The Miracle of Wörgl

A Case Study of Demurrage Money

Most discussions of unemployment and poverty focus on questions of fiscal policy. Those on the Left argue that government needs to implement measures such as progressive taxation, public spending, minimum wage legislation, etc., while those on the Right say that government needs to avoid interfering with the economy and allow market forces to pick up the slack.

But the economist-entrepreneur Silvio Gesell (1862-1930) advanced a different theory which attributes unemployment to a basic design flaw in our system of money. According to Gesell, the two primary functions of money — i.e. medium of exchange and store of wealth — are fundamentally incompatible. By creating a form of money that is designed to be hoarded, we end up with a medium of exchange that fails to circulate as it should.

Gesell argues that hoarding of money is the primary cause of unemployment. (Keynes would subsequently advance the exact same argument in The General Theory.) According to this theory, in times of economic uncertainty holders of money prefer to hoard their money rather than spend or invest. This causes the circulation of money to slow down, leading to falling prices, business losses and layoffs. Economic weakness then further strengthens the incentive to hoard, thus causing the dynamic to become self-reinforcing. This was exactly what was happening during the Great Depression, and, to repeat, according to Gesell it was due to the fact that money can be hoarded without loss. Any hoardable form of currency will periodically stop circulating properly, resulting in economic stagnation, insufficient wages and unemployment.

Such an explanation of unemployment leads to a completely different set of solutions. Gesell believed that governments are largely powerless to combat joblessness using conventional fiscal policy. Rather, he argued that the only way to effectively address the problem is to change the nature of money itself. Specifically, he argued that money should be used ONLY as a medium of exchange and should be designed in such a way as to make it unusable for the purpose of storing wealth. By separating the two functions of money, our medium of exchange would no longer be susceptible to hoarding and would circulate more rapidly and consistently resulting in increased economic activity and greater stability.

How did Gesell propose to accomplish this? Via a concept known as demurrage. Demurrage money is designed to lose value at a consistent, predetermined rate (Gesell proposed a depreciation rate of 5% per year). Demurrage essentially functions as a penalty on those who withhold money from circulation. Since such currency loses value with the passage of time, its holders are incentivized to spend or invest rather than hoarding it.

(It should be noted that demurrage is not the same thing as inflation. Inflation is defined by rising prices. With demurrage currency, while it is true that individual units of money lose value, the purchasing power of par-value currency remains stable. Another important difference is that inflation is unstable and unpredictable, whereas demurrage is uniform and consistent.)

Gesell developed the concept of demurrage in a series of writings which culminated with his book, The Natural Economic Order (1916). Keynes spoke approvingly of Gesell’s analysis, referring to him as an “unduly neglected prophet”. Irving Fisher, a famous Yale University economist and the intellectual godfather of the New Deal, described himself as “a humble servant of the merchant Gesell” and wrote his own book entitled Stamp Scrip (1933) to introduce Gesell’s ideas to an American audience.

During the Great Depression, the Austrian town of Wörgl was suffering from extreme unemployment. The mayor, Michael Unterguggenberger, was familiar with Gesell’s ideas and proposed the creation of a local demurrage currency to jump start the town’s economy. His proposal was approved on July 5th, 1932. The town deposited 40,000 schillings of national currency in a local savings bank and used it as backing for the issuance of local demurrage currency which was used to pay the salaries of government employees. Taxes were also made payable with the notes. In order to compel people to keep the money in circulation, stamps needed to be affixed to the bills once a month to keep them at par value. The stamps cost 1% of the value of the notes (thus resulting in a 12% annual depreciation rate).

The program was an immediate success. The fact that people wanted to avoid the losses resulting from holding onto the notes caused them to spend the money quickly (and even prompted some to pay their taxes early). The currency circulated rapidly, resulting in increased economic activity and more employment. Rising public revenue gave the town an increased ability to invest in public works. During the 13 months that the currency remained in existence the town paved roads, installed street lights, built public housing, a reservoir, a bridge and a ski jump. An additional benefit of the currency was that it could only be used locally and thus circulated within the community rather than being siphoned off to distant financial centers.

Word of the program’s success spread quickly, prompting six other nearby villages to copy it, and in June of 1933 Unterguggenberger addressed a meeting of public officials from 170 municipalities who were interested in replicating the project in their towns. Word of “the Miracle of Wörgl” spread internationally as well, attracting the attention of the future president of France, Edouard Daladier, who gave a detailed report to the French parliament. Irving Fisher sent an assistant to Wörgl to report on the project, since he viewed it as a potential solution to the Great Depression.

Later that year, the Austrian Central Bank, who viewed the currency as a threat to its power, instituted a ban on complementary currencies, thus shutting down the program. We can only speculate how history might have turned out if the Austrian government had embraced Gesell’s proposals rather than suppressing them. But 90 years later Wörgl still stands out as a beacon of hope to those who believe Gesell’s theories hold the key to building a stronger, healthier, more stable economic future which generates better outcomes for everyone.