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Comment on the Wrgl Experiment with Community Currency and Demurrage | Reinventing Money

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Comment on the Wrgl Experiment with Community Currency and Demurrage

by Thomas H. Greco, Jr. May 9, 2002 It is not hard to demonstrate that,because of the intentional scarcity and mismanagement of official currencies,which has been generally prev alent in recent times, and which was particularly sev ere during the Depression y ears of the 1 930s, a supplemental local currency can and does improv e the general economic health of the community , and helpsenable its most marginal members to acquire the necessities of liv ing. Thus, Ihav e argued, in all of my writings onthe subject, for the freedom to issue such currencies. On the other hand, Ihav e cautioned against the common errors and pitfalls associated with suchinitiativ es, which hav e too often been repeated. If the cause of monetary freedom (or, more accurately , free exchange ) is to be adv anced, and notunduly hindered by gov ernment and the established monetary and financialauthorities, it is imperativ e that priv ate ex change initiativ es be properly designed and carried out. It is necessary to distinguish the features which areessential from those which are either superfluous or downright harmful, and forthe management of priv ate ex change media to be bey ond reproach. The design feature, which is theobject of inquiry here is that known as demurrage , which is theintentional depreciation of a currency ov er time, the main object being toprev ent its being hoarded and to speed its circulation from hand to hand. Many of the stamp scrip issues of the Great Depression were based on thisidea, which is generally credited to Silv io Gesell. Of all his great insightsinto money and economics, this idea of depreciating money is the one itemthat his followers hav e seized upon with great passion. The most celebratedcase in which a demurrage currency was issued was that of the Austrian town ofWrgl. The Wrgl ex perience has often been heralded by modern day Gesellians asproof of the effectiv eness of demurrage in stimulating the circulation ofcurrency , and thus, as the main feature that is necessary for the economicadv antages of a community currency to be realized. But does the ev idencesupport such a conclusion? T he fundam ental question, in the Wrgl case isthis: Would the Wrgl currency have been just as effective without thedem urrage feature, as with it? While contemporary writersfrequently refer to this case, few, if any , seem to know any of the detailsabout it, and definitiv e accounts of the Wrgl ex perience are not easy to find.Howev er, through T. Megalli, a good friend and colleague in Germany , I hav eacquired some useful commentaries, which were written at the time. Theseaccompany ing articles all appeared in one issue of the Annals of
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Comment on the Wrgl Experiment with Community Currency and Demurrage | Reinventing Money

CollectiveEconomy from the y ear 1 934. They are: 1 . The Wrgl Experiment With DepreciatingMoney . By Alex . V on Muralt 2. A French V iew of The Wrgl Experiment: A New Economic Mecca . By M.Claude Bourdet 3. The End Results of the Wrgl Experiment. By Michael Unterguggenberger,Burgomaster of Wrgl (Austria) These articles all support theconclusion that the local currency did, indeed, improv e the financial conditionof the local (parish) gov ernment that issued it, and the general health of thelocal economy during the time it was allowed to circulate. As to whether thedemurrage feature was an effectiv e element in causing this result, the ev idenceis far less compelling. The first of these articles, isperhaps the most informativ e. V on Muralt appears to hav e been quite diligent inhis inv estigation and gathered as much factual ev idence as was likely av ailableat the time. His account is certainly more detailed than any other I hav e seen.I will summarize a few of the more salient points and prov ide my interpretationof their meaning. But, of course, thereader can ex amine the original article and draw his/her own conclusions. The town of Wrgl began to issue itscurrency , called labor certificates, in July of 1 932. V on Muralts study ,which included a v isit to Wrgl, was apparently conducted in April of thefollowing y ear. Let us begin by summarizing the features of the Wrgl notes, ashe described them. 32,000schillings were printed (in denominations of 5 and 1 0 sch.), but only 1 2,000schillings were issued by the parish by pay ing its workers. Thelocal currency was redeemable, on demand, for official currency , but there wasa 2% fee on such redemptions. Foreach schilling of local currency issued, one schilling of official currency wasdeposited (at interest) in a bank account to cov er demands for redemption. Thedepreciation (demurrage) rate was 1 % per month. This was called the Relieftax . Inorder for a note to maintain its full face v alue, it was necessary to affix astamp at the end of each month. these stamps could be purchased at the parishoffice. Thenotes ex pired at the end of the y ear, but could be ex change, free of charge,for new ones, so long as all the necessary stamps had been affix ed. The author concludes that the parish(local gov ernment) was the principal beneficiary of the ex periment anddescribes both the direct gain and the indirect gain which itrealized.
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Comment on the Wrgl Experiment with Community Currency and Demurrage | Reinventing Money

Amongthe direct gains, he catalogs the following: 1 ...the 1 2 % relief tax ation deriv ed from the circulating certificates, whichpresumably deriv ed from sale of the stamps which were supposed to be affix ed toeach note in order for it to not depreciate. He points out that this would notbe collected on the entire note issue, since those notes in possession of theparish would need to be stamped by the parish without charge to any one beforebeing recirculated. 2.Rev enue from the 2% redemption fee on notes turned in in ex change for officialcurrency . 3.Interest income earned on the official currency redemption fund (at the rate of6%). Income from the first of these rereckons at 50 schillings per month, or 600 per y ear; from the second, at 690schillings ov er a nine month period (during which 34,500 schillings wereredeemed), or 920 per y ear, from the third, 7 20 schillings per y ear (6%interest on the fund of 1 2,000 schillings). Failing to annualize the secondfigure, he computes a total of ov er2,000 schillings, which more precisely should be giv en as 2,240 schillings pery ear. In order to gain a sense of whether this is a large or small amount, hecompares it to the burgomasters annual salary of 1 ,800 schillings. Anothermajor gain, which v on Muralt mentions in passing, is the windfall profitassociated with the substantial amount of local currency which was nev er presentedfor redemption. He say s, Howev er,of the 1 2,000 schillings worth of reliefmoney issued, only about two-thirds is in circulation. The remainder hasdisappeared, hav ing been annex ed by souv enir hunters and collectors. That suchsubstantial amounts of depreciating money should v anish in this way ,contradicts the theoretical intention which aims at accelerating thecirculation and not at hoarding. For the parish, howev er, the disappearance ofnotes is not unwelcome, since thisrepresents for it a net gain. If the stated estimate is correct, this gainwould amount to about 4,000 schillings. This souv enir collecting (hoarding)is a phenomenon which Gesell seems to hav e ov erlooked, but it is one which canprov ide significant profits to a currency issuer, especially in the early stages while the currency remains a nov elty . Still, so long as there are peoplewho are disposed to collect things, some profit from this source can beex pected (just as stamp collectors prov ide a profit to the post office by buy ingstamps but nev er using them to claim the serv ices due). Frequent changes in thedesign of the notes (as with postage stamps) should make collectors a continualsource of profits for the issuer. A similar ex perience has been reported by theissuers of Ithaca HOURS, with the amount of currency lost in this way beingestimated at up to fifty percent. V on Muralt also describes importantindirect gain of the sy stem stating that during the first six months heav y tax arrears, 90 % of these in relief money , reached the parish treasury . Sucharrears were said to hav e risen from 26,000 schillings to 1 1 8,000 schillingsbetween 1 926 and the close of 1 931 , and that 7 9,000 schillings of that hadhenceforth been paid, howev er v on Muralt say s that I was unable to obtain fullconfirmation at the offices of the Ty rolese Gov ernment. Hefurther prov ides figures that show substantial increases in rev enues from localtax es (From the numbers he cites, one can compute a combined increase in suchlocal tax rev enues of more than 61 %),
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Comment on the Wrgl Experiment with Community Currency and Demurrage | Reinventing Money

arguing that, These are increases whichcan only be accounted for by the pay ment of arrears; but they are not assubstantial as those cited by the burgomaster. He reports the burgomastersobserv ation that tax es were eagerly paid and sometimes paid in adv ance. Heconcludes that, This eagerness to pay tax es may be, in my opinion, simply owing to the fact that the business man who finds at the close of the monththat he holds a considerable amount in relief money , can dispose of it with thegreatest ease and without loss by meeting his parish obligations. A change ofattitude has manifestly taken place. Ifformerly the pay ing of tax es was deferred to the last, now it occupies firstplace. It would be therefore highly desirable to inquire whether, parallel tothe increased tax pay ments there is not an increased indebtedness towards othercreditors, e.g. , towards the suppliers in Innsbruck and V ienna. I hav eno data bearing on this problem. That last point is certainly an important one. Toround out the financial picture, v on Muralt points out that, with regard to apreex isting debt of 1 ,290,000 schillings, owed to the Innsbruck Sav ings Bank,the parish was still unable to to meet its obligations in cash. In addition, he points out that much of theimprov ement to the local economy may hav e resulted from the injection of fundsfrom outside. He say s that, Thanks to the v arious sources of rev enue abov eindicated, and thanks also to subsidies from the Productiv e Unemploy ment Fundand a relief credit of 1 2,000 schillings from the Ty rol Gov ernment, the parishwas enabled to carry out a farreaching employ ment scheme. So,the situation was a bit more complicated than we, today , might hav e thought. Inlight of all this, how much of the miracle of Wrgl can be said to deriv efrom the issuance and circulation of the local currency , and how much wascontributed to that effect by the demurrage feature? I think the case is v ery strong for arguing that this supplemental medium of ex change had a v ery significant impact in improv ing, not only the financial condition of the localgov ernment (parish), but also the local business climate and generalprosperity , although v on Muralt giv es us little information about the latter.Still, there can be no doubt that, being a local currency accepted only withinthe local economy , the Wrgl notes must hav e benefitted the local economy ,because, unlike official currency , they could not be used to pay outsiders. Thefact that the local populace were, as a whole, substantially in arrears ontheir tax dues to the parish would certainly assure a high lev el of acceptance(locally ) and a continuing demand for the local currency , at least until suchtime as those tax arrears had beenpaid. This tax foundation is, after all, the primary reason for publicacceptance of any gov ernment-issued currency . In light of this, I maintain thatthe demurrage feature had little to do with the success of the Wrglex periment, and that the results would hav e been largely the same without it.The demurrage feature may hav e, howev er, as v on Muralt, intimates, giv en thepay ment of local tax es priority ov er the pay ment of priv ate bills by thepopulace, but the small sav ings deriv ed from following that course make itdoubtful. I would think that the threat of property seizure would prov ide a farstronger incentiv e for the pay ment of tax arrears than would the av oidance of asmall percentage loss on the currency . In my opinion, giv en the prev ailing circumstances in Wrgl at the time and the particular design features of the Wrglcurrency , its beneficial impact deriv ed primarily from three fundamentaleffects: 1 . the substitution effect,
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Comment on the Wrgl Experiment with Community Currency and Demurrage | Reinventing Money

2. the supplementation effect, and 3. the backlog effect. Thesubstitution effect deriv es from this: A sum of official currency , which oncespent into the local economy , can quickly flow out again, instead, wasdeposited at interest and used as the basis for issuing (spending) a localcurrency that would hav e a circulation limited to the local community economy .This assured recirculation within the community enabled the rapid clearing oflocal debts and gav e local merchants preferred status ov er outsiders as sourcesof supply . Thesupplementation effect is this: The official money deposited did not remainidle in a the banks v ault, but as is the practice of banks, was used as thebasis for making additional loans to its customers, so that money remained incirculation, while the new local money was also put into circulation. Thebacklog effect is this: The general monetary stringency which ex istedthroughout Austria at the time had caused debts to accumulate far bey ond theirnormal lev els and for peoples material needs to go unmet. The infusion of newsupplemental ex change media would likely be met by people eager to spend it. Wesee in the Wrgl currency notes, many features which are also inherent in theToronto Dollar model, which notably does not include demurrage. Such similaritiesinv ite performance comparisons, which I leav e to others or for another time.One should be cautioned, howev er, to also take careful note of theirdifferences, particularly the fact that Toronto Dollars are not issued by themunicipal gov ernment and are not accepted in pay ment of tax es, so TorontoDollars lack the impetus to circulate which deriv es from a tax obligation.Further, while both currencies prov ide for redemption in official currency , theWrgl notes were issued as wage pay ments to municipal workers, so the amountissued was determined by local gov ernment action, not by v olunteer purchasers.Lastly , the economic circumstances are different. The backlog effect inpresent-day Toronto is generally missing.

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