Tuesday, November 6, 2012

The Wörgl Experiment



Information from the following sources: 


 
 
 

The first article, written in 2002, is a summary of the other three – all three written contemporaneously in 1934.  The first and third of the older articles are quite instructive (the third being penned by the Wörgl mayor himself).

I will begin by reminding that I am all for competitive currency and 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.

So Wörgl presents no significant philosophical hurdle for me.  Led by the mayor, a local village decided to introduce a new currency.  What follows are my key takeaways from the referenced articles – all penned by individuals sympathetic to the experiment:

About 32,000 shillings of notes were printed, but only 12,000 were ever placed in circulation.  Of these, about 4,000 were hoarded – despite the demurrage – as collectibles, etc.

The demurrage was 1% per month.

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.

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

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

Apparently there was no noticeable price inflation; 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.

Approximately 100,000 shillings worth of projects were implemented in Wörgl during the time of the experiment – in a town which had “normal” annual tax and interest income of approximately 36,000 shillings.  This “investment” represents the miracle.

It seems the miracle could be accounted for as follows:

During the time of the experiment, local tax payments to the parish increased by 37,000 shillings, while federal and provincial tax payments fell by an aggregate of 29,000 shillings (if I understand the source information properly) – keeping more money in the local economy.

In addition to the increase in annual tax payments to the parish, significant payments were made in taxes owed in arrears, as well as taxes paid in advance.  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.  Of 83,000 shillings of taxes owed in arrears at the beginning of the experiment, 77,000 shillings was paid to the parish accounts.  Basically, a huge tax increase.

Parish debt owed to the Innsbruck Savings Bank was defaulted, resulting in significant gain to the parish.  The default was over 100,000 shillings.

My conclusion: It seems that the entire experiment was a Keynesian one – significant increased spending on public works financed by a) stiffing the federal and provincial governments, b) defaulting on debt owed to the Innsbruck Bank, and c) significant increase in taxes in arrears being collected due to the threat of demurrage.

I find no miracle here.  The experiment likely could not have lasted much more than a year, given that the bulk of the projects were funded by one-time events that could not be repeated.

One more fallacy in the long list of funny-money miracle fallacies.

2 comments:

  1. Interesting that you don't mention that this was in the midst of an economic crisis of epic proportions and that other towns sought to emulate Wörgl's experiment. There is no need to talk about a "miracle", it is simply an effect of demurrage, but maybe it's worth pointing out that other parts of Europe (and America) did not enjoy such prosperity around that time and were quite interested in what was happening in Wörgl...

    And where is the "fallacy", by the way? I'll give you that I don't like the term "miracle", but I still don't see any "fallacy" after reading your article, unless you really claim that this is all due to defaulting on the parish debt (and I haven't double-checked your claims). The fact that people paid taxes earlier is another normal effect of demurrage, so no "fallacy" here (and no "miracle" either).

    About "funny money": because paying interest on fractional-reserve loans created out of thin air (it doesn't really matter whether the currency in which these loans are issued is backed by gold, paper, tally sticks, or whatever you want) is not "funny"?

    But I know the answer: any monetary scheme that doesn't receive the Austrian stamp of approval is, by definition, "funny money".

    ReplyDelete
    Replies
    1. Memehunter, thank you for visiting and commenting.

      “Interesting that you don't mention that this was in the midst of an economic crisis of epic proportions and that other towns sought to emulate Wörgl's experiment.”

      This post was in reply to comments at a Daily Bell article. I did not intend for it to be a thorough post; I did not intend a post at all, however it was relatively easy to find the credible links that formed the basis for my conclusions, so I went ahead.

      I intend to look into this further, and write at least one additional, more thorough, post.

      “And where is the "fallacy", by the way? I'll give you that I don't like the term "miracle", but I still don't see any "fallacy" after reading your article, unless you really claim that this is all due to defaulting on the parish debt (and I haven't double-checked your claims). The fact that people paid taxes earlier is another normal effect of demurrage, so no "fallacy" here (and no "miracle" either).”

      I find the fallacy of the “miracle” (or whatever term is appropriate) based on the following: 1) it seems taxes normally paid to federal and provincial governments were not paid, but stayed with the parish, 2) paying almost all taxes that were previously in arrears can only happen once – it is not a repeatable event, 3) paying taxes in advance is also not repeatable (how many years in advance might one chose to pay?), and 4) defaulting on debt certainly frees up resources that were not previously available.

      “About "funny money": because paying interest on fractional-reserve loans created out of thin air (it doesn't really matter whether the currency in which these loans are issued is backed by gold, paper, tally sticks, or whatever you want) is not "funny"?”

      My complaint on the general subject of money / etc. is strictly regarding government involvement. If it is market derived, I have no basis for complaint, although I might disagree with certain aspects of the system (Real Bills is one such example). So in today’s environment, I find the single-most important issue (and overwhelmingly so) is that government backs and guarantees the system.

      “But I know the answer: any monetary scheme that doesn't receive the Austrian stamp of approval is, by definition, "funny money".”

      No, see my answer above. Even Austrians do not agree on all aspects of money and credit. Some find no fault with market derived money in any form, including fractionally reserved – as long as it is not backed by the state. Others believe only 100% gold-backed money is good (or not “funny”). I tend to side with the former group.

      Delete