Thursday, November 8, 2012

The Miracle of Wörgl

If it is a Miracle, any sort of evidence will answer, but if it is a Fact, proof is necessary.
 Mark Twain

Miracles do not, in fact, break the laws of nature.
C.S. Lewis


Wörgl is a town in Tyrol, Austria, in the Kufstein district. It is 20 km from the state border with Bavaria.

Wörgl was the site of the "Miracle of Wörgl" during the Great Depression. It was started on the 31st of July 1932 with the issuing of "Certified Compensation Bills", a form of currency commonly known as Stamp Scrip, or Freigeld. This was an application of the monetary theories of the economist Silvio Gesell by the town's then mayor, Michael Unterguggenberger.

The experiment resulted in a growth in employment and meant that local government projects such as new houses, a reservoir, a ski jump and a bridge could all be completed, seeming to defy the depression in the rest of the country. Inflation and deflation are also reputed to have been non-existent for the duration of the experiment.

Despite attracting great interest at the time, including from French Premier Edouard Daladier and the economist Irving Fisher, the "experiment" was terminated by the Austrian National Bank on the 1st September 1933 [5]

The Path to Wealth

I believe there are no shortcuts to wealth.  Wealth comes from savings – consuming less than is produced.  This savings funds investment – investment in tools and methods than enhance the production and delivery of commodities (goods and services).  Prices are the communication tool: driving production to the most efficient sources, and driving the goods to the users that place on these the highest value.  Profit and loss ensures that it is the efficient that continue, while the inefficient go out of business before much damage is done – the best conservation tool known to man.  All of this will work well if markets are left free, or reasonably free.  Free markets and contracts – wherever two or more are gathered around a deal without coercing third parties – are the most fundamental necessity.

So when I hear of miracles or shortcuts to this process, I will admit I am a skeptic.  Many miracles are offered – the printing press is the most sacred, but other forms of government intervention such as stimulus spending are also held on a pedestal.  These might work for a time, but eventually fail – often leaving the situation as bad as or worse than before.  I find none of these interventions to provide more wealth for more people than provided by the free market, as described above.

Given my views, it should be clear that I am supportive of any and all competitive currency / money schemes derived in the free market.  I can even accept decentralized schemes that come with some form of community backing – I would strongly prefer no state action, but can also accept multiple and competing small state options, especially if free-market options are allowed to develop side-by-side.

Therefore, the concept of Wörgl presents no issue to me, at least regarding the aspect of the story that the members of the community chose to utilize a currency other than the one sanctioned by the state.  Led by the mayor, a local village decided to introduce a new currency. 

However, as can be seen from the introductory paragraph (and as will be explored further), this is not just a story of a new currency introduced into the market.  It is also a story attributing to that currency some miraculous properties – an ability to shortcut the wealth creation process.  This specifically is the reason I chose to examine the Miracle of Wörgl (along with an encouraging word from The Daily Bell).

The Theory

The theory behind the experiment of Wörgl comes from Silvio Gesell (1862 – 1930), and specifically his idea of free money and demurrage.   His economic theory was much broader than strictly this issue of free money (and, as will become clear, Gesell does not mean free-market money, as in competitive and open):

Freiwirtschaft (German for free economy) consists of three central aspects, usually summed up as The Three Fs:
Freigeld (free money)
All money is issued for a limited period by constant value (neither inflation, nor deflation).
Long-term saving requires investment in bonds or stocks.
Freiland (free land)
All land is owned by public institutions and can only be rented, not purchased (see also Henry George).
Freihandel (Free Trade)
Free Trade has long been a mainstream position now, but the anti-globalization movement largely opposes it.

The (proposed) results include:

  • More private spending for consumption and investment
  • Consumers invest surplus money in expanding companies
  • Full employment: Work for everyone who can work
  • Rate of economic growth can be set by the society
  • Interest rates drop to almost zero percent in the long run
  • Freiland prevents high real estate prices
  • Tremendous social disparities will cease
  • Less working hours per week for everyone in the long run [9]

So with free money and free land (free, like air is free), scarcity, if not eliminated, at least will no longer cause inconvenience to man.  Suffice it to say, it is a theory that flies in the face of everything I understand about the nature of man and economy.

Bernard Lietaer is one of the leading proponents today of these theories; of importance to the experiment at Wörgl, specifically the issue of free money and demurrage (stamp scrip).  Lietaer sees such a “stamp scrip” currency working only in certain conditions:

This paper proposes a solution for countries which are characterised by four criteria: they have no convertible currency now, and they experience three problems - potentially or actually - unemployment, inflation, and ecological degradation. The proposed strategy provides a new convertible currency - hereafter called New Currency - which constitute a powerful mechanism to tackle simultaneously these three problems. Its only precondition is that they produce at least some raw materials for which an organised international market exists.

Technically, this New Currency is a combination of two concepts, usually analysed separately: stamp scrip, and currency backed by a basket of commodities.

Stamp scrip is a medium of exchange characterised by a small monthly "user fee", or "negative interest" charge. This user fee gives an incentive to the bearer not to hoard this currency. Its practical and demonstrated economic effects include a strong positive impact on employment creation and on inflation control. It also provides structural support for ecologically sound economic growth. While the concept of "negative interest rates" may appear unusual at first sight, it has solid theoretical backing behind it.  Even more importantly, it has been tested and used with remarkable success in a variety of cultures and historical settings, including as recently as the 1930's in Western Europe.

The second concept - a currency backed by a predetermined basket of commodities - is more familiar. One original aspect here is that the Central Bank would guarantee delivery of the value of the basket, but would remain free to deliver it in the form of any mix of the commodities of the basket. This approach provides unusual stability for the international value of the currency, while guaranteeing substantial flexibility in the way the country fulfils its commitments.                

The stamp scrip concept actively promotes internal economic stability and employment growth, while the basket of commodity concept ensures immediate convertibility to the national currency and the international stability of its purchasing value. These two concepts fit together by equating the negative interest rate of the Stamp Scrip with the costs of storing, insuring and delivering to their respective international markets the underlying commodities of the basket. [8]

Per Lietaer, Keynes offers further support to Gesell’s theory:

Is such an unconventional concept as Gesell's "negative interest money" a theoretically sound one? The answer is a resounding yes, and is supported by personalities of no lesser stature than John Maynard Keynes. Chapter 17 of Keynes' "General Theory of Employment, Interest and Money" [1936] analyses the implication of such negative interest money, and provides a solid theoretical basis confirming the claims made by Gesell for such a currency. He even specifically states that:

“Those reformers, who look for a remedy by creating artificial carrying cost for money through the device of requiring legal-tender currency to be periodically stamped at a prescribed cost in order to retain its quality as money, have been on the right track, and the practical value of their proposal deserves consideration" [ ibid. Page 234].

And he concludes with the amazing statement that "the future would learn more from Gesell than from Marx” [ibid. Chap. 22, Page 355]. [8]

Lietaer offers an example from ancient Egypt, as an early for of the application of negative interest:

Each farmer who contributed to the stockpile obtained a warehouse receipt - usually a piece of broken pottery with the inscription of the date and the quantity of bags of wheat he had contributed….The key to it, however, was a time charge on these receipts - to pay for the guardian of the depot, and for the pilferage by rodents - constituting the "negative interest charge" of the Gesell money. [8]

I have come across this claim and specific application of Lietaer’s before, and in this he is just plain wrong.  The charge by the warehouse is not for negative interest, or demurrage.  The charge is clearly for storage and grain losses due to rodents.  This example is most certainly not applicable to the theory.

Lietaer offers other example of such “stamp scrip, occurring before the experiment at Wörgl, in Germany:

The economy of the small town of Schwanenkirchen in Bavaria had been wiped out as well as the rest of Germany by the hyperinflation and economic recession of the 1920's. Mr. Hebecker, owner of the bankrupt local coal mine, decided in a desperate effort to propose payment to his workers not in Reichsmark, but directly in "Wara", payable in coal from the mine.

By 1931, this "Freiwirtschaft" ("free economy") movement had successfully spread throughout Germany, involving no less than 2000 corporations and a variety of commodities in the "Wara" exchange system. Unfortunately, this experiment was blocked by the Central Bank in November 1931, and continuing economic stagnation generated the general dissatisfaction which brought to power Adolf Hitler with the consequences we all know. [8]

Then later, in the United States:

The third example of introduction of stamp scrip in the 1930's could have been the biggest experiment of all: the United States of America. Dean Acheson, then Assistant Secretary of the Treasury, was approached by Professor Irving Fisher with the same idea under the name of "stamp scrip". One feature of Professor Fisher's approach was that the "negative interest" stamp was fairly high (2% per week) and was calculated so that the face value would be amortised over one year, and the currency withdrawn at that point.

Acheson decided to have the whole concept verified by his economic advisor, the well-respected Professor Russel Sprague at Harvard. The answer was that indeed stamp scrip would work perfectly economically, but that it had some implications for decentralised decision making which Acheson should verify in Washington. By this time, the "stamp scrip movement" as it became known, had created interest by no less than 450 cities around the United States. For example the City of St. Louis, Missouri, had decided to issue $100,000 worth of stamp money. Similarly, Oregon was planning to launch a $75 million stamp scrip issue. A federal law had been introduced in Congress by Congressman Pettengil, Indiana, to issue $l billion of stamped currency. Irving Fisher [1933] published a little handbook entitled "Stamp Scrip" for practical management of this currency by communities , and described the actual experience of 75 American communities with it.

Just at that time however, on March 4, 1933, Roosevelt announced the New Deal in his speech with the famous line "the only thing to fear is fear itself". It announced the temporary closing of all banks, prohibited the issue of "emergency currencies", and launched a series of centrally determined "public work projects". [8]

The last example offered by Lietaer is of the island of Guernsey, where the practice continues to this day:

Invoking an ancient prerogative to produce its own notes, in 1813 Guernsey issued 4000 Guernsey Pounds which were interest free. While this experiment was not strictly using negative interest rates, it did clearly go a long way in that direction compared to a "normal" interest environment. [8]

As with the example he provides for Egypt, it is not clear why Lietaer offers Guernsey – the notes are not negative-interest notes, therefore do not provide the incentive to spend them prior to the depreciation.

In the referenced paper, Lietaer goes on to describe the means by which such a system could be implemented today, as well as addressing some of the potential shortcomings of such a scheme – both subjects are outside of the scope of this paper.  In any case, it is difficult to take the remaining commentary seriously when the examples he uses are “fast and loose.”

As mentioned above, Irving Fisher took notice of the success at Wörgl, although he felt a much higher demurrage charge should be applied; otherwise seemed to approve of the experiment.  It was felt by others, however, that 2% per week would render the entire experiment dead on arrival:

Silvio Gesell (1862-1930), the inventor of Free-money, at first proposed 5.2% per year to be applied weekly, but later favored 1% bimonthly, or the so-called "Seriengeld" consisting of four different colored series of money where one would be recalled and exchanged for a fee. He never really considered circulating Free-money as an alternative currency. Now back to Woergl. A high 12% per year was used and it worked, while Mr. Fisher's 104% per year (2% weekly) never worked. [6]

The author of the piece feels that Fisher’s push for 104% demurrage killed the idea internationally:

I do not think that Irving Fisher intentionally killed Free Money with the impossible 104%, but he did so in fact…. People always seem to forget that there are two parties in any deal, buyer and seller. The seller must also be satisfied and must know that other people will in turn sell him something for it. A currency losing 2% every week just would not do. It gives no TIME to decide. [6]

The Economic Environment of Wörgl

With the introductory and background work out of the way, we can now focus on the specific situation of Wörgl.  The context is the economic impacts of the crash of 1929:

At the time Wörgl had a population of 4216. Being a railway junction, the railway employed 310 people in 1930, but by 1933 the number had plummeted to 190….Already in 1929 the service facility for steam locomotives had become obsolete following the transition to electric engines. The nearby cement plant in Kitzbühel employed 45 to 60 workers in 1930, but by 1933 that figure had shrunk to two. The Zipf brewery sacked between 10-14 workers from the previous 33-37. A cellulose factory, which in 1930 still employed 360 to 410 workers, in 1933 had only 4 men guarding idle machines. Farmers, who made up about a third of the working population, could barely sell their products at depressed prices and the remaining two thirds of the work force, consisting of blue collar and white-collar employees plus people running small businesses, considerably suffered from these bleak circumstances. The ranks of the unemployed increased daily. Both they and those with expired insurance benefits turned to their mayor. In 1932 there were some 200 expired benefits cases destined for public charity schemes. In the spring of 1932 Wörgl township counted 350 unemployed. In its immediate surroundings there were 1500. [6]

Michael Unterguggenberger Enters the Story:

In 1916, the 32-year-old railroad engineer Michael Unterguggenberger, while doing his military service close to the frontline in what today is known as the Ukraine, came across a strangely named periodical (Der Physiokrat) published in the all but impressive number of 600 and started to read. He found an article published by a man called Silvio Gsell presenting a surprising idea: the problem with money is that it is different from iron.

If you put iron on the shelf, it will start to rust. With money, however, nothing like this would happen. You can put it on the shelf for as long as you want but it will not start to decay. To the contrary, when you put the money in the bank, you will accrue interest -yes, all this is fine for as the companies, managers, farmers, and workers produce enough revenue to finance the interest.

In times of crisis, however, money on the shelf may contribute to a spiraling problem: less available funds, lower wages, less consumption, even more money being stored, fewer sales, bankruptcies, lay-offs, high unemployment.... All this was painfully clear in Austria in the late 1920s and early 1930s. [7]

(For a further biography of Michael Unterguggenberger, Mayor of Wörgl, see note [6].) 

The mayor’s economic focus was prices…

He read and re-read: An economic crisis, that is the falling off in sales and employment with all the attendant symptoms, is a consequence of falling prices. The solution: prices must never be allowed to fall. [6]

…and the slow circulation of money

Slow circulation of money is the principal cause of the faltering economy. Money as a medium of exchange increasingly vanishes out of working people's hands. It seeps away into channels where interest flows and accumulates in the hands of a few, who do not return it back to the market for the purchasing of goods and services but withhold it for speculation. As money is an indispensable wheel in the machine of production, an accumulation of great sums in a few hands means a gigantic danger for peaceful production. Every time the flow of money is interrupted, so is the exchange of goods and services, with a consequent fall in employment. Uncertainty about the state of the economy makes the owner of money careful, causing him/her to hoard it or to spend it reluctantly. He or she distrusts investment. Money circulation is thus slowed down, the turnover of goods and services shrinks and jobs disappear. [6]

The Mayor Applies the Theory

He started by approaching people to win them over. He went from person to person until he could hold a decisive session of the Wörgl Welfare Committee. After long talks with every single member of the committee he launched the session on 5th July 1932. [6]

Based on these theories, and with the approval of the committee, the experiment began with the printing of the first 1,000 shillings of notes on July 31, 1932.  These were used by the town to pay wages. [6]

Unterguggenberger did not call the documents he would use “money”, he called them “Arbeitsbestätigungsscheine”- work certificates to which specific values were assigned. [7]

In July, 1932, 32,000 shillings of notes were printed [2], but only 12,000 were ever placed in circulation. [2] Of these, about 4,000 were hoarded – despite the demurrage – as collectibles, etc. [2] A more precise number of notes that made it into circulation is 7,443 schillings. [6] (There are different estimates in other sources in the range of 5,000 – 6,000.)

The demurrage was 1% per month. [2]

Each of the issued Wörgl notes was backed by the equivalent amount of official central-bank issued notes.  These notes were deposited at the local Raiffeisen Bank, and earned 6% interest, to be earned by the parish (Wörgl) treasury. [2]

The Wörgl notes could be converted to the official currency at a charge of 2%. [2]

The notes entered circulation via payment to the parish employees – first at 50% of their wages, later 75%. [2]

Apparently there was no noticeable price inflation [2]; it should be kept in mind that a) the experiment lasted only approximately one year, and b) the notes were backed by the official Austrian-state note.  Both factors would minimize price impacts, and certainly relative to the impacts to the larger Austrian economy.

The notes were accepted by outside (non-Wörgl) businessmen, at times reluctantly due to the demurrage, as they were seen as a means of increasing trade. [2]

Approximately 100,000 shillings worth of projects were implemented in Wörgl during the time of the experiment. [2] This “investment” represents the miracle.

The experiment was brought to a forced end by the central bank and Austrian courts on 1 September 1933. [4]

The Results

The shillings paid to the workers were returned almost immediately as payment of taxes due.  The author of this piece calls this “an anecdote,” while it strikes me as a key tenet of the “miracle”:

AN ANECDOTE: The first wages paid out, to the amount of 1000 Schillings, returned to the coffers of the community almost on the same day. Taxes were being paid! On the third day somebody came running and shouting, "Mr. Mayor! Our Bills are being counterfeited. We have only issued 1000 Schilling so far, but the amount of overdue taxes paid with them has already reached 5,100 Schillings! Somebody must have counterfeited the Bills!"

There are some doubts by one author regarding the velocity as portrayed in this anecdote; conversely economic theory suggests people will dispose of “bad money” as quickly as possible.  Depreciating notes likely will be disposed of in priority to non-depreciating notes – Gresham’s Law in action.

The experiment produced seeming miracles, with the townspeople’s enthusiastic support:

Eye witnesses report: One report was written 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." (H.E. remark: No longer!) Everywhere one sees new streetlights, as well as one street named after Silvio Gesell. (H.E. remark: Name long changed) The workers at the many building sites (H.E. remark: No more building sites two months later) 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. Some people maintained that the system being experimented in Wörgl prevents the formation of equity, acting as a hidden new way of exploiting the taxpayer. There seems to be a little error in that view. Never before one saw taxpayers not protesting at the top of their voices when parting with their money. In Wörgl no one was protesting. On the contrary, taxes are paid in advance; people are enthusiastic about the experiment and complain bitterly at the National Bank's opposing the issuing of new notes. It is impossible to dub it only a "new form of tax" for the general improvement of Wörgl. 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. As far as saving is concerned one can say that the new money favors saving properly so-called rather than hoarding money. As money lost value by keeping it at home, one could avoid the depreciation by depositing in the savings bank. [6]

Some of the major completed projects included: the drainage system in the main streets was improved; the streets were repaired and many asphalted; the Railway Street was lighted in a modern fashion; a ski-jumping platform was constructed; and the parish mill received extensive modernizations and improvements. [2]

Interviews were conducted with the local businessmen and various town leaders, using a series of 12 questions.  Almost unanimously they praised the new money. [6]

The “miracle” received notoriety, and others wanted to copy the success:

Free Money Spreads in Austria.  The people of Kitzbühel, a nearby village and famous ski-resort, after laughing at first also put "Dwindling Value Money" in circulation after the example of Wörgl. On 1st January 1933 they issued Bills for a total of 3000 Schillings, or one Schilling per head of population. The vouches of Wörgl and Kitzbühel were mutually interchangeable and were accepted without problems. Four other communities in the Tyrol: Hopfgarten Market and county, Brixen and Westendorf (total population 16,000) also decided on "Dwindling Value Money" pending the federal government decision.

In June 1933 Mayor Unterguggenberger held a briefing in Vienna for 170 Mayors - after reviewing accounts and reports from Wörgl. All the attendants were of the opinion that it was desirable to introduce that "magic money" also in their communities. [6]

As to price inflation, none was noted:

“I leave it to our economists to decide whether there is, in spite of a 100% cover, some sort of inflation. In any case, a rise in prices, which is the first effect of an inflationist policy, has not taken place. Possibly this would be different if the system of using depreciating money were applied to a whole country….” [3]

It cannot go unsaid that the author of this statement is incorrect in one point: a rise in prices is normally not the first effect of an inflationist policy, and may not be an effect at all.  As to inflation in Wörgl, it should be remembered that a) the experiment lasted just over one year, and b) the parish pegged the local currency to the national one.

“Wörgl has meanwhile become the Mecca of all believers in free money.” [2]

There was desire from many parts of Austria to copy this experiment. [2] International visitors made “their pilgrimage” to the parish to witness the success firsthand, and further correspondence was received from numerous international locations.  Even astrologers took an interest, asking for the mayor’s birth date.

Irving Fisher Takes a Look

As previously noted, Fisher took notice of this success, and sent “a Geneva economist, Hermann Scheibler, who went to Woergl on my behalf and questioned the mayor, the bank and some of the merchants and workmen.” [6] In addition to observations consistent with those previously noted, his findings include:

Taxes in arrears from 1926 to 1931 were as follows (year by year): 21,000 Schillings 26,000 " 28,000 " 31,000 " 61,000 " 118,000 " But after the scrip was issued, not only were current taxes paid (as well as other debts owing the town), but many arrears of taxes were also collected. [6]

Minor Limitations and Critiques are Noted

The author of this piece (or Fisher – it is not clear from the original text), despite on the whole being quite favorable to the experiment, sees significant limitations in its application:

Woergl, by the way, would have failed the moment when the deflation of the Schilling had ended, because then the 12 % would have ceased to be acceptable. The Woergl Bills would have put an inflationary pressure on the Schilling as well as on themselves if they had spread as they were about to. They had no exchange rate and were therefore pegged to the Schilling. [6]

The author believes there must be an exchange rate from the beginning; else the circulating currency would eventually be caught up in the inflation of the underlying currency. [6] He believes this exchange rate should be established from the beginning, although it seems to me that the peg to the official shilling (with the exchange guaranteed for a 2% fee), likely helped in at least the initial acceptance of the circulating currency. 

Financial Gains to the Parish

Besides the boom in projects, following are the gains – and specifically the financial gains – to the Parish:

Direct gains:

  • From the 1% demurrage: 50 schillings per month (600 annualized) [2]
  • From the 2% exchange fee: 690 schillings in 9 months (920 annualized) [2]
  • 6% interest earned on the 12,000 schillings deposited at the local Raiffeisen Bank (720 annualized) [2]
  • Total: 2,240 schillings annualized

For comparison, the mayor’s salary was 1,800 schillings.

Indirect gains:

There are two different figures found for the total of taxes owed to the Parish in arrears – I cite both sources below.  However, the two sources substantially agree on the amount of taxes in arrears paid to the Parish during the time of the experiment:

  • Tax arrears, which from 1926 to 1931 grew from 26,000 schillings to 118,000 schillings, were reduced by 79,000 schillings during the year [2]
  • Tax arrears at the end of 1931 amounted to 83,000 schillings and were reduced in the subsequent year by 77,327 schillings. [4] (conflicts with data from previous source)

“When, towards the end of the month, an inhabitant of Wörgl does not know what to do with his ((money)) which is about to lose 1 % of its value, he bethinks himself of paying therewith his taxes. This alternative has not only led to the payment of the heavy tax arrears which had accumulated for years, but, what is unprecedented, to the payment of taxes in advance!” [3]

“The fact that the local populace were, as a whole, substantially in arrears on their tax dues to the parish would certainly assure a high level of acceptance (locally) and a continuing demand for the local currency, at least until such time as  those tax arrears had been paid.” [1]

Which occurred at about the time the experiment ended…calling into question the repeatability of the “miracle” of the first year.  The previous two paragraphs (especially the second one) should be read again, until the message is properly absorbed.  Herein lies the “miracle.”

The Root of the Miracle

During the time of the experiment, local tax payments to the parish increased by 37,500 shillings [4] (arguably due to increased economic activity).

As mentioned, in addition to the increase in annual tax payments to the parish, significant payments were made in taxes owed in arrears (77,000 – 79,000 shillings) – virtually eliminating the balanced owed in arrears – as well as taxes paid in advance.  [2] This was due, primarily it seems, to the desire to avoid the demurrage.  In other words, where tax payments previously occupied the last spot in the monthly budget, it quickly moved to the first spot. 

There is some speculation (though no direct evidence available) that this payment of taxes both in arrears and in advance was partially accomplished on the backs of commercial suppliers. [2]

“Accordingly, people have been inclined to deny that the Wörgl experiment produced any new wealth, contending that it represented merely a shrewd method of bleeding the tax-payer…. Here, on the contrary, the tax-payer does not protest at all. Indeed, he enthusiastically favours the experiment and bitterly complains that the State Bank is attempting to stop new issues.” [3]

(It is not the first (or last) example in history of sheep getting fleeced and being thankful for it at the same time.) 

A 12,000 schilling relief credit was granted by the Tyrol government. [2] 

A partial default on Parish debt owed to the Innsbruck Savings Bank:

  • The Innsbruck Savings Bank reduced interest owed in arrears by 50,000 schillings. [2]
  • Various diverse claims were presented by the mayor to the bank, totaling 70,000 schillings (including interest). [2]
  • A parish deposit book, in the value of 37,000 schillings, was presented to the Innsbruck bank – “a practically frozen asset.”  [2] Presumably the Innsbruck bank froze the asset for lack of payment by the parish against its debts.

The default / forgiveness was over 150,000 shillings.

So Where Does This Leave Us?

The Woergl experiment still is the subject of considerable debate among experts, which is often more ideological than factual. Some believe that, had the experiment not been stopped, the success would have broadened and a new tool would have been at hand to cope with the crises. Others believe that it was stopped just in time before it could do any harm. [7]

Let’s stick to the factual:

It seems that the entire experiment was a Keynesian one – significant increased spending on public works financed by:

  • A significant amount of taxes in arrears (over 77,000 schillings representing either 67% or 93% of the total past due, depending on which estimate is used) being collected due to the threat of demurrage.
  • Taxes paid in advance, of an indeterminate amount.
  • An increase in annual tax receipts (of 37,500 schillings) due to the artificially stimulated economy,
  • A credit by the provincial government of 12,000 schillings,
  • Defaulting on debt owed to the Innsbruck Bank of over 150,000 schillings.
  • An amount of 2,240 schillings due to parish earnings on demurrage, exchange, and interest.

Whether by accident or by design, the Mayor found a way to collect almost all taxes in arrears in one year – and at the rate of payment, would have collected the balance in not more than six additional months.  He also found a way to get taxpayers to pay taxes in advance.  Just this “miracle” alone would be enough to explain the reason other mayors flocked to learn the story.

As to increasing ongoing tax receipts via an artificially stimulated economy, there is nothing new here – this method has been deployed almost always and almost everywhere.

All of this to finance 100,000 schillings of projects.


As mentioned at the beginning, when it comes to the market, and certainly the market for money, credit, and currency, I favor free-market and competing solutions, and even am favorably disposed to decentralized solutions of almost any type.  Through decentralization and competition, the best solutions are developed.  For this, I have no criticisms (or reasons to criticize) the actions taken at Wörgl.

However, it is not appropriate that the experiment avoids proper scrutiny, or that its proponents attribute the “success” to incorrect factors.  Wörgl was not a miracle, but an example of Gresham’s Law and Keynesian spending.  It is certain that the experiment could not have continued much longer even if the national government did not shut it down.  Virtually all of the money used to pay for the projects came from one-time events:

  • Taxes paid in arrears cannot be again paid in arrears annually and repetitively.  The balance owed to the parish was almost paid completely in the first year – with little more to collect thereafter.
  • Taxes paid in advance certainly have a natural life – for how many years will taxpayers pay two years’ future taxes?  For how many years can they economically afford to do this?
  • The annual increase in normal tax receipts when due to an artificial boom cannot be sustained – witness the fiscal impacts of the dot-com bubble bursting or the subsequent real-estate bubble bursting.
  • The Tyrol government credit was a factor fully outside of any local “experiment.”
  • Defaulting on a portion of the loan certainly freed up resources, but is also not a sustainable method of financing.

Thus ends the saga of Wörgl: one more money fallacy in the long list of funny-money miracle fallacies sent to the grave.

Sources referenced in text:

1)      Comment on the Wörgl Experiment with Community Currency and Demurrage, by Thomas H. Greco, Jr.                        May 9, 2002

2)      THE WÖRGL EXPERIMENT WITH DEPRECIATING MONEY, by Alex VON MURALT (Zurich-Vienna).  Originally published in Annals of Collective Economy, Geneva, Switzerland, 1934

3)      A FRENCH VIEW OF THE WOERGL EXPERIMENT.  A NEW ECONOMIC MECCA.  By M. Claude Bourdet.  Originally published in Annals of Collective Economy, Geneva, Switzerland, 1934

4)      THE END RESULTS OF THE WOERGL EXPERIMENT, by Michael UNTERGUGGENBERGER, Burgomaster of Wörgl (Austria).  Originally published in Annals of Collective Economy, Geneva, Switzerland, 1934

5)      Wikipedia entry: Wörgl

6)      The story of Wörgl, based on the book The Experiment in Wörgl, by Fritz Shwarz.   Verlags-Genossenschaft Freies Volk. Bern, Switzerland.  1951. Translated in part from the German by Heinz Martzak-Goerike and prepared and shortened for the internet by Hans Eisenkolb

7)      Austrian Places: The Woergl Experiment, by Markus Reiterer

8)      A Strategy for a Convertible Currency, by Bernard A. Lietaer, July 1990.  (Note: This article has been published in ICIS Forum, Vol. 20, No.3, International Center for Integrative Studies, New York, July 1990, pp. 59 - 72)

9)      Freiwirtschaft

Other sources reviewed, not referenced directly, usually because information found was duplicative to earlier-cited sources:

A)     TEDxBlackRockCity - Hollis Doherty - The Woergl Experiment and the Evolution of Money. 

B)      The Wörgl Experiment: Austria (1932-1933); the story of the “miracle of Wörgl” as told in The Future of Money (pp. 153-155).

C)      Description of the Wörgl Experiment

D)     An Experiment in Worgl

E)      Wörgl Success

F)      The Worgl

G)     The Worgl Schillings

H)     Laboratory readings: Wörgl's Stamp Scrip – The Threat of a Good Example?


  1. An instant classic! I'm certain this one get's the circulation it deserves.

    Excellent job, BM!

    All the best,


  2. BM focuses on government and its effects on society at large in Worgl rather than the entire economy - public *and* the far more significant larger private sector.

    The example of Guernsey, given by lietaer, was obviously provided to illustrate merely how the absence of interest debt does not burden the money supply and makes for a healthy economy.

    Even if the tax arrears had contributed to the initial surge and success of the experiment, tax payment and its implications (government spending) is by no means the whole story of an economy. This is to ignore the significant individual and private sector business prosperity resulting from the increased velocity of the money supply.

    BM:'It seems that the entire experiment was a Keynesian one - significant increased spending on public works financed by …'

    Utter nonsense! It is a local currency initiated by local people. Yet, free-market types want to equate it to a 'statist' endeavor just because the authority of the day, which was local, was obviously working alongside the government! Now, if free-marketeers really believe in free choice then the form of government is also the people's choice - anyone wanting change must utilize the existing political structure or seek revolution etc. Isn't that what Ron Paul is doing? Using the existing imperfect political structure for positive change rather than sitting pretty, waiting for a complete structural change in society to occur by itself.

    An analysis of the increased prosperity of the town of Worgl as a whole (not just the public purse) is necessary comparing the increase in private wealth to public spending. We need to look at the increase in profits in industry and commerce and the commensurate increase in disposable income. Also, a local-government default does not create a surge in a failing economy. Furthermore, just the absence of usury alone in other examples: Click to view link demonstrates how an economy thrives without interest.

    BM: 'Wörgl was not a miracle, but an example of Gresham's Law and Keynesian spending. It is certain that the experiment could not have continued much longer even if the national government did not shut it down. Virtually all of the money used to pay for the projects came from one-time events:'

    This is nonsense. Even if 'one-time events' contributed to the level of economic success in the public sector, it does not follow that other positive effects, such as the increased circulation of money, were not primary factors in the success of the town's economy as a whole. In the Islamic Empire, the zakat system (negative interest) was employed for centuries and prosperity was firmly established throughout that period.

    Also BM fails to mention one point - no interest was payable on bank loans which means that, for example, a mortgagee would not pay three times the actual value of their home via interest - that would certainly make the ordinary citizen more prosperous.

    Interest free economics is the only effective way to push the wealth through the arteries of the economy and away from the parasitic banking fraternity to the real wealth creators - private enterprise. What say you?

    1. This comment has been removed by the author.

    2. Summer

      Please bring some facts, stop relying on faith.

      (Summer made the same comment at the DB thread today.)

  3. 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.

    Anthony Migchels' article on Wörgl, while referring to the experiment as "extraordinary" (perhaps unfortunately), seems to use the same sources and numbers that you use (for the most part). He certainly acknowledges the debt and taxes issues, but highlights the effect on velocity which you seemingly ignore. It would be interesting to have your opinion on this, in order to better understand your viewpoint. 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"?

    Here is Anthony's article:

    1. memehunter

      Thank you for your comment. You raise a good point, and one that I touched on only briefly in the article. Had I seen the Migchels article beforehand, I would likely have addressed the velocity issue more thoroughly (I went through the first 5 or 6 pages of a search resulting in the various sources I identified, and either I missed this one, or it wasn't in these first several pages).

      I will address your questions in a new post, as this deserves proper discussion. I will place the link to the new post in this comment thread.

    2. Memehunter

      Here is my post:

  4. "Each of the issued Wörgl notes was backed by the equivalent amount of official central-bank issued notes."

    ... that were lent out again... thus Worgle money increases the money supply, according to bionicmosquito's own source reference:

    "As the director of the bank informs me, the money has been lent out to trustworthy wholesalers at 6 % interest in the form of sight-bills."

    Unlike the Uk transition Town pounds like Lewes Totness, Brixton, etc... where sterling is locked up in a safe deposit box out of circulation.