Bitcoin vs The Wörgl Experiment
A history of private money
Morning everyone, it has been a while since my last post but it has been a busy few weeks. This week I am writing after learning about a fascinating experiment that I had never heard of before that was conducted in a small European town during the height of the great depression.
Wörgl is a small town nestled in the hills of Austria near the border with Germany. Today it is home to 13,000 people and otherwise wouldn't be the subject of well anything noteworthy if not for an experiment carried out by the town's mayor in 1932.
In 1932, the town still lay in ruins after the events of World War 1 and the subsequent economic depression that was in full swing and had hit Europe just as hard as the U.S. The town had unemployment of around 35% and its infrastructure was in disrepair with zero budget to fix it. The May of the town, Michael Unterguggenberger, decide that he must try and do something to help kick start the town's economy and continue to encourage growth, spending, and more earning by the residents. The town had 40,000 Austrian schillings in the bank and instead of putting that currency to work, he took a different approach.
The mayor issued 40,000 of a new currency that became known as the "Stamp Scrip". ! stamp scrip was equal to one schilling with the only difference being that the value of a stamp scrip decreased in value by 1% each month that any-one party (business or individual) held it. It was a self decaying currency that rewarded individuals and businesses to earn and continue to spend and invest since simply holding stamps crips would result in a loss of their value.
The result? A resounding success. Unemployment in the town dropped to 0%, poverty was wiped out, and nearly all the town infrastructure was rebuilt within a year. There are also reports that inflation and deflation were essentially non-existent during this time period. It was such a success that by 1933 over 200 Austrian townships and even the French Premier, Edouard Daladier, had reached out to Mayor Unterguggenberger asking for details of the stamps crip project so they could replicate it.
Unfortunately in 1933, the Austrian Central Bank banned the experiment calling it an illegal use of a private currency. We will get to that in a minute, but what the Wörgl Experiment demonstrated is an amazing ability to spur economic activity but it is also engineered to behave nearly the opposite in character to a modern-day private currency that has garnered a lot of attention, Bitcoin.
Bitcoin is a fixed supply digital asset that is meant to be resistant to inflation. Unlike USD, which can have new supply introduced by the US Federal Reserve, Bitcoin's supply can never change from the 21 million tokens that are still in the process of being mined. As the demand for bitcoin increases the only "lever" of change that can be pulled is the price. Given that its core function is as a store of value, those that think the demand for bitcoin will never stop are encouraged to accumulate and hold the asset.
The characteristic of a store of value makes for lousy currency. Think of bitcoin like a stock, stock in great companies like Apple or Microsoft are tremendously valuable, but they make for a lousy means of economic exchange since the people who hold those assets do so because they believe they will increase in value so why would you want to use them to pay for things. Sure, technically stock and bitcoin are a currency and a form of value exchange but their incentive structure is built to reward accumulation and holding, and thus the ability to transact them is expensive, slow. and complex.
The stamp scrip encouraged the exact opposite, earn and spend, earn and spend.
While it certainly isn't perfect for all situations, the stamp scrip does present an interesting value prop different from that of many current cryptocurrencies like bitcoin, namely scarcity. Scarcity can be a great tool for driving value, but a fully functioning currency needs to be able to do more than just store value.
Blockchain technology does present an interesting opportunity to introduce a financial instrument such as the stamp scrip into today's global society. A global distributed ledger and block times are the perfect tool for recreating the stamp scrimp. It definitely makes you think about the engineered scarcity of tokens such as Bitcoin and Ethereum and makes you wonder how we can continue to evolve digital money to benefit society. The stamp scrip isn't perfect, but neither is bitcoin so we should learn as much as we can from them and continue to build and experiment with new and better technology.