Michael Unterguggenberger is the architect of a little-known monetary experiment in 1932 that may soon make a comeback – on a global scale.
Michael Unterguggenberger was mayor of the Austrian town of Wörgl in 1932, during the depths of the Great Depression. In July that year he began one of the most intriguing – and controversial – monetary experiments in history.
Like much of the world at that time, Wörgl had high and growing unemployment. The mayor wished to kick-start a recovery with a programme of publicly-funded works – repairing streets, planting trees, building a bridge. That sort of thing. Trouble was, he didn’t have the money to pay for it.
So he took what money the town did have, deposited it with a local bank, and used it as a guarantee to issue IOUs which would circulate as currency (at the time this had not yet been outlawed by Austria’s authorities).
Wörgl’s new ‘currency’ came with strings attached: once a month it lost 1% of its face value. This created an incentive for people to spend their money as soon as possible after they received it. And that’s exactly what happened.
They paid debts. They bought things, helping to keep local businesses going and provide work for others. They paid their taxes early – and then paid future taxes in advance.
In economic terms, the Wörgl experiment aimed to increase the velocity of money, ie how many times each unit of currency is spent.
Did it work? Some hail the experiment a success. Here’s how its results are described on one website:
“Wörgl was the first town in Austria which effectively managed to redress the extreme levels of unemployment. They not only re-paved the streets and rebuilt the water system and all of the other projects on Mayor Unterguggenberger’s long list, they even built new houses, a ski jump and a bridge with a plaque proudly reminding us that ‘This bridge was built with our own free money’.”
However, there are critics. The Mises Institute appears torn in its assessment. On the one hand there’s a desire to applaud the free market spirit behind creating one’s own currency. On the other, the Keynesian ideas it was used to fund – stimulus spending, the multiplier effect – leave them cold. The Mises critique boils down to an argument that Wörgl’s policy was unsustainable.
Being able to pay your taxes with the IOUs was a big reason why people accepted them as money. But once you’ve paid, say, two years’ of taxes in advance, will you still be happy to work for a currency you can only spend locally? One that loses its value each month?
There’s also the matter of Wörgl defaulting on some of its debt to free up cash, as well as a grant the town received from the Tyrol government. Both these things helped towards delivering positive outcomes.
Beyond all that is the question of how sustainable a boom is when it’s built on increased velocity of money. After all, there’s a limit to how many times and how quickly the same banknote can pass from hand to hand to hand.
Unterguggenberger returns
Why am I telling you about a quirky economic experiment in a small town 83 years ago? Because the 1% loss of value on the IOUs is an example of negative interest rates on cash. And not cash in the bank, either, but paper currency too. Negative interest rates (as a concept and now as a reality) have made a comeback, and a startlingly rapid one at that.
Four years ago I had an email exchange with an economist friend about Wörgl. To our minds it was just a historical quirk. Since then, however, some central banks have started applying negative deposit rates.
And last Friday, Bank of England chief economist Andy Haldane gave a speech on the subject which has ruffled a few feathers. It included the idea of negative interest rates on paper currency, as well as negative rates more generally.
Whatever the merits of the argument, the Wörgl story shows that the idea of penalising cash will receive a sympathetic hearing in some quarters. Why? Because the benefits of the scheme were visible and immediate. Policymakers love that.