeed encourage community 'import replacement'. Also, of course, communities may agree - as they did in the Tyrol - to accept each other's currency at par.

Bibliography :
Silvio Gesell - The Natural Economic Order, access here.
Bernard Lietaer - The Future of Money, access here.
Peter North - Local Money, read a review here.

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