Vegetable Money

Investment Note #17 - 9th August 2024

Vegetable Money

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Synopsis

• For central banks quantitative easing, negative interest rates, and sending cheques directly to consumers were, at one point, considered to be left-field thinking but have now become part of the orthodoxy. In this Investment Note, we look back through history at some unorthodox policies, their application and the value of looking beyond conventional opinion.

The Recession That Wasn’t

• At the beginning of 2023, the word on almost every US economist's lips was ‘recession’. In 2022, the Federal Reserve went on an unprecedentedly rapid series of interest rate hikes. The effect on businesses and consumers was expected to be large enough to stall growth.

• Initially, the forecasts looked well-founded. By March 2023, two major US banks, SVB and Signature, had imploded. The financial world was braced for more pain to come quickly.

• But the pain never materialised. In fact, 2023 was a banner year for the US economy, real GDP grew by 3.3%, exceeding even some pre-pandemic forecasts (source: Washington Post). The surprising strength of the economy was driven by vigorous consumer spending, even in the face of elevated inflation.

• Spending was so unusually high because the US consumer had plenty of excess savings, accumulated thanks to the ‘pandemic checks’ sent from the government during the Covid-19 lockdowns. US excess savings peaked at $2.1 trillion according to the Federal Reserve Bank of San Franciso.

• The result, although delayed, was a good one. The consumer bolstered the economy in 2023 because they had kept the money the government sent them during the pandemic in their piggy bank.

But Why Did People Keep The Money For So Long?

• Lots of reasons. For one, it is just more difficult to spend money when stuck at home, but what we want to focus on is what John Maynard Keynes called the Paradox of Thrift.

• Essentially, because money is a store of value people are predisposed to save it as the economic outlook darkens. While the accumulation of money may be rational at the individual level, a communal act of money-hoarding can conceivably spawn the recession/depression people initially only feared.

• The remedy Keynes suggested was some form of stimulus. This can be done indirectly – public works projects are the traditional method, but direct stimulus (cheques to the consumer) is increasingly more politically appealing, and arguably more effective as the individual rather than the government chooses where the money gets spent.

• As we’ve seen though, with direct stimulus, people are just as likely to save their money as spend it. So, the question then becomes, from a policy perspective, can we improve on this?

Vegetable Money

• Enter Silvio Gesell, a deeply strange self-taught economist who in his seven-day tenure as finance minister for the Bavarian Soviet Republic in 1919, pioneered the concept of a currency demurrage, money that would lose value at a consistent pre-determined rate. Vegetable money he called it, because, like vegetables, this money would expire.

• The theory worked like this: A $100 bill of this vegetable money, would have 52 dated boxes on the back, where the holder must affix a 10-cent stamp every week for the bill to still be worth $100. If you kept the bill for an entire year, you would need to add 52 stamps (for $5.20) so that the bill would still be worth $100. Thus, the bill would depreciate 5.2% annually at the expense of its holder (this rate could be fine-tuned).

• Gessell’s ideas were not received with wide acclaim, but some major economists of the day embraced the concept. Keynes himself devoted a section to the subject in his seminal work General Theory of Employment, Interest and Money (1936), in which he said that “the future will learn more from the spirit of Gesell than from that of Marx”.

The Miracle of Wörgl

• In 1932, Austria and the rest of the Western world were in the middle of a deep depression. Unemployment was over 30% and the central government couldn’t do much to help.

• The small town of Wörgl was particularly desperate, of its population of 4,500, 1,500 people were without a job, and 200 families were penniless.

• The mayor, Michael Unterguggenberger, was familiar with Gesell’s ideas and proposed the creation of a local demurrage currency to jump-start the town’s economy. The experiment began on July 31st 1932, with the issuing of ‘Certified Compensation Bills’, Wörgl’s own currency.

• The program was an immediate success. The fact that people wanted to avoid the losses resulting from holding onto the notes caused them to spend the money quickly (and even prompted some to pay their taxes early). The currency circulated rapidly, resulting in increased economic activity. Unemployment in Wörgl dropped 25% while it rose in the rest of Austria. The “miracle of Wörgl” inspired six neighbouring towns to copy its monetary system. Édouard Daladier, the French Prime Minister, even paid a visit to see the currency in action on the ground.

• Ultimately, the project was shut down by the Austrian Central Bank and Supreme Court, but the idea had already spread outside Austrian borders.

Mr. Fisher Goes to Washington

• The ‘miracle’ fascinated Yale professor and titan of 20th-century economics, Irving Fisher, who published his own treatise on the subject of currency demurrage, Stamp Scrip (1933). Fisher championed the idea in the United States, where, between 1932 and 1934, city councils, cooperatives and chambers of commerce created more than 300 similar systems.

• Such was Fisher’s enthusiasm he approached the Roosevelt administration to bring it to the federal level. He then convinced Congressman Samuel Pettengill and Senator Joe Harris to introduce a bill in Congress to issue $1 billion of a national Stamp Scrip currency.

• The project never got off the ground as President Roosevelt announced the New Deal around the time of the Stamp Scrip bill. In his pronouncement, Roosevelt temporarily closed all banks, prohibited the issue of "emergency currencies" like the one Fisher was urging, and launched a series of centrally determined public work projects.

Summary

• Coming back to the present, the US economy emerged quickly from the COVID-19 pandemic, a combination of unprecedented money printing and surprisingly quick vaccine development meant that direct stimulus wasn’t actually necessary. This was by no means the base case result.

• As we mentioned in Investment Note #14 central banks may not be in a rush to return to the era of negative interest rates so alternative approaches to monetary policy may be required. Money is in many ways an act of collective delusion, as crypto enthusiasts will rush to tell you, the legacy of experiments like those in Wörgl and elsewhere is to show that rules around money are not set in stone and that the toolkit available to central bankers when dealing with macroeconomic shocks is not limited to raising and lowering interest rates.