History of Stamp Scrip
Excerpted from Chapter 1 of the book New Currency, by Jordan McLeod:
"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 su!ering as a consequence of poor monetary policies, but also in large part they were su!ering needlessly. In the a"ermath 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.56 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 e!ects 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.
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. Thee 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."