Case Study THE WÖRGL EXPERIMENT: JULY 1932- SEPTEMBER 1932 INTRODUCTION The Great Depression spread throughout the world in the 1930's and brought with it severe unemployment, a dramatic drop in foreign trade and crop prices. The town of Wörgl, Austria had been just as badly hit, with many of its factories closing down. It was a town of 4,300 inhabitants with 1500 unemployed. And the town was slowly going bankrupt. The town mayor Michael Unterguggenberger was a keen follower of Silvio Gesell's 'free money theory'. BACKGROUND Gesell's theory held that a form of local currency could prevent economic downturn which he believed was caused by the hoarding of money. With a percentage of depreciation on this new currency it would be of no advantage to hoard money as it would end up being worthless. This promotes the circulation of money which leads to an increase in general economic confidence. In July 1932 Unterguggenberger proposed a plan to the town authorities where by they would issue a stamp scrip currency to the value of 32,000 Austrian shillings. These tickets, called 'Wörgl Certified Compensation Bills' would then decrease in value by one percent every month. At the end of the month people would have to buy a stamp in order to revalue their ticket to the new face value. This stamp was placed on the back of the ticket and the proceeds went to the poor relief fund. Money was utilised quickly, within the month, in order to avoid this devaluation fee. Due to the first world war and the effects of the Great Depression the town of Wörgl was in need of repair. The town authorities could not carry these out due to a massive backlog of unpaid taxes. This along with the ever-growing problem of unemployment led Unterguggenberger to a solution. Men who had long been unemployed and idle were hired to rebuild the streets and tend to the many neglected public works. They were paid with the local currency and the new notes were being circulated rapidly, households quickly used them in the shops to buy food and essential items. In turn the shopkeepers used this money to pay their taxes to the municipality who then paid their bills and debts. In the first month the new money had been circulated twenty times throughout the locality and 100,000 shillings worth of public works had been completed in the first four months. The stamp scrip was used in conjunction with the national currency and city workers, the mayor included, received 50% of their wages in the new currency. The currency was accepted everywhere in the town except the post office and railroad which were run by the Austrian government. The scrips could be traded for Austrian currency at a redemption rate of 2%. The increase in business led to a decrease in unemployment while it tended to rise throughout the world in the same period due to the deepening depression. The local currency was a great success and warranted the attention of many other areas interested in following their path. The French minister of finance visited Wörgl to view the local currency in action and economist Irving Fisher suggested similar schemes in the US. He believed in the power of Gesell's scrip theory in avoiding economic downfall. Fisher wrote the book Stamp Scrip in 1933 outlining the advantages and benefits of stamp scrips. In June 1933 Unterguggenberger held a meeting with representatives of 170 other towns throughout Austria. Soon the idea of local currency was spreading across the country. The Austrian National bank began to panic over the financial revolution fearing that local currencies would overtake their monopoly on printing national money. The National bank took legal action making it illegal use the Wörgl currency stating "...as a matter of record the borough of Wörgl has exceeded its powers, since the right to issue money in Austria is a privilege of the National Bank. This is stated in Art. 122 of the bylaws of the Austrian National Bank. Wörgl broke that law." (Silviano 2006) September 1933 saw the prohibition of Wörgl money, however the town appealed and the case was taken to the supreme court which denied the appeal and ended the local currency. Unemployment soon returned to 30% and poverty again ensued. Much of what the town of Wörgl had accomplished during its thirteen months of local currency was destroyed during WWII and the 'experiment' was put on the backburner of history. However, it is without doubt that this thirteen-month period was an overwhelming success for both the inhabitants of Wörgl and the town itself. QUESTIONS 1. What global event was the Austrian city Wörgl reacting to? [K] (200 Words) 2. Using your understanding of exchange rates and international currency, explain why the Austrian government would decide to ban the stamp script currency. [A] (200 Words) 3. How did the consumers in Wörgl react to the outside events and to the currency put in place? [T] (200 Words)