Book Excerpt: Chapter One

CHAPTER ONE

AN ECONOMIC MIRACLE

During the Great Depression, the esteemed Yale economist Irving Fisher came to a stark realization. In the midst of this grave economic crisis he observed that not only were the majority of Americans suffering as a consequence of poor monetary policies, but also in large part they were suffering needlessly. In the aftermath of Black Tuesday, October 29, 1929, millions were left unemployed and in severe financial hardship. Within three years, industrial production had dropped by almost 50%, and 5,000 banks in America alone had gone under.

Black Tuesday may have started on Wall Street but its impact was deeply felt globally. Whole industries came to a standstill and the consequent social distress gave rise to regressive political movements around the world that capitalized on the anger, fear and confusion of the times.

By 1933, Fisher had come to understand that millions were experiencing intensified financial pain because they did not have access to a sufficient money supply. Indeed, in retrospect, many prominent economists including current Federal Reserve Chairman Ben Bernanke and economist Milton Friedman later agreed with Fisher’s on the ground observation that the Great Depression was severely exacerbated by a contracted money supply that was unduly restricted from expanding to the levels of demand.

In plain language, the US Federal Reserve was not printing enough money to meet the needs of the people. Their inability to increase the money supply was in large part due to regulations that bound them to backing their currency with gold and by reaching credit ceilings that were in place. The money supply then further contracted because of the declining confidence in the banking system. As a consequence, hoarding money became a widespread pandemic. This left people with things to sell and others with things to buy but an insufficient supply of money to effectively enable the exchanges. Therefore, more than one million Americans were reduced to the slow and difficult process of barter while tens of millions of others had insufficient and sporadic access to cash. The overall impact of hoarding was severely amplifying the financial pain throughout the country and the rest of the world.

The Miracle of Wörgl

With this grave problem in mind, Fisher wrote the book Stamp Scrip in the midst of the Great Depression to disseminate an effective solution as quickly as possible. It was basically an instruction manual for local towns and cities to create their own temporary local currency to compensate for the contracted money supply and the inability to increase it at the Federal level.

First, he instructed towns, municipalities and cities to issue notes (scrip) on their own, and to guarantee their value with the promise to pay it back in US currency within one year. This, he believed, would increase the confidence in the market and help ensure they could be used interchangeably with legal tender. By producing their own scrip, local municipalities could effectively act as surrogate printing presses for the Federal Reserve as they were constrained from creating new money on their own.

The ‘stamp’ in ‘stamp scrip’ was something far more novel and innovative a proposal for boosting the economy out of the Depression. Fisher designed the money to have 52 boxes on their reverse side. Each week on a Wednesday, the money holder would be required to buy a stamp to validate the value of the note for the following week. In Fisher’s design, for each $1, one had to pay 2¢ to buy the weekly stamp to keep it valid (or 2% weekly). This provided the money holder with significant new incentive for using their currency before the expiry date on Wednesday. This bold and creative idea came to America from Europe where it had successfully been implemented. The most notable of its applications came in the town of Wörgl, Austria.

In 1932, the town of Wörgl was suffering from a 35% unemployment rate. The town’s mayor had a long list of projects and only 40,000 Austrian schillings in the bank to pay for them. Rather than simply spend the money on what would amount to only a fraction of the work that needed to be done, he used the schillings to back the creation of local stamp scrip. The mayor then used the stamp scrip to begin paying for public projects and thereby introduced the currency into the town’s circulation. Yet, it was only after this money was spent that the dramatic effects began to take hold.

In less than two years from the start of using the stamp scrip it became the first town in Austria to reach full employment. With the equivalent of a modest number of Austrian shillings in circulation, reports money expert Bernard Lietaer, “Water distribution was generalized throughout…the town was repaved, most houses were repaired and repainted, taxes were being paid early, and forests around the city were replanted.”

Clearly when a town begins to experience full employment during a depression and even voluntarily deciding to pay their taxes early, people will talk. In this short period of time the success of the town had garnered international attention and was branded the ‘miracle of Wörgl.’ Even the French Prime Minister, Édouard Dalladier, came for a special visit to evaluate the dramatic economic renaissance of a depressed community.

The Science Behind the Miracle

While a part of this marked turnaround came from the town’s revenues in collecting stamp scrip fees, this was not the most significant force behind the dramatic revitalization. Of greater importance were the extraordinary contributions from its increasingly engaged citizens. These citizens were enabled to transform their community and do what was previously impossible and economically unfeasible when the average velocity of money throughout the town increased fourteen fold because of the stamp scrip’s monthly expiration date.

In other words, with the introduction of stamp scrip, money changed hands fourteen times more frequently in the same period of time than with the national currency, the Austrian shilling. The sudden increase in trade and activity of this magnitude represents a dramatic rise in economic activity and confidence that simply cannot be replicated by central governments through spending programs or tax cuts.

Between July 5, 1932 and November 21, 1933, an average of only 5,500 units of the stamp scrip were outstanding (its value was on par with the Austrian schilling). These units circulated throughout the community 415 times over 13.5 months. Each unit therefore changed hands on average approximately every single day. As a consequence only 5,500 schillings of stamp scrip in circulation produced the extraordinary equivalent of more than 2.5 million Austrian schillings in economic activity during this period (this is the equivalent of about 64 million Austrian schillings or US $7.5 million in 2001 terms). Net investment in productive assets also increased by more than 200% compared to the previous year prior to stamp scrip coming into circulation.

Fourteen times the number of economic transactions is an extraordinary leap in activity by anyone’s standards. In traditional economic thinking it is generally assumed that such an increase in the velocity of money can occur through innovative technical advances or during unfortunate times of hyperinflation when people cannot give their money away fast enough because of its falling value.

New technologies, ranging from faster transportation, to new economic tools, to new communication devices have enabled economies to increase the velocity of economic activity and the span and breadth of their trade. When money is able to move from one transaction to another at a faster rate, economic output can grow because the speed of business increases. Enhanced potential for greater wealth creation, efficiencies and societal interconnectivity also emerge.

The general exception to this case is the occurrence of hyperinflation, which emerges when the purchasing power of money rapidly devalues. This phenomenon tends to occur when the money supply far exceeds demand. For example, in the Weimar Republic in 1923, hyperinflation was so severe that prices doubled every two days. In other words by holding on to money for two days, the price of a loaf of bread would double. Holding onto it for four days, it would double again, and so on. In such dire circumstances it is in the money holder’s interest to spend the money as quickly as possible to avoid the devaluation, which can accelerate the velocity of money.

In the case of Wörgl, the town certainly did not experience the negative effects of hyperinflation when the velocity of money and economic activity skyrocketed. At first glance, one might hardly think that placing an expiry date on money would constitute a techno-economic advance. Nevertheless, the town succeeded in transforming massive unemployment and stagnation into full employment and community revitalization during the Great Depression. All of this came directly as a consequence of implementing stamp scrip. This achievement truly was a miracle, yet backed by the innovation of solid, grounded economic means.

The primary source of renewal and revitalization did not come from the town’s spending on public projects but from the creative enterprises and projects taken on by its citizens. Rather than rely on municipal governments or centralized powers, the people of Wörgl had created the means to take power into their own hands and directly get things done without the meddling of relatively arbitrary and inefficient centralized bureaucracies.

The Origins of Stamp Scrip

Credit for the innovation of stamp scrip belongs to German entrepreneur and economist Silvio Gesell. In his opus, The Natural Economic Order Gesell introduced the concept of demurrage (i) as an economic tool to effectively solve the problems of hoarding, interest and inflation. It was his original thinking that served as the basis for the successful stamp scrip currencies in Germany, Austria and America during the Great Depression. His work garnered notable recognition and approval from many of his contemporaries, including some of the most acclaimed economists of the 20th Century, including John Maynard Keynes (ii), and as we have already seen, Irving Fisher.

In practical terms, it is a fee applied by ship owners to penalize vessel charterers for delays in their allotted time for loading, transporting and removing cargo. It serves the function of ensuring that current charterers deliver on schedule so that the next charterer has access to their vessels on schedule, and so on. It therefore protects shippers and ship owners alike from incurring lost revenue due to delays no fault of their own. Thus, as a result of demurrage, the whole shipping system becomes far more stable, predictable and efficient.

Gesell realized this same process could be applied to money with the potential to generate far greater resilience and equity in the economic system. As an entrepreneur he fully understood the value of free markets and trade, but demonstrated with remarkable clarity that there was a world of difference between the systemic operating principles of a market economy that uses demurrage and one that does not. The successful implementation of his ideas confirmed their theoretical soundness and brought on acclaim by many noted economists and thinkers of his time.

Creative Capitalism

The dramatic recovery and expanded economic opportunities that the town of Wörgl experienced in less than two short years echoes the kind of change Bill Gates called for when he pointed out the need for a more Creative Capitalism. The shift from 35% unemployment to full employment within 13 months is virtually impossible within the framework of our current economic system. This is precisely the kind of qualitative change we need in our global economy to help reverse problems like unemployment, poverty, inequality, disenfranchisement, and broken governments that have accumulated enormous national debts for future generations to inherit despite the fact these same problems have continued to worsen on several fronts. Says Gates:

“Capitalism has improved the lives of billions of people—something that’s easy to forget at a time of great economic uncertainty. But it has left out  billions more. They have great needs, but they can’t express those needs in ways that matter to markets. So they are stuck in poverty, suffer from preventable diseases and never have a chance to make the most of their lives…we need a more creative capitalism: an attempt to stretch the reach of market forces so that more companies can benefit from doing work that makes more people better off. We need new ways to bring far more people into the system—capitalism—that has done so much good in the world.”

Increasing the velocity of money via innovation is one of the best ways to enhance economic activity and prosperity—the prerequisites for a more creative capitalism. If the world were able to achieve anything remotely close to what was achieved in Wörgl, it would be a markedly different place—and clearly for the better. Factoring in the emergence of digital technologies and the increasing speed of business in the age of the internet, along with the increasing ability of like-minded social entrepreneurs to connect and organize online, an economy that could capitalize on digital technologies and effectively reproduce the results of full employment and the restoration of a town within two years during the Great Depression is a tremendous signal of hope in uncertain times. So what happened? Why isn’t it already in use around the world today? Wherever it was properly implemented, it succeeded. Why didn’t it catch on?

A Challenge to Central Authority

For better or worse, it would appear that the success of the stamp scrip and the subsequent emergence of decentralized power structures and economic activity have been broadly interpreted as a threat to the power and control of national governments and their central banks.

By the time the German stamp scrip “Wara” had successfully spread throughout Germany in 1931, it had attracted the attention of the German Central Bank. Subsequently it was prohibited from further operations because of the Central Bank’s monopoly on currency creation. The process was similar in Austria. When 200 communities launched projects to copy Wörgl’s success, they were also blocked by the Austrian Central Bank. In 1934 after the town’s stamp scrip was banned Wörgl quickly fell from full employment back into a painful rate of 30% unemployment.

In the United States, Irving Fisher and his colleagues helped introduce the stamp scrip idea into 400 cities and thousands of smaller communities. To adopt even broader implementation Fisher brought the stamp scrip concept to the attention of the US Treasury Department. According to Lietaer, Dean Acheson, the Undersecretary of the Treasury at the time met with Fisher and subsequently sought out other expert opinions on whether stamp scrip would work. Lietaer relates that Acheson was advised, “…it would work but that it would imply strongly decentralized decision making, which he should check out with the President.” Soon thereafter, President Roosevelt prohibited any use of “emergency currency” and announced one of the most ambitious and controversial series of centralized government projects in American history: the New Deal.

New deal, Part II?

Between the beginning of September and the end of October, 2008 global markets lost a staggering $16 trillion in market value.82 These shocking losses dramatically impacted the US Presidential elections and made Barack Obama the historic choice for 44th President of the United States.

Shortly after his election, the President’s team suggested they wanted to create a stimulus package that would deliver a “jolt” to the financial crisis and “startle this thing into submission.” These comments have led many to believe the incoming Administra-
tion is seeking to implement a new New Deal. While the intention is surely noble, there is little historical evidence to suggest that big government can spend its way out of a crisis effectively. The only thing it is absolutely certain to do is dig the country further into debt. Not many are aware that America’s biggest industrial collapse actually occurred five years after the New Deal began even though government spending and controls had increased markedly in response to the Depression. One of the main problems in this bailout process is that centralized governments consistently act from a limited and arbitrary perspective that makes it very difficult for markets to reasonably understand or predict. Says Russell Roberts:

“By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s.”

There is another significant problem. This isn’t 1933. Today’s America is facing far more complex challenges at home and abroad. It has accumulated more than a $10 trillion debt (about $40K per US citizen) and an increasing dependency on foreign powers to finance government spending and deficits.

The US Government Accountability Office (GAO) projects that the costs to maintain Medicare and Social Security programs at current levels will alone surpass all tax revenues by $40 Trillion over the next 75 years. Both the GAO and Treasury Department have deemed these fiscal expenditures simply “unsustainable.” Consider the projected escalation of the US Federal Debt per cent to GDP without significant entitlement reforms in Figure 1.

Figure 1

Keep in mind that these projections were made prior to the deepening of the recession, which will likely lead to tax revenues much lower than projected. Incredibly, despite these dire projections many interests continue to lobby for even greater healthcare benefits and spending in the midst of this economic crisis. But where will the money come from and who will ultimately pay for it in the long run? How long can this go on without experiencing a severe moment of reckoning?

According to Kent Conrad, the chairman of the Senate Budget committee, the moment of reckoning may not take long. He warned that by running deficits perpetually at such magnitude could lead to a permanent American economic decline:

“President Obama is walking into a fiscal disaster of stunning proportion, coupled with an economic downturn of unknown duration and depth. Our nation is building a wall of debt that is certainly sobering and I think should give us all pause. My own economic and budget team projects that, unless we take decisive action, even after our economy pulls out of its slide, trillion-dollar deficits will be a reality for years to come.”

The country of course is also currently engaged in two very costly wars and faces other dire threats ranging from terrorism to cyber warfare to a destabilizing global geopolitical order. Furthermore, while the economic power of the United States has been extraordinary since World War II it too appears increasingly difficult to sustain moving forward. In global terms, it is expected that relative wealth will increasingly flow from the West to the East, while a number of countries will continue to challenge American power in global affairs.

The continued emergence of a multi-polar world order therefore presents itself as an opportunity if not necessity to create more stable and cooperative global relationships, institutions and structures. The failure to do so means countries such as China or Russia may well assume America’s current position of economic power and leadership yet potentially demonstrate far less interest in actualizing global values and responses to global problems.

A Second Chance

The bottom line is that the world order is in flux and likely transitioning from a unipolar world of American dominance toward a more unpredictable and unstable multi-polar world with several countries competing for power, resources and influence. A collective collaboration of the world’s most powerful and influential nations in economic affairs therefore presents itself as the most effective means to ensure that all parties are included in economic and geopolitical processes while securing each from the arbitrary and excessive influence and power of a single nation over the whole.

Anyone who has ever even cursorily followed dialogues at the UN Security Council will be well aware that such collaboration is easier said than done. The key question therefore becomes ‘How do we create the global market conditions and rule-sets to best align national interests and stimulate favorable propensities for successfully managing this critical transition period into a multi-polar world fraught with threats ranging from weapons of mass destruction to financial crisis to terrorism to culture wars to global pandemics to the burden of escalating national debts?’

This brings us back to stamp scrip. If it can reverse a 35% unemployment rate and help achieve full employment and community renewal within the span of two years for a small town, during a depression, could it be applied on a much broader, international scale? Could it do for the global economy what it did for Wörgl?

The conclusion, we shall make here, is ‘yes it can.’ It does not mean it is a foregone conclusion, however. In fact unless our way of understanding goes deeper than in the days of Irving Fisher and FDR, it is likely to remain peripheral and unknown to the majority of engaged citizens, while rejected by centralized governments. In the context of our current financial crisis and the lessons from the Great Depression, this moment in time affords us a second chance to reevaluate our assumptions about money and the nature of the universe based on new understandings in epistemology and quantum interconnectedness. This emerging way of seeing the world allows us to take a fresh new look at stamp scrip as an instructive path towards creating new currency for the 21st century global economy.

Towards New Currency

The opportunity to reevaluate stamp scrip as a market innovation for the new global financial architecture brings us to a critical point about new currency. Currency is not only about money that is in circulation within a society, it is also about acceptance, meaning and shared common values.

It is one thing if it worked in a small town in Austria several decades ago. But without truly grasping its meaning and value in a shared global context, why on Earth would diverse peoples even think about changing the way they use money now?

In the following chapters, we shall look at money not only as an objective phenomenon but also as a subjective one. We will look at how the world has changed since FDR’s decision in 1933 to forbid stamp scrip, and shall see why today’s world is far better positioned to capitalize on its power and transformative potential. We will also consider it through the lens of epistemology and systems theory to see how money is far more than a thing out there in the world. In seeing money as an extension of how we know the world, we can consciously design it to reflect the global values that are emerging in response to global problems and challenges of unprecedented complexity.

In the words of former US National Intelligence Council Chairman Robert Hutchings, “The world is on the cusp of the most profound shift in global power and influence in a century. Managing this quiet revolution calls for nothing short of a new international system, with a radical revision of existing institutions and patterns of doing business. It is a time for thinking big.” Yes, indeed. Yet, if the current financial crisis has taught us anything it is that the average person on Main Street can no longer afford to leave these issues solely up to the so-called experts, almost all of whom failed to see these problems coming. Money and the global economic system must become central and broadly understood issues for all concerned citizens around the globe. It is a time for all of us to start thinking big.

Get New Currency: How Money Changes the World As We Know It

FOOTNOTES

i) The term ‘demurrage’ is borrowed from the shipping industry. It is a charge designed to keep vessels moving efficiently and on time. Demurrage is a French word that I shall herein call a ‘circulation charge.’ This references Margrit Kennedy’s term ‘circulation fee.’  ‘Charge’ has herein been deemed more appropriate due to its connotations as a catalyst (‘re- charge’ means to refresh and revitalize). It also supports organic and energy metaphors, such as increasing the velocity and power of money’s current as it flows throughout society; it also increases the connectivity of economic actors.

ii) In his General Theory of Employment, Interest and Money (1936), Keynes observed “The idea behind Gesell’s stamped money is sound.” (p.357)

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