The Shadow Economy and the Wörgl Experiment

Written by: Jonathan Tinsley on 4 February, 2013
Filed under Economy

It appears almost banal to reiterate that the current economic recession, sliding inexorably towards its third dip, was not caused by the people who continue to suffer by it. It was caused by the rapaciousness of the banks and the governments who continue to quantitatively ease hedge fund managers’ bonuses. Yet it would be incorrect to accuse the financial elite of ineptitude; they personally are continuing their grotesque rise up the pay-scale, surely their only aim. Moreover, the power these institutions hold over elected government is crippling, as seen by the pathetic, obsequious fumbling over credit ratings. We are in a situation where it is the political orthodoxy to not just conform to the banker’s hegemony, but to actively encourage and enhance it. Consider that two of the countries three major political parties form the current coalition and that the other party presided over one of the most City-friendly governments in history.

As the ballot-box beckons only every five years and mass protests are evidently inefficacious, the ability of people to affect change on a national level is limited. Apathy is one all too obvious solution. Another may well to be to embrace community, extra-governmental schemes. How, however, are people to affect economic change locally, given the global nature of the economy? Furthermore, consider that ordinary people are beholden to the state not just because of the protection and fundamental services it offers, but because the state controls the money supply.

Yet money itself is translucent and slippery; its sole purpose is as a mutually agreed upon way to alleviate debt. An economy needs an exchange unit to function, but the form of the exchange unit is effectively irrelevant. Government issued banknotes are literally nothing more than stained paper yet they develop a worth due to the universal consent and acceptance of those who use them. The consequence of this is that it is entirely possible to setup a local economy using a different monetary system to the government. As long as people can agree that the debt has been settled, there is no reason for standard money to be exchanged.

Communities could use such a system to create their own ‘shadow’ economy, trading their own services and skills amongst themselves, stimulating the local economy and cutting out the lumbering Leviathan. The difference would be that the services would not be traded for standard money but for an entirely different form of currency without central control. Here is the salient point, the currency would not act as standard money does; the usual rules would not, could not, be allowed to apply. No vast accumulation would be permitted, no large, potentially destabilising debts either.  This can be built in inherently to the system; any money which is sitting idly would automatically become worthless, removing the incentive to hoard and promoting re-investment. Such a form of money, called Freigeld (free money), was proposed by the economist Silvio Gesell, financial minister of the fated Bavarian Soviet Republic.

Gesell was a serious economist and praised by such establishment figures as John Maynard Keynes, who said that “the future will learn more from Gesell’s work than from Marx’s spirit”. His ideas, however, are now rarely discussed and he remains something of an obscure figure. For those who bemoan the power and seeming immovability of the current system, his thought provides a potential alternative that can be implemented at the lowest level by ordinary people. Rather than remaining quiescent, a shadow economy could allow local resources and skills to be traded and utilised without the need for government cash.

There is a historical precedent for such schemes, most notably the small town of Wörgl in Tyrol, which setup its own shadow economy during the Great Depression. The mayor of the town, the fantastically named Michael Unterguggenberger, was a follower of Gesell and implemented the town’s own Freigeld in 1932.  The town was rejuvenated and was so successful that the French Prime Minister, Eduoard Dalladier, and economists travelled there to witness what was dubbed the ‘miracle of Wörgl’.

Unterguggenberger issued those working for the council with money that was produced by the council itself. This currency was so-called stamp script money. In order to remain valid the money had to be affixed with a stamp, worth one percent of the value of the note, at the end of every month. As the money would depreciate in value every month, there was no incentive to accumulate large quantities of it and people would instead continue to spend it, maintaining circulation and trade. Many would even pay their taxes early for this reason.

Public work projects were carried out, including houses, a reservoir and a bridge inscribed with the words “this bridge was built with our own free money”. This was not a Rooseveltian scheme of centrally-planned mass employment but rather an economy driving and generating work itself. Unemployment fell dramatically and neighbouring villages and townships began to try to copy the idea. Inevitably, the Austrian central bank intervened declaring the schemes illegal and the Supreme Court agreed, plunging Wörgl back into the depression and returning unemployment levels to 30%.

The thought of such a council driven scheme now seems, to put it mildly, unlikely. Yet the success of Wörgl serves to demonstrate the power of working away from a central authority, especially in times of imposed austerity. The practicalities of setting up a modern, community shadow economy have been discussed by Werner Hofer, a professor at the University of Liverpool, who has written a pamphlet on the idea. Hofer proposes a system whereby an online register would keep a track of everyone’s account balance. This would be fairly simple (according to Hofer) to setup and would remove the problem of forgery, which is a clear drawback of any physical currency.

Of course, a shadow economy of sorts already exists. The bundles of debt and general debris, relentlessly circled from one bank to another, which allow the banks to turn profits regardless of the performance of the real economy, are effectively equivalent to a community run economy. We need to realise that, like the banks, we too can function and thrive when the government denies us the traditional and standard routes to do so.