More on Wörgl: The Velocity of Money

Memehunter raises an important question in the comments of my last post regarding Wörgl. 

From memehunter:

BM,

This is a well-researched effort. I must note, however, that you apparently neglected to address the effect of demurrage on the velocity of the circulation of money.

Couldn't the increased velocity be the main reason, or at least an important factor, behind Wörgl's relative prosperity? And, if that is the case, why wouldn't it be "sustainable"?

Memehunter then pointed me to an article on this point, from Anthony Migchels.  I did not come across this article in my original search:

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.

I suspect the velocity is certainly an important factor in the relative prosperity of Wörgl during the time of the experiment (and I have no doubt that demurrage contributed to this velocity directly).  This seems to be consistent with (my understanding of) most schools of economics: the velocity of money has an effect on the pace of the economic activity of the subject population – or perhaps, more accurately, the pace of economic activity can be measured by the subsequent velocity of money.

Far beyond the scope of either my original post or this one, but I will mention that it is also held that velocity will have an impact on price inflation / deflation.  Inflation apparently was not a problem in Wörgl during the year of the experiment.  As I mentioned, I suspect inflation was kept in check because a) the scrip was tied to the national currency (which I believe was suffering through a price deflation at the time, and b) the experiment lasted only one year.

So, would this be sustainable?  If not, why not?

I believe the activity would not have been sustainable.  I believe that once the taxes in arrears were completely paid and once the people paid in advance to the degree they felt sufficient (one year in advance?  Five years in advance?  I don’t know, but at some point they would stop), the scrip would lose a key part of its attractiveness.

One way a government can ensure the demand for its currency is to demand (or accept) that taxes are paid in the subject currency.  The other way is through monopoly legal tender laws.  Wörgl obviously could not legislate or enforce monopoly legal tender, so the demand for the scrip could certainly be attributed to the need to pay taxes. 

The demand could certainly not be attributed to the demurrage – not when there was the national schilling available – paying interest, and at a one-for-one exchange (setting aside the conversion fee).

Once this tax need was satisfied, what would happen to the desirability of a depreciating-value scrip vs. currency that did not come with a 1% monthly penalty?  The answer to me is clear, not that we have to agree.  I suspect the depreciating scrip would begin trading at a discount, and sooner than later would be regularly returned to the bank for the national currency, even with the 2% loss.  Two percent might be too big a loss when one owes taxes and can satisfy these taxes with the depreciating scrip at full face value.  However, when there is no benefit to holding a depreciating currency to the national one, I suspect many would eat the one-time 2% charge to avoid paying the recurring 1% charge.

In my opinion, this is exactly the situation that was immediately in front of Wörgl when the national government put an end to the experiment.  Depending on which estimate of taxes in arrears used (see the discrepancy as pointed out in my first article), within one month, but not more than six, all taxes in arrears would have been paid.  At that point, I suspect demand for the scrip would have fallen – resulting in the exchange for national currency that I described above.

For two reasons, it is too bad the experiment at Wörgl was not allowed to continue: 1) as I have stated before, I fully favor free markets and competition in money / banking / etc.  Decentralized and competitive systems are certainly preferable to centralized systems.  For this reason alone, I support having an infinite number of experiments all around the world; and 2) I guess I could see if my suspicions would have proved out.

I hope these comments are clear regarding my views on your questions.

I would like to comment on one other point from the Migchels article:

The simple fact is that even today a demurrage instead of interest on the money supply would radically transform our economies overnight.

I do not know if Migchels is suggesting the complete replacement of current money schemes with schemes based on demurrage, or if he suggests that both operate side-by-side, as was done in Wörgl.  So I make no statement about his view on the subject, other than to use this sentence of his to clarify the issue presented.

To the extent this has been commented on by others in the papers I found in my research, they all pointed to having the two currencies side-by-side.  Bernard Lietaer held this view, as does Fritz Shwarz / Irving Fisher (again, this is from the quote that I mentioned the attribution was not clear). 

As to why this should be so (or why it should not be so), I have no opinion at the moment.  It is not of terrible importance to the purpose of my posts.