Friday, June 1, 2012

Stamp Scrip: Episodes in Economic History

On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl made economic history by introducing a remarkable complimentary currency. Wörgl was in trouble, and was prepared to try anything. Of its population of 4,500, a total of 1,500 people were without a job, and 200 families were destitute. The mayor, Michael Unterguggenberger, had a long list of projects he wanted to accomplish, but there was hardly any money with which to carry them out. These included repaving the roads, streetlighting, extending water distribution across the whole town, and planting trees along the streets.

Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, the mayor deposited them in a local savings bank as a guarantee to back the issue of a type of complimentary currency known as 'stamp scrip'. This requires a monthly stamp to be stuck on all the circulating notes for them to remain valid, and in Wörgl, the stamp amounted 1% of the each note’s value. The money raised was used to run a soup kitchen that fed 220 families.

Because nobody wanted to pay what was effectively a hoarding fee, everyone receiving the notes would spend them as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings. This offer was rarely taken up though.

Only the railway and post office refused to accept the local money. Ultimately, people paid their taxes early using scrip as well, resulting in a huge increase in town revenues. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but 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. 

In other words, Stamp Scrip improved local-level C, I, and G, three of the four components of GDP.

The key to its success was the fast circulation of scrip within the local economy, 14 times higher than the schilling. This in turn increased trade, creating extra employment. At the time of the project, Wörgl was the only Austrian town to achieve full employment. Formally, it calls to mind the Quantity Theory of Money, whereby:
MV = PY and 
dM+dV = π+dY

Six neighboring villages copied the system successfully. The French Prime Minister, Eduoard Dalladier, made a special visit to see the 'miracle of Wörgl'. 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.

At this point, the central bank panicked, and decided to assert its monopoly rights by banning complimentary currencies. Wörgl's citizens sued and lost in the Austrian Supreme Court. It then became a criminal offense to issue 'emergency currency'. The town promptly went back to 30% unemployment. In 1934, social unrest exploded across Austria, which was followed by annexation four years later. 

The 1920s had already seen a scrip currency called the 'wara' in the German town of Schwanenkirchen. This saved the town's economy and kept a coal mine operating. The wara started circulating more widely and became part of the 'Freiwirtschaft' (Free Economy) movement, based on the ideas of Silvio Gesell. Central to Gesell's ideas was the use of a hoarding fee of the kind used in Wörgl (technically known as 'demurrage'). In 1936, the soundness of the idea was affirmed by Keynes in the General Theory of Employment, Interest and Money.

The most groundbreaking feature of demurrage is that it is intrinsically anti-inflationary. Whereas conventional currencies are progressively devalued by interest, anti-inflationary money steadily increases in value. As each monthly stamp is added, the value of the note effectively increases by the stamp amount. This is technically equivalent to a negative interest rate.

The present short-term focus of investments and lack of long-term vision are exacerbated by interest-driven currency devaluation. This reduces the financial appeal of longer-timescale projects. The use of a demurrage currency gives a rate of return simply lending out money. When money is repaid (remember these are non-interest currencies), it will have increased in value owing to the money saved by having avoided paying the monthly demurrage fees. This has the potential to enable investment in highly beneficial but economically marginal activities such as earth repair.

Recently, the Federal Reserve Bank of Cleveland has launched an economic commentary brief explaining how a stamp scrip plan would work in the US. In 1933 during the great depressesion, a US plan for the issue of Stamp Scrip was drawn up by Irving Fischer.
This article is a re-posting of  of a 2002 blog article originally posted by Laboratory Readings. It has undergone minor modification to the text. 

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