Demurrage (currency)

Demurrage is a cost associated with owning or holding currency over a given period of time. It is sometimes referred to as a carrying cost of money. For commodity money such as gold, demurrage is in practice nothing more than the cost of storing and securing the gold.

Demurrage is sometimes cited as having advantageous economic effects, usually in the context of complementary currency systems. However, the effects of demurrage have not been extensively studied, nor have its benefits (or detriments) been rigorously demonstrated. The study of the effects of demurrage on an economic system is a rich and largely unexplored area of research in economics and other fields such as sociology.

Theory

While demurrage is a natural feature of private commodity money it has at various times been deliberately incorporated into currency systems as a disincentive against hoarding of money, as well as to achieve other perceived benefits. In particular, with regards to long term investment financing it has the effect of changing the dynamics of net present value (NPV) calculations. All else being equal, a currency system with demurrage places an increased emphasis on the value of long term returns on an investment. As such it may create an incentive to invest in initiatives which offer more in the way of longer-term returns.

Like inflation, demurrage's effect is similar to that of a negative interest rate on all currency in circulation. Both inflation and demurrage reduce the purchasing power of money held, but demurrage does so through fixed, regular fees while inflation does so through expansion of the money supply, which compared to demurrage fees is less certain in the magnitude of its effect, involves an uncertain time lag in the development of its effect, and is not necessarily uniform in net effect across the holders of the currency. Additionally in the case of inflation by central banks, the money is created and distributed in a centralized fashion, with uneven costs and benefits, and done entirely at the discretion of the directors of the central banks, rather than on a known, regular schedule, in fixed amounts. These uncertainties in turn make the determination of net present value of an investment more uncertain, and thus rational action with respect to future expectations becomes more difficult under inflation than under demurrage.

Gresham's law that "bad money drives out good" suggests that demurrage fees would help a currency achieve more rapid circulation than competing forms of currency. This led some such as German-Argentine economist Silvio Gesell to propose demurrage as a means of increasing both the velocity of money and overall economic activity. On the other hand, the highly influential British economist John Maynard Keynes contended that Gesell's proposed demurrage fees could be evaded by the use of more liquid competing forms of money and that therefore inflation is a preferable method to achieve economic stimulation.

History

Demurage-charged local currency was successfully tested in the Austrian town of Wörgl between 1932 and 1934, until the Austrian central bank stopped the experiment. Local scrip systems, many of which incorporated demurrage fees, were also used across the United States during the Great Depression, and the Bankhead-Pettengill bill of 17 February 1933 was introduced in Congress to institutionalize such a system at the national level under the US Treasury, as documented in Irving Fisher's book Stamp Scrip. Bernard Lietaer also documents in his book Mysterium Geld the use of demurrage currency systems in Europe's High Middle Ages' bracteate systems and ancient Egypt's ostraka - dated receipts for the storage of grain - and credits these currency systems with the great prosperity of these societies.

The major central banks' post-WWII policy of steady monetary inflation as proposed by Keynes was influenced by Gesell's idea of demurrage on currency, but used inflation of the money supply rather than fees to effect the goal of increasing the velocity of money and expanding the economy.

Proceeds of the system

In some instances, the demurrage fee is charged by some sort of central authority, and results in the collection of currency into a large pool. What is done with this pool varies widely among both historical and proposed systems. In some cases, it is used to pay administrative costs of the system. If the currency in question is run by the government, the demurrage fee can be used as tax revenue; this parallels a proposed tax on the holding of bank deposits proposed by some economists. Other systems have been proposed which involve redistributing this pool equally to all users of the currency.

Mutual credit systems charging demurrage do not end up with a pool of money, as they simply cancel the demurrages on both positive and negative balances against each other.

Current examples

E-gold is an example of a modern private currency in which demurrage is applied. In this case there is a gold storage charge of 1% per annum. The demurrage associated with e-gold is arguably expended by the currency operator to help cover real storage costs.

Bernard Lietaer's terra is a commodity basket currency proposal similar to Keynes' bancor or L'Europa and bearing a demurrage charge.

See also

• Freigeld
• Seigniorage

External links

• Taxonomy of money systems, with discussion of relationship of demurrage concept to others
• T.H. Greco. "Money: understanding and creating alternatives to legal tender". White River Junction, Vt: Chelsea Green Publishing, 2001.
• Bernard Lietaer. The Future of Money. Century; New Ed edition (February 1, 2002) ISBN 0-7126-9991-0
• Lietaer, Bernard A. (2001). The future of money: a new way to create wealth, work, and a wiser world. London: Century. ISBN 0-7126-9991-0. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)