Monday, September 5, 2016

Wörgl Enters the Mainstream

The “Miracle of Wörgl,” Silvio Gesell, stamp scrip, Bernard Lietaer, Anthony Migchels; the memories flood my soul, like the time I ate street-side bar-b-que from a vendor in small town in Korea and felt it for the next four days…. And now, more than three years after my last writing on the topic…excuse me while I once again must offer tribute to the economic porcelain gods….

What is Wörgl and who are these characters that are causing such stomach pains in bionic?  Well, give me a moment to recover, and I will explain….

I have written several commentaries on this supposed Miracle of Wörgl.  The most concise was published at the Mises Institute site.  To make a long story short, I offer the opening paragraph from this post:

The "Miracle of Wörgl," refers to the story of currency demurrage and the impact it had on the economy of Wörgl, a small town in Austria. For a bill of such currency to retain its face value, the currency holder must pay a regular, periodic payment (a tax) for a stamp or other marking. Wörgl is regularly touted by advocates of demurrage as a successful implementation of such a currency, one designed to encourage velocity due to the incentive to spend it in order to avoid the periodic tax.

The theory behind the experiment of Wörgl comes from German economist Silvio Gesell (1862–1930).  He had many highly-respected fans at the time:

Free money may turn out to be the best regulator of the velocity of circulation of money, which is the most confusing element in the stabilization of the price level. Applied correctly it could in fact haul us out of the crisis in a few weeks ... I am a humble servant of the merchant Gesell.

— Prof. Dr. Irving Fisher


Gesell's chief work is written in cool and scientific terms, although it is run through by a more passionate and charged devotion to social justice than many think fit for a scholar. I believe that the future will learn more from Gesell’s than from Marx’s spirit.

— John Maynard Keynes

Quack, quack.

Returning to the supposed miracle that occurred in this small Austrian town during the depression in the 1930s….  The town and surrounding region was suffering from significant unemployment.  The mayor convinced the locals to implement this scheme of currency demurrage – requiring a payment representing 1% of the face value of the currency every month in order for the currency to remain “good.”  The payment was evidenced via a stamp on the currency.

The “miracle” was a massive increase in projects financed by the government, thereby greatly increasing employment.  The ability to pay for these projects came from many sources, but the main one was that – in order to avoid paying the 1% fee as the end of the month drew near – the people used the currency to pay off their significant taxes owed in arrears.  They even paid taxes in advance.  This resulted in a major boon to the local government treasury.

The Austrian central bank shut down the experiment at about the same time all arrears had been paid.  In other words, the game was up one way or another.

So why is bionic regurgitating this bad meal, after more than three years?  OK, here goes: Want a Free Market? Abolish Cash.  So writes Narayana Kocherlakota.  Before I continue, who is Narayana Kocherlakota?

Narayana Rao Kocherlakota (born October 12, 1963) is an American economist and is the Lionel W. McKenzie Professor of Economics at the University of Rochester. Previously, he served as the 12th president of the Federal Reserve Bank of Minneapolis until December 31, 2015. Appointed in 2009, he joined the Federal Open Markets Committee in 2011. In 2012, he was named one of the top 100 Global Thinkers by Foreign Policy magazine.

Connected; well respected by the people who count.

He entered Princeton University at age 15 and graduated four years later with an A.B. in Mathematics in 1983. He earned a Ph.D. in economics from the University of Chicago in 1987.

A whiz kid; earned his Ph.D. at the most free-market economics school in the politically-acceptable world.

So what does Kocherlakota have to do with Gesell?  Let’s return to his article:

Imagine what would happen in a free market if everyone suddenly decided that future economic growth would be very slow. The price of safe assets such as U.S. government bonds -- assets that pay off even in a low-growth environment -- would rise sharply. As a result, the real (inflation-adjusted) interest rate, which always moves opposite to the price of safe assets, would fall. In principle, if the demand for safe assets was strong enough, the real interest rate could go deep into negative territory.

Inherent in his view of a “free-market” is a central bank: nowhere in his commentary does he question such an institution – a government enabled monopoly cartel.  Such a monopoly is criticized in every other industry at free-market schools like Chicago, but never even discussed when it comes to banking.  But no degree-granting economic institution crosses this bridge for any reason other than to ridicule the idea of a free market in money and banking.

Second is his prediction that interest rates would dive to extreme negative levels in a free market, a phenomena I am certain never occurred (for anything more than a very short period, if even that) in anything close to a free market – you know, a market without a central bank and a market dependent on specie-backed money. 

Is it surprising that the “markets” are driving interest rates to negative territory after central banks have created untold trillions in demand for market paper?

Third is that negative interest rates are a good thing – and the more negative, the better.  Good, as in efficacious toward a healthy economy.  When your previous theories have placed the world in such deep doo-doo, of course, you want to come up with new theories.

You see, it was by following the old theories that the global economy is in this mess – theories espoused by monetarists from Chicago and Keynesians from Princeton (yes, I know – a distinction without any meaningful difference).

Not only does Kocherlakota embrace these discredited theories (as he must in order to stay relevant); he advocates the elimination of one of the oldest economic practices known to man – at least ever since trading a chicken for a cow was deemed a bad deal.  Kocherlakota wants to eliminate cash:

Yet two government mechanisms prevent real interest rates from getting too negative. The first is cash: As long as people can hold currency, which loses its value only at the rate of inflation, they won't buy safe assets that yield even less. The second is the central bank's promise to keep the inflation rate low and stable -- at about 2 percent in most developed nations.

Cash is a “government mechanism”?  Only in a world of monopoly money.  Anyway, I will deal here only with the first “government” mechanism; as to the second, Kocherlakota would like to see the threat of higher price inflation – no commitment to keep prices stable.

Like any government interference, this causes inefficiencies.

Remember: a government-enabled central banking monopoly cartel is not “government interference” in Kocherlakota’s universe.  If you hint that it is, you will be banished from any respectable economics position for the rest of your career.

The right answer is to abolish currency and move completely to electronic cash, an idea suggested at various times by Marvin Goodfriend of Carnegie-Mellon University, Miles Kimball of the University of Colorado and Andrew Haldane of the Bank of England.

All the right people say so.

This is different than Gesell in application, but identical in theory:

Because electronic cash can have any yield, interest rates would be able go as far into negative territory as the market required.

Kocherlakota = negative interest; negative interest = currency demurrage; currency demurrage = Gesell.  Therefore Kocherlakota = Gesell. 

From Bernard Lietaer, an advocate of stamp scrip (as cited in my aforementioned article at Mises):

Stamp scrip is a medium of exchange characterized by a small monthly "user fee," or "negative interest" charge. This user fee gives an incentive to the bearer not to hoard this currency.

This is no different than banning cash and forcing negative interest on electronic balances in order to drive spending.

Returning to Kocherlakota:

Some groups of people, particularly retirees and soon-to-be-retirees, might react with horror to such an idea.

You think?  Probably some others as well.  But Kocherlakota has a solution to this.  His solution is even more government interference in his version of a free-market economy already plagued by too much government interference (shocking, I know):

If a government wants to redistribute resources to the elderly or the poor, it's much better off just giving them money.

Basic Guaranteed Income – believe it or not, an idea espoused by some so-called libertarian thinkers as well.

Kocherlakota doesn’t stop there:

If cash were abolished, I would support the adoption of two complementary measures. First, instead of targeting a positive inflation rate, central banks could target true price stability by aiming to keep the level of prices constant over time. (To be clear, this would be disastrous unless cash were eliminated first.)

Because targeting a (price) inflation rate has proven to be so easy, aiming for a different target is a piece of cake.  And more: price stability “would be disastrous unless cash were eliminated first”?  What?  I wonder what economic theory that is supported by economic history might prove this – you know, a history during a time of a relatively free-market, with currency backed by specie?  I suggest the answer is that there isn’t one.

Second, currency does provide a service beyond being a store of value and a medium of exchange: It's anonymous and thus ensures the privacy of transactions. In its absence, governments would have to allow the private sector to offer alternatives with the same attractive features.

A free-market in currency?  He can support this all he wants.  Kocherlakota is no dummy – he knows the government will never support this, so he can safely duck for cover under this platitude.  There is only one theoretically consistent and acceptable alternative, given Kocherlakota’s scheme of ensuring deeply negative interest rates: demurrage – that is the alternative.  Stamp scrip – pay 1% (or some such) per month for the “privilege” of holding currency.

Some of the problems that were hoped to be solved by implementing Gesell’s theory included: 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. 

In other words, all of the same things Kocherlakota is after:

We’ve endured a deep recession and a miserable recovery because the government, through its provision of currency, interferes with the proper functioning of financial markets. Why not ensure that doesn't happen again?

In order to avoid the government interference of providing currency (something that can and should be done outside of government anyway), Kocherlakota supports the government interference of central banking and transfer payments.


I would suggest a different answer to Kocherlakota’s question:

Want a Free Market?

End the Fed.


  1. Martin Armstrong is always writing about hordes of clipped coins that people buried during the falls of various civilizations and cultures. The lesson is that people horde stuff when they lose confidence in the system. But, we are like a lot smarter than those stupid Romans.

    1. 1000 years from now it will be tough to find American dollars from this era as they don't have the physical longevity of clipped coins.