The Power of Demurrage: the Wörgl Phenomenon

Anthony Migchels – Real Currencies July 2, 2012

The velocity of money is a badly neglected aspect of monetary theory. It is far more important than people realize and both in past and in the present depression, sluggish circulation played a major and negative role. The most obvious way of increasing the velocity of money is Silvio Gesell’s demurrage, a negative interest rate, in effect a tax on holding money. This is not just theory. There is a famous case in which it was implemented. The Wörgl experiment showed truly extraordinary results and is legendary in Interest-Free Economics. It’s relevant today too, with the Danish Central Bank this week setting a negative interest rate for the first time in history.

Wörgl is a small town in the Austrian Tyrol that would be completely inconspicuous, were it not for an amazing event that transpired almost 80 years ago.

At the height of the Great Depression some 4500 people lived in the village. It was suffering badly from the catastrophic policies of the Austrian Central Bank, which had brought down the money supply from 1067 million Schillings in 1928, to 997 million in 1932 and 872 million Schillings in 1933. Unemployment stood at 1500 and 200 families were completely destitute.

The town owed 1,3 million Schillings to the Innsbruck Savings Trust and had to pay 50,000 per year in interest over that debt. The council was owed 118,000 in taxes, but it was all but impossible to get at it, with the result that the town was lagging on its own obligations to the regional government.

Meanwhile, there were plenty of public works that needed to be done. Roads had to be repaved, Street lights were necessary, water distribution needed to be extended and trees had to planted along the streets.

Enter Michael Unterguggenburger, the burgomaster (mayor) of Wörgl. He had been studying economics for the better part of his life and lived through the difficult times of the 1907 depression, the Great War, the associated inflation and now this massive deflation. He believed in Socialism’s big idea of ‘ending exploitation of men by men’, but not in their methods, most certainly not their nationalization of the means of production.

He did however read Silvio Gesell’s book ‘the Natural Economic Order‘.

In this work Gesell introduces his ideas about the circulation of money and how to improve it: through demurrage. A tax on holding money, a negative interest rate.

And Unterguggenberger, desperate at the situation in his town, decided to give Gesell’s ideas a shot. He created ‘Certified Compensation Bills’, in denominations of 1, 5 and 10 Schillings. These would devalue at a rate of 1% per month at the end of the month, and those holding the bill at the time devaluation needed to buy a stamp of 1% of nominal value to extend it.

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