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Chapter 3 of "Short Circuit" - page 3

The traders took no risk in accepting Wörgl scrip as it was completely backed by the national currency loan which the mayor had obtained from the savings bank and left on deposit there. This enabled anyone holding scrip to swap it at any time for 98% of its face value in national currency. Very few people appear to have made the exchange because at 2% it cost more to do so than to pay the 1% monthly re-validation fee, but any local money which was returned to the bank or paid to the council in taxation was immediately re-launched into circulation in the town.

Just as in Schwanenkirchen, the effects of the 'auxiliary money' were impressive. In the first month, 4,542 Schillings were paid off in tax arrears, allowing a new public works programme employing fifty men to begin, their wages paid entirely in scrip. In the second half of 1932 Wörgl spent 100,000 Schillings rebuilding and asphalting four miles of streets and extending the sewerage system, the entire cost being covered out of overdue tax receipts. The savings bank benefitted too and deposits exceeded withdrawals for the first time for many months. In January 1933, the town began to build a ski jump and a reservoir. Both were completed without incurring any debt.

As one might expect, other towns started planning to copy the scheme and although the Austrian Government had not been hostile to the Wörgl experiment, the Central Bank felt it had to prevent similar systems from becoming widespread for fear it would lose control over the amount of currency in circulation nationally and hence be unable to prevent inflation. It instituted legal proceedings against Wörgl council and on 1st September 1933, the scheme was stopped, exactly 13 months after it had begun. "Wörgl had a community currency but it was not a personally-issued currency like LETS; its issue was institutional" Michael Linton comments. "It was just a substitute for the national currency issued by a local government rather than by the Austrian central bank. All of the many such local money schemes in the past have merely been small scale versions of national currencies and they don’t work any better at the local level than they have at the national. Because they are kept scarce like national currency they create a climate of competition which still leads to local unemployment and local rich and local poor. More seriously, they are also inherently less stable than national currencies and prone to irrecoverable collapse, so the authorities were in some ways quite right to suppress the Wörgl one although almost certainly they did so for the wrong reasons."

The story now moves to the United States where several hundred communities ranging from villages to the state of Iowa and cities such as St. Paul, Minnesota, either issued their own scrip or seriously considered doing so. The pioneer was Hawarden a town of 3,000 people in Iowa, in October 1932 but unfortunately the promoter, Charles Zylstra, departed from the Wörgl/Wära model and did not set up a redemption fund to guarantee the issue. Instead, he proposed that every person who received a scrip note with the face value of a dollar should stick a special 3-cent stamp on it before passing it on and that after it had been used for 36 transactions and had collected $1.08-worth of stamps it could be redeemed for a US dollar.

Unfortunately, there was no way apart from public honesty to ensure that a stamp was applied after every transaction. Moreover, although the scrip itself was dated in an effort to prevent hoarding, the absence of dates on which stamps had to be applied meant that there was no incentive to pass the money along as quickly as possible. In fact, as the scrip was used to pay part of the wages of men engaged on unemployment-relief projects, the whole scheme amounted to little more than an optional tax to meet the cost of the work which was paid by those using the local money.

Despite its problems, Zylstra's system was adopted in several towns with mixed results. Eventually, however, it was replaced by closer approximations to the Wörgl scheme as that became better known, notably through the efforts of a professor of economics at Yale University, Irving Fisher, who even published a manual on how to set up and run a stamp scrip system in 1933²⁵. Fisher described at length a type of scrip proposed for the city of Reading, Berks County, Pennsylvania, in which the note had fifty-two squares on the back, each printed with the date of consecutive Wednesdays in the year after its issue. Special two-cent stamps were stuck in these squares by whoever held the note on Tuesday night before they could be used the following day and by the end of the year, a sum of $1.04 would have built up to allow the note to be redeemed at par and leaving 4 cents to cover expenses. According to newspaper reports of the time, scrip of this type was widely adopted.

By 1933, more than 300 communities had introduced some form of barter system, scrip or local currency to try to overcome the nationwide currency shortage. Tenino in Washington State even used wooden money - it printed 25c, 50c and $1 tokens on spruce wood after the local bank collapsed, freezing everyone's assets. $6,500-worth of timber coins were put into circulation but when the day came for them to be redeemed in US currency, only $30-worth was presented - coin collectors and tourists had taken the rest, leaving the town council with enough cash to buy the bank and open it again.

"Scrip permitted if soundly backed" was the headline in The New York Times on 10th January, 1933, but it was too good to last. Three months later, on March 4th 1933, President Roosevelt forbade any further issues, although existing schemes were allowed time to wind themselves up. It was not that the government had any objections to scrip being issued to create jobs but it had been advised by Professor Russell Sprague of Harvard that the US monetary system was being democratised out of its hands.

Within the past few years, however, scrip has re-appeared in at least 21 communities in the United States as a result of the work of Paul Glover in Ithaca, which is described in the panel. However, the most recent version of stamped scrip I know of was issued in the small historic French town of Lignieres-en-Berry in August 1956 in an effort to generate more business and thus counteract the town’s decline: its population had halved to 1,700 in the previous fifty years and of those who remained, 300 were over seventy²⁶. Initially, the scrip, which was issued by a group of the town’s traders, was exactly like that in Wörgl. It was backed by national currency into which it could be converted at 98% of its face value and had to be revalidated each month with a stamp costing 1%.

The early results were encouraging but the project started to enjoy real success when, in April the following year, wage earners were told that if they converted their money into scrip, they would be given 5% extra. Naturally, it was necessary to stop people who bought scrip this way immediately converting it back for a quick profit and the new notes were stamped with their date of issue so that they could only be changed into francs at the 98% rate after four months: if converted earlier, a bigger discount applied. This deal proved very attractive to the people of the district because, if they converted their cash into scrip and spent it immediately, they were effectively getting a 5% discount from the traders. However, if they simply held on to the scrip for four months and then stamped it to bring it up to date, they could convert it back to cash and earn a 3% rate of interest for the period. As a result, the new money was widely used in the town and tended to circulate for at least four months before being cash in.

Many communities moved to copy the system, alarming the Bank of France so much that in July 1957 it sent a team of police specialists to investigate what it saw as a virus about to contaminate the whole country. Laws carrying penalties of up to two years’ imprisonment and a 20 million franc fine were passed to frighten off people planning similar systems but Lignieres scrip continued to circulate at least until the early 1960s and another small town, Marans, introduced a variant of it in March 1959 without anyone being prosecuted.

Scrip - but not of the stamped variety - is currently being used in some Argentine provinces as a result of a decision by Roberto Romero, the governor of Salta in 1984 to give public employees and creditors the choice of being paid in promissory notes immediately or in national currency some days later. As prices were rising rapidly at the time, many employees chose not to wait and accepted the new notes because the banks would exchange them at par for national currency if necessary anyway. However, in order to encourage people not to exchange them, Romero organised a lottery offering prizes to the holders of the notes bearing the winning numbers. The provincial government naturally accepted the new money for the payment of taxes and shops and businesses rapidly began to accept it too. Three other provinces took up the idea and have since issued their own money on similar lines.

Why do Governments let Banks create Money? (Click for panel from original book)

Local currency systems can avoid the conflict between money's function as a medium of exchange and as a store of value if they develop different currencies to do different jobs. A LETS unit can be a satisfactory medium of exchange. It can also fulfil money's third function - that of being a unit of account - because it allows people to keep track of how they stand with each other. But by no stretch of the imagination can it be considered to be a store of value and anyone who builds up a large surplus of units in their account so as to be able to obtain goods and services when they retire in twenty years' time is a fool because no-one can guarantee that the system will still be operating then. This is both a strength and a weakness. This deficiency is a serious weakness with LETS because people earning more local units than they can immediately spend stop accepting them so readily and thus damage the system for everyone else. However, rather than trying to enable LETS units to duplicate all the functions of national currency, it is probably better to create a local store of value in some other way.

Robert Swann, a co-founder of the Schumacher Society in the United States and one of North America's leading thinkers on economic alternatives, has taken part in two attempts to devise currencies which are also stores of value. One of these was the 'Exeter Experiment' - the successful launch in Exeter, New Hampshire in 1972 of the Constant, a currency devised by Dr. Ralph Borsodi, a leader of the decentralist movement in the United States and the author of a book, Flight from the City, which encouraged a back-to-the-land movement during the Great Depression in the 1930s. Despite his background, however, Borsodi, as his book about the experiment Inflation and the Coming Keynesian Catastrophe³⁰ reveals, was motivated more by what he saw as the dishonesty, theft and embezzlement that inflation involved than any thoughts of achieving greater community self reliance: indeed, prompted by President Nixon's decision a few months earlier to break the dollar's link with gold, he did not intend to launch a local currency at all but was running a small-scale experiment to demonstrate the viability of a new type of national or international currency.

The first Constants were sold on June 21st 1972 at a conference organised by the School of Living, an organisation Borsodi had founded and for which Swann then worked. Borsodi deposited the proceeds, and those from subsequent sales, with two banks in Exeter so that they had funds to cash any Constants presented to them. Alternatively, if the holder wished, the banks would lodge the Constants in a special account in the holder's name. The value of a Constant was based on that of specific amounts of thirty basic commodities, including gold, silver, iron, aluminium, lead, copper, nickel, tin, zinc, coal, oil, wheat, barley, rice, rye, oats, soya, maize, wool, cotton, cocoa, coffee, copra, hides, jute, rubber, cement, sulphur and sugar, and holders could sell them at any time for the total of whatever the constituents were then worth: Borsodi's organisation, Independent Arbitrage International, recalculated the Constant's underlying value monthly and let the banks know. "People who bought Constants from Borsodi's organisation at, say, $2.18 a 10-Constant note were surprised later when the bank paid them $2.19 for it" a local newspaperman, Mel Most, wrote after the experiment had been running for seven months.

As Borsodi realised, the Constant was potentially far more than a way of protecting one's purchasing power against commodity-price inflation because, if firms had begun to quote prices in Constants rather than dollars, and banks had offered Constant loans, there would have been a real possibility that the new units would have proved so much more reliable than the steadily depreciating dollar that the national currency would have ceased to be used. Before this could happen, however, the experiment was terminated a year after it had begun because Borsodi thought he had proved his point, namely, that a commodity-based currency was entirely workable. He did not feel that at his age - he was then 86 - he could take on the responsibility of setting up and running an international currency-issuing bank.

For our purposes, the significance of Borsodi's experiment is that a small town - Exeter had a population of almost 9,000 people at the time - readily adopted an alternative currency despite the fact that it was not backed by the local government as had been the case in Wörgl. "Thousands of dollars[-worth] of bank money orders and personal checks for Constants have circulated like money and been used for buying and selling, and have been cashed [by banks]" Most wrote. "Even the staid, wealthy Philips Exeter Academy paid in Constants for thousands of dollars[-worth] of printing and supplies." Swann adds ³¹: "The Town of Exeter accepted them as payment for parking fines. Very few people ever redeemed them for dollars at the bank." Even when the experiment ended not all Constants came back: many were kept by their holders as souvenirs. No legal problems over issuing the notes emerged.

Read a panel on why governments let banks create money

With the exception of silver and gold, Borsodi never intended that his proposed Bank for the Issue of a Stable Currency (BISC), for which the Exeter Experiment was a dummy run, should buy actual physical stocks of the thirty commodities backing the Constant because of the costs and problems involved in storing them, particularly perishables like wheat and rice. Instead, he proposed that BISC buy commodity futures with part of the money it received for Constants and that it should sell the futures and buy replacements as they approached maturity. The rest of the purchase money was to have been invested in securities or issued as loans and the income used to cover BISC's administrative costs. The bank was likely to prove highly profitable, Borsodi wrote, because only fractional commodity backing for the Constant would be necessary.

Today, however, Swann thinks that energy is a better way of backing for a currency than a collection of commodities because the long-run price of every product is related to the amount of human, animal, renewable and fossil energy that went into making it. One of his proposals would, in effect, turn electricity producers into currency-issuing banks. "Almost every community has renewable resources for producing energy" he writes in one of the chapters he contributed to Building Sustainable Communities³², a book on the methods that communities can use to be come more self-reliant published in 1989. "All such energy resources can be converted into electricity or measured in kilowatt hours." He envisages community companies established to develop these resources financing themselves by selling energy notes. "For example, if local utility rates are presently 10 cents a kilowatt hour, then one dollar would buy 10 kilowatt hours for future delivery. Owners of the notes, sold in lots of 10, 50, and 100 units (comparable to current values of one, five and ten dollars) would hold them for future redemption no matter what their future dollar rate.... The community organization or corporation would issue the notes only in amounts equal to their projected output of electricity, thus avoiding inflation of the currency."

Since the notes would always be worth the current price of the amount of electricity they represented, they would be accepted instead of national currency by people living in the generating plant's service area in payment for goods and services, particularly if, as with the Constant or the Wörgl schilling, a local bank stood ready to redeem the notes for cash. Although Swann has not tried such a system out, he was associated with the successful launch of the Deli-Dollar and the Berkshire Farm Preserve Note which are discussed in the next chapter and which share the sale-of-product-in-advance feature with his energy note idea. As a result, there is no reason to believe that an energy-backed currency would fail.

Wära, stamp scrip, Hours, Time Dollars, Wir, Reeks, Constants - a wide range of currency systems is available for a local economies to use. Which would suit a social field with a population of a few tens of thousands of people? The answer is 'Most of them' because each excels in specific functions and only a range of systems can fulfil them all. The first step is undoubtedly to get several LET systems established, each limiting its membership to about 250 people so that the necessary social controls operate well.

Then, for those who neither need nor want to join a LET system because they have adequate national currency incomes but would like to use their leisure to help others, a Time Dollar-type system should be considered. Business people will want their own WIR-type system in which their unit and the national currency are equal in value so they do not have to distinguish between the two in their books. These business systems will have to control the amount of credit they allow much more stringently than would a LETS because their membership is likely to be larger and less amenable to social pressures.

There is no reason why a district should not also have its own equivalent of a national currency which would be accepted by everyone for all transactions. This could be a store-of-value commodity-based unit, Borsodi-style, operated by a local group³³; or an energy note, backed by one or more power producers; or a national-currency-backed banknote issued by the local council on the lines of that in Guernsey. Indeed, there is no reason why a single area should not have all three in operation simultaneously. There would be some inconvenience, certainly, but computerised cash-registers would minimise it and shops in border areas at present readily cope with keeping three or four currencies in their tills. In any case, if a combination of several local currencies and a national or international one works significantly better than a national or international one alone, should the fact that traders would need to do a little extra book-keeping be allowed to prevent it starting up?

In the past, of course, several different types of money could generally be found in use in the same place at the same time. Some ancient civilizations used one form of money - generally silver - for long-distance trade and another, perhaps barley, as their unit of exchange closer to home. This meant that, unlike the mainstream system today, a shortage of external currency did not prevent internal trading going on³⁴. In the Middle Ages, coins from several countries would often be used to make a single payment, the value of each type based on the weight of precious metal it contained. Later still, notes issued by innumerable private British banks circulated alongside sovereigns from the Royal Mint and it was only in 1844 that the Bank of England, a private company until 1946, was given the exclusive right to issue paper money in Britain - previously its monopoly had extended just sixty-five miles from London. This limited monopoly allowed about twenty Scottish banks to issue their own money in 1800, each backing its notes with its own gold reserves. This system was very stable - losses to note-holders and depositors amounted to only £32,000 between 1727 and 1844, the entire period they were allowed to operate, and Scottish notes were preferred to English ones as far south as Yorkshire³⁵. In Ireland in the 18th Century, the currency consisted of a mixture of foreign coins, bankers' bills and notes, and locally-issued silver and copper tokens, the result of a British ban on the export of English gold and silver coins to pay for imports purchased there.

But, in common with other aspects of life, this diversity has been lost. The money supply has been standardised and nationalised and although banks in Northern Ireland and Scotland still issue paper currency carrying their name, they do so as agents of the Bank of England. But it is only in the issue of notes and coin that the state has a monetary monopoly: two other more important forms of money - cheques and credit cards - still enable the banks to create spending power privately and government controls over the extent to which they do so are indirect and ineffective. Uncrossed cheques are essentially a near-currency since they can be passed from hand to hand in settlement of successive transactions. During an eleven-month-long bank strike in Ireland in the early 1970s, they allowed economic life to proceed more or less normally. Quite soon, forms of privately-created electronic money like the Mondex system tested in Swindon in 1995 may displace the state’s cash and notes altogether. "Users would carry a plastic card that would let them download funds from their bank account using a mobile phone or cashpoint. The card could then be used to make purchases [by swiping it through a reader] up to the value of the sum downloaded" Giles Keating, the head of global economics at the CS First Boston bank in London explained in an article³⁶ in The Financial Times.Click for 2003 update on Mondex

Keating went on to argue that holders would be able to use their cards at home and abroad because the readers would automatically convert the currency held in the card to the one in which the purchase was priced. This would give people complete freedom to choose the currency they downloaded into their cards. "The effect would be dramatic. Smaller currencies could almost disappear - especially if there is any hint of systematic depreciation. Even larger currencies would face a substantial decline in usage if they were weak. ... Long-term credibility as a strong currency would become even more important than it is at present."

But even though state control over the supply of money and the issue of currency is at present only partial and, if Keating is right, may well disappear altogether, we can expect considerable resistance from governments to community monetary systems once they threaten the status quo: the only reason that LET systems have escaped problems so far is that they are having so little effect on what is conventionally regarded as the 'real' economy that they do not warrant the effort to close them down. But when communities get serious, the opposition will become serious too. The big banks, who are developing the electronic money systems, will not allow their power to create money to be eroded without a struggle and will find ready allies in politicians hoping to retire to a seat on their boards. Power is never given away by the powerful, it has to be taken by the weak. Consequently, if we are ever to achieve independence in our lives and communities, the right to issue our own currencies is one of the issues over which we must expect to have to fight.

Further Information (last updated August 2002):