Free Economy and the Miracle of Wörgl

Silvio Gesell’s Free Economy and the Miracle of Wörgl

Dr George Reiff*

The Freiwirtschaft (‘Free economy’) is an economic theory conceived by Silvio Gesell in 1916. It calls for the abolishment of interest and focuses on the free flow of money in the economy that is kept moving through the application of negative interest. The system was seen as ‘natural economic order’ but it has never been put into practice by any national government..

Silvio Gesell was a merchant and private scholar of German-Argentinian descent. He developed his system based on observation rather than mainstream economics.

Freiwirtschaft consists of three central premises (The Three Fs):

  • Freigeld (free flowing money): All money is issued for a limited period at constant value (neither inflation, nor deflation). Hoarding (holding back) of money is discouraged by the application of a negative interest rate on a monthly or annual basis. Long-term saving requires investment in bonds or stocks or Savings Banks; both methods avoiding losses in value due to negative interest.
  • Freiland (free land): All land is owned by public institutions and can only be rented, not purchased in order to avoid speculative withdrawal of land from the market.
  • Freihandel (Free Trade): Free Trade has long been a mainstream position in a perverted form until now, but the anti-globalization movement largely opposes it in the present form.

Gesell saw his system having the following results:

  • More private spending for consumption and investment
  • Consumers investing surplus money in expanding companies
  • Full employment: work for everyone who can work
  • The rate of economic growth set by the society based on the GDP
  • Interest rates dropping to almost zero percent over time.
  • Freiland preventing high real estate prices
  • Social disparities ceasing to exist

As mentioned before, this economic theory has never been put into practice by a country but in 1932, an Austrian mayor used Gesell’s ideas to rescue the economy of his town.

THE MIRACLE OF WÖRGL

In the early 1930s, the world was in the midst of an economic crisis. World trade had fallen by 60% and the flow of financial capital internationally had fallen by 90%. One of the most serious consequences was the emergence of mass unemployment; in 1932 the unemployment rate in Austria was 24.7%.

Some local communities tried to find solutions aimed at easing the crisis. One of the initiatives was the so-called ‘miracle of Wörgl’ – the ‘free flowing money experiment’ that took place between summer 1932 and summer 1933 in the town of Wörgl, Austria. In 1932, cement and pulp production at Wörgl declined sharply and unemployment rose dramatically. Many citizens were unable to pay their municipal taxes at a time when the municipality was faced with high expenses in the form of assistance payments to the unemployed. The town’s treasury was empty, and the end was in sight.  It was decided that a welfare committee should be established to organize the issue of emergency money.

The mayor of Wörgl Michael Unterguggenberger (1884-1936) searched for solutions for the crisis within his community and finally opted for a monetary system experiment. The theoretical basis for the experiment was the free economics of Silvio Gesell, which prescribed depreciating money as a remedy for low economic activity. The basic observation that Unterguggenberger made in his community experiment was the sluggish movement of money during the deflationary period. The citizenry of Wörgel held (hoarded according to Gesell’s Theory) their money back rather than spending it on goods and services. Unterguggenberger saw that this needed to change. Local money was provided in the form of ‘employment confirmation slips’ or ‘AB-notes’ for use in the town of Wörgl only. It was arranged that these slips would lose value by a steady current security fee of 1% per month with the result that the holder of that money would be strongly encouraged to circulate it, for holding the money meant loss of value. In practice, this concept was implemented so that as each month passed, tokens worth 1% of the slip had to be attached to it, so that the note retained its validity – see example below.

An AB note showing the typical 12 fields for the monthly token stamp

When the program was implemented on the 5th July 1932, Unterguggenberger gave the following explantion:

“Slower money supply is the main cause of the current economic paralysis. Money as a medium of exchange slips away more and more from the hands of creative people. It seeps into interest channels and accumulates in the hands of people who render the money unavailable to the market by holding it back as speculative funds”.

Unterguggenberger introduced the free flowing money on a voluntary basis. It was equivalent to the existing Austrian Schilling. Municipal employees were paid initially up to 50% of their wages and later up to 75% in AB notes. In addition, there was a job program for the unemployed set up and they were completely paid for their work in AB notes. The initiative of mayor Unterguggenberger found much support in the community; all commercial businesses in the city participated in the AB note scheme because communal taxes could be paid with the notes.

After a short time the positive effects of the experiment emerged. The movement of money was very high, investments in the infrastructure of the community took place and unemployment fell by about 14% at a time when unemployment in Austria as a whole rose by 19%.

The Wörgl experiment with free flowing money found some resonance in the international press. Unterguggenberger was invited to undertake international lecture tours and the French Finance Minister and later Prime Minister Daladier visited Wörgl in 1933 because of the free flowing money experiment. Further, an economist, Irving Fisher was sent to Wörgl by the American government. Fisher later tried, albeit unsuccessfully, to introduce a Wörgl-like money under the name Stamp Scrip in the USA in an attempt to overcome the economic crisis there.

Wörgl Mayor Michael Unterguggenberger

The miracle of Wörgl came to a sudden end. In January 1933 an injunction to prohibit the experiment was issued by the Austrian authorities against the community of Wörgl. The Austrian National Bank was behind this; it saw its monopoly on money threatened. The community of Wörgl appealed against the decision but was not successful. The use of AB notes continued illegally in Wörgl until late 1933 when the Austrian State threatened to use force. The miracle of Wörgl ceased on 15 September 1933 amidst comments from the Swiss government that the Wörgl example could undermine the monopoly of the Swiss Central Bank as well. Unterguggenberger was even prevented from lecturing in Switzerland afterwards.

Following the prohibition of free money Unterguggenberger made the following comment:

“I had foreseen that the whole affair would be banned! I only did it because I wanted to give the world a sign that it was possible! To me and the world I have proven it! Now this knowledge has to slowly mature in the minds of men! The introduction of the railway was in the beginning threatened by prohibition as well”.

CURRENT CURRENCY INITIATIVES

The Wörgl experiment is not forgotten by proponents of alternative currency systems today.  There are currently regional initiatives in Germany, Switzerland and Austria, inspired by Wörgl and Silvio Gesell’s Theory. And in the town of Wörgl itself, an Unterguggenberger Institute was established in 2003, dedicated to the documentation of the Wörgl experiment and the collection of information about current complementary currency projects.

Immediately after the First World War, Silvio Gesell himself made the following comment:

„Trotz der heiligen Versprechen der Völker, den Krieg für alle Zeiten zu ächten, trotz der Rufe der Millionen: ‘Nie wieder Krieg’, entgegen all den Hoffnungen auf eine schönere Zukunft muß ich sagen: Wenn das heutige Geldsystem, die Zinswirtschaft, beibehalten wird, so wage ich es, heute schon zu behaupten, daß es keine 25 Jahre dauern wird, bis wir vor einem neuen, noch furchtbareren Krieg stehen. Ich sehe die kommende Entwicklung klar vor mir. Der heutige Stand der Technik läßt die Wirtschaft rasch zu einer Höchstleistung steigern. Die Kapitalbildung wird trotz der großen Kriegsverluste rasch erfolgen und durch Überangebot den Zins drücken. Das Geld wird dann gehamstert werden. Der Wirtschaftsraum wird einschrumpfen, und große Heere von Arbeitslosen werden auf der Straße stehen. An vielen Grenzpfählen wird man dann eine Tafel mit der Aufschrift finden können: ‘Arbeitssuchende haben keinen Zutritt ins Land, nur die Faulenzer mit vollgestopftem Geldbeutel sind willkommen.   Wie zu alten Zeiten wird man dann nach dem Länderraub trachten und wird dazu wieder Kanonen fabrizieren müssen, man hat dann wenigstens für die Arbeitslosen wieder Arbeit. In den unzufriedenen Massen werden wilde, revolutionäre Strömungen wach werden, und auch die Giftpflanze Übernationalismus wird wieder wuchern. Kein Land wird das andere mehr verstehen, und das Ende kann nur wieder Krieg sein“,

Translated into English Gesell’s comment reads:

“Despite the holy promise of the peoples, to abolish war for all times, despite the cry of millions ‘never again war!’, against all the hopes for a better future, I must say that: if the current monetary system, the economy based on interest, stays continuously in use, then I dare to opine that it will take not even 25 years before we are faced with another horrible war. I see this development clearly before me. Today’s state of technology enables us to increase the world economy towards highest performance. Accumulation of capital will take place fast despite the losses incurred through the war and by over supply the interest rates will be lowered. Money will be hoarded then, people will keep it available in cash. The economic area will shrink and huge armies of unemployed will be on the streets. At many borders one will find a sign where is written: ‘people looking for employment must not enter this country; only the Lazy with stuffed wallets are welcome’. Like in olden times, there will be the idea to steal lands from other countries and canons will be manufactured and at least one will have created work for the unemployed again. Within the unsatisfied masses there will awaken wild, revolutionary currents and the poisonous plant ‘Over-Nationalism’ will proliferate also. No country with understand the other country anymore and the end of all this can only be war again.”

History reports that it took only 22 years before WWII began and the mechanism that Gesell described so well near to one hundred years ago is right now at work in the contemporarily ‘Euro Crisis’ and ‘Dollar Crisis’.

REFERENCES