Demurrage Money

Demurrage currency, also known as depreciating money or stamp scrip in its paper money form, is a type of money that is designed to gradually lose purchasing power at a flat constant rate. Unlike traditional money, demurrage is designed to only be a ''temporary'' store of value. Demurrage money functions primarily as a medium of exchange and unit of account. In some cases, demurrage currencies have been employed as emergency currencies, intended to keep the circular flow of income running throughout the economy during recessions and times of war, due to their faster circulation velocities.

Demurrage is sometimes cited as economically advantageous, usually in the context of complementary currency systems. The German-Argentine economist, Silvio Gesell, advocated for demurrage currency as part of the Freiwirtschaft economic system. He referred to demurrage as ''Freigeld'' 'free money' — "free" because it would be freed from hoarding and interest. Gesell theorized that Freigeld would increase the velocity of money, eliminate inflation, reduce unemployment, create an interest-free economy, and lead to fewer recessions.

Theory

The functions of money

While demurrage carrying costs are a natural feature of commodity money, demurrage has at various times been deliberately incorporated into currency systems as a disincentive to hoard money and to achieve more efficient allocation of capital in society, thus creating demurrage currency.

Freiwirtschaft economists propose that the function of money as a store of value is incompatible with its function as a medium of exchange for maximum economic efficiency.
In ''The Natural Economic Order'', Gesell wrote: "The power of money to effect exchanges, its technical quality from the mercantile standpoint, is in inverse proportion to its technical quality from the banking standpoint."
This implies that money that is great for storing wealth, such as hard currency, is bad for functioning as a medium of exchange, even though the latter function was the prime reason why money was created in the first place.
Since demurrage currency is deliberately designed to be bad at storing value, it is therefore great at functioning as a medium of exchange, which Gesell believed to be the only legitimate function of money.

Gresham's law that "bad money drives out good" suggests that demurrage currency would suffer more rapid circulation than competing forms of currency. This led some such as Silvio Gesell to propose demurrage as a means of increasing both the velocity of money and overall economic activity.
In real-life experiments during the early-to-mid 1900s, demurrage on money was demonstrated to significantly increase the velocity of money in circulation, even incentivizing people to pay their taxes in advance.

Preventing recessions

One of the most important differences between demurrage and inflation is how they affect economic recessions differently:
# Inflation is defined as "a general rise in prices".
# During recessions, prices tend to fall.
# When prices fall and we can expect them to continue falling, commerce falls too. People avoid buying commodities sooner when they expect that they can buy them cheaper later.
# Recessions thus face a game theory problem: society wants to increase commerce, but nobody with hoardable money wants to increase commerce if prices will continue to fall.
# If prices are falling, then there is no inflation, by definition.
# If there is no inflation, then there are no penalties for withholding money from circulation during a recession.
# Thus, holders of money are rewarded for withholding their money from circulation during periods of falling prices.
# This makes it difficult to increase circulation and end the recession.
By contrast, demurrage currency would encourage people to keep commerce going during recessions, unlike inflation.
If money continues to lose purchasing power (even at a slow rate), then people will use it sooner rather than later.
Gesell proposed that money should have a demurrage rate 5.2% per year, or 0.1% per week, but he also believed that real-world experimentation would probably be necessary to figure out the optimal rate.

In some cases, demurrage currencies have been employed as emergency currencies, intended to keep the circular flow of income running throughout the economy during recessions and times of war, due to their faster circulation velocities.

Other differences between demurrage and inflation

Inflation and demurrage both tend to reduce the liquid savings over time, but there are many crucial differences between the two.
Unlike inflation, demurrage gradually reduces only the value of currency held, not on newly issued money, money placed into a bank (from the lender's perspective), nor money that will be claimed or issued in the future.
In fact, demurrage would increase the value of claims to future money like stocks and bonds, since they would become a more reliable way to store wealth, due to the penalty on holding cash.
Inflation also increases prices across the consumer price index, whereas demurrage does not.

Inflation also benefits borrowers at the expense of lenders, whereas demurrage does not.
The effect of demurrage on borrowers depends on what they do with the money.
If they spend it (either for consumption or investment), they do not bear the cost of demurrage.
If borrowers hold onto the money, they would lose due to demurrage.
People are thus strongly disincentivized to borrow demurrage money without spending it.

The rate of inflation usually fluctuates, and inflation may devalue currency in a variety of ways, so inflation is not easy to predict.
By contrast, the depreciation rate of demurrage currency would stay at a fixed rate set by the government, thus leading to a more stable and predictable economy with lower prices.

Freiwirtschaft economists theorize that demurrage currency could eliminate both inflation and deflation.
There tends to be some interest cost that is built into the goods and services that consumers tend to purchase, so if demurrage currency eliminates interest rates, then prices are less likely to increase.
Demurrage would also naturally cause the money supply to decrease, thus causing deflation.
If a central bank issues and monitors demurrage currency as Gesell originally proposed, then it could replace all the money that disappears due to demurrage by printing money at a similar rate.
The money printing could create just enough inflation to cancel out the natural deflation of demurrage, thus achieving an inflation target of 0%.

Interest rates, lending, and borrowing

Some regard demurrage as a negative interest rate policy, but they have different effects. Under demurrage currency, hoarding money becomes impossible because the face-value of money depreciates regularly. This forces the circulation of money. By contrast, it is possible to hoard money on negative interests, since the face-value of money is constant and people can use their money as a means of saving. For example, Japan's negative interest rates drove up the sales of safes and strongboxes.

Negative interest rates tend to discourage people from storing their money in banks, in order to avoid having their money depreciate in value.
For this reason, it can be difficult to decrease the money supply and/or cause deflation, so some aspects of monetary policy could theoretically become ineffective at low interest rates.
Some economists have expressed interest in demurrage currency as a way to avoid this problem and effectively turn interest rates negative.

When the medium of exchange is scarce, traders will pay to rent it (interest), which acts as an impedance to trade.
In stable or deflationary environments, interest is a net transfer of wealth from debtor to creditor.
Under inflationary environments, interest is a net transfer of wealth from creditor to the debtor.
Demurrage currency aims to end both of these cases.

If the liquidity preference theory of interest rates is correct, then interest rates would disappear when money cannot be used as a long-term store of value, so demurrage money would theoretically have no interest rates.
Under a demurrage monetary system, banks would be incentivized to loan money to avoid paying demurrage fees.
This new incentive would lead to a further incentive for bankers to lend demurrage money without charging interest rates, in order to reduce the disincentives for borrowers to borrow demurrage money.
The result would be an interest-free economy.

Borrowers would also be incentivized to use the demurrage money as soon as possible before the purchasing power decreases due to demurrage.
Since demurrage money would theoretically increase the velocity of money, eliminate interest rates, and lower the opportunity costs to borrowing credit, demurrage money could theoretically lead to greater economic efficiency and prosperity.

For long-term investment financing, demurrage currency affects the dynamics of net present value (NPV) calculations. Demurrage in a currency system reduces discount rates, and thus increases the present value of a long-term investment, and thus gives an incentive for such investments.Bernard Lietaer
transaction.net Community Currencies: A New Tool for the 21st Century.
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Economic and environmental sustainability

Freiwirtschaft economist argues that the growth imperative of modern economies is caused by interest burdens on debt, inflation, and opportunity costs created by the existence of interest.
Fuders believes that the growth imperative has harmful environmental and social consequences.
Fuders concludes that it is impossible to meaningfully address the problem of unsustainable growth or fulfill the sustainable development goals proposed by the United Nations without completely overhauling the monetary system in favor of demurrage currency.

Bernard Lietaer and have also argued that the existence of interest has negative impacts on resource consumption and the environment.
As an example, Lietaer wrote: "When it pays more to cut a tree, sell the wood and let the proceeds earn interest than simply let the tree grow, it is predictable that "economic pressures" will be felt to cut more trees than is optimal from an ecological viewpoint. Stamp Scrip would reverse that process."

Proceeds of the system

In some instances, the demurrage fee is charged by some sort of central authority, and is paid into a fund. The application of this fund varies widely among both historical and proposed systems. In some cases, it is used to pay the costs of administering the tax. If the currency in question is run by the government, the demurrage fee can contribute to general tax revenue.

In Gesell's proposed system, the individual owners of Freigeld would pay the demurrage fee for the stamps to the government, thus reducing the amount of other taxes that a government would have to collect. If individuals do not want to pay the demurrage fees, they could deposit their money into a bank. The bank would become responsible for paying for the stamp fees, and the money would retain its full value from the depositor's perspective. Bank would thus be incentivized to loan the money in order to pass the holding expense onto others and avoid paying for the stamps, which would guarantee that plenty of money would be available for lending in the economy. Gesell believed that banks would loan until their interest rates eventually fall to zero. Banks would collect only a small risk premium and an administration fee, without any need to adjust for inflation or deflation.

In mutual credit systems, all positive accounts, or those over a credit threshold, are debited the demurrage fee if there is no trading (purchasing) after a certain period (e.g. a month or year after the last purchase).
The fee typically accrues to the administration account and thus adds to the common credit pool.

Critical analysis

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 inflation was therefore a preferable method to achieve economic stimulation.
However, Scottish economist Ahmed Anwar argues that Keynes' objection to demurrage currency is flawed and contrary to Gresham's law.

One of the main barriers to the success of any demurrage currency is establishing it as a trusted medium of exchange.
People generally only accept payments in a currency when they believe that it will be accepted in future exchanges.
When businesses do not accept demurrage money, workers usually refuse to receive it as payment.
Additionally, Jérôme Blanc argues that past experiments on demurrage currency relied heavily on both a distrust in the value of conventional money, as well as trust among a local community.
Although past experiments have worked successfully in small towns, they may not be as effective across an entire country, unless there is a way to ensure that trust in demurrage currency can scale with the size of the population that uses it.

None of the localities that have used demurrage currency in the past and present have fully implemented all three of the main proposals of Gesell's Freiwirtschaft.
Since only the Freigeld aspect of the theory and proposal has been tested, the Freiland and Freihandel aspects of the theory would also need to be implemented simultaneously, in order to observe how a Freiwirtschaft economy would work as a whole.

According to economist , while demurrage currency has successfully worked on local scales in the past and present, and while freiland reform is possible without freigeld reform, there is an economic consensus that successful large-scale freigeld monetary reform will not be possible without freiland reform.
The reason is that if money can no longer be used as a long-term store of wealth, then most people would shift to storing their wealth within land instead.
If land reform is unfeasible for any reason, then large scale freigeld reform will be unlikely to have its intended effects.

Professors Nikolaus Läufer and Gerhard Rösl argued that demurrage currencies can only increase economic activity temporarily. They believe that although the velocity of money would increase in the short-term, the total amount in circulation would gradually decrease, since demurrage currencies lose value over time. The lengthy use of demurrage currencies would thus ultimately lead to a decline in economic activity and economic instability. However, Gesell supported allowing a monetary authority to monitor the money supply. If the amount of money in circulation falls too much, the monetary authorty would print more money.

Gesell believed that Freiwirtschaft would create Darwinian natural selection in the economy: "Free competition would favor the efficient and lead to their increased propagation." Marxists such as the academic Elmar Altvater described Freigeld as a "Social Darwinist concept" and criticized its past supporters for trying to ally with the Nazi Party, even though the Nazis ignored their ideas. replied to this accusation that the theory of evolution was new at that time and existed in contrast to the dogmas of Christianity above all. Onken wrote that Gesell did not represent a "struggle of the strongest against the weaker", as he instead advocated "to create the conditions for a just distribution of income and wealth".

History

Pre-modern usage

Bernard Lietaer 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 prosperity of those societies. One notable example of demurrage is the founder of the Mark of Brandenburg, Albert the Bear.

The Islamic system of zakat sometimes works as a form of demurrage tax, but not always since it applies to assets generally, not currency specifically.
Zakat on wealth is based on the value of all of one's possessions. It is customarily 2.5% (or ) of a Muslim's total savings and wealth above a minimum amount known as ''nisab'' each lunar year,Yusuf al-Qaradawi (1999), Monzer Kahf (transl.), Fiqh az-Zakat, Dar al Taqwa, London, Volume 1, , p. xix. but Islamic scholars differ on how much ''nisab'' is and other aspects of zakat.
Today, in most Muslim-majority countries, zakat contributions are voluntary, while in Libya, Malaysia, Pakistan, Saudi Arabia, Sudan and Yemen, zakat is mandated and collected by the state (as of 2015).

Guernsey experiment of 1815

In 1815, there was a money experiment on Guernsey in the British Channel Islands.
The consequences of the Napoleonic Wars were noticeable throughout Europe, including on this island.
The islanders produced food far beyond its own needs, but the collected taxes and interest payments to London banks finally brought payments to a halt.
The incumbent governor of Guernsey, Daniel de Lisle Brock, proposed the construction of a market hall for 4000 pounds sterling to give the economy a new impetus.
These 4000 pounds were printed and put into circulation as a complementary currency.
After five years, the hall had fully amortized, which means that it had fully earned its depreciation and the 4000 pounds, which had now been in circulation on the whole of the island and had caused all kinds of revenues, were again available to the investor of the market hall, and were no longer needed and burned.
According to this principle, several building projects with self-printed and later again destroyed building projects were realized one after the other.
However, by 1835, the intervention of foreign banks and a reduced money supply caused the economy to come to a standstill again.
Some supporters of Freiwirtschaft, including , regard the "Mirakel of Guernsey" as a precursor to demurrage money, after Silvio Gesell, who wrote an article about the experiment.
The Guernsey pound is still used today.

1890s and early 1900s

The application of deliberate demurrage rates on currency was first theorized to have economic benefits by Silvio Gesell in the 1890s.
Gesell first started thinking about the structural problems caused by the monetary system after the 1890 depression in Argentina hurt his business considerably.
Gesell released his first theoretical writing on currency
The Reformation of the Monetary System as a Bridge to a Social State
(, 1891).
He also wrote and published ''The Nerve of Things'' (, 1891) an
The nationalization of money
().
In 1916, Gesell later published his most famous work on demurrage, ''The Natural Economic Order''.

After Gesell died in 1930, many localities were inspired his economic theories and tried using demurrage currencies to alleviate their local economies during the Great Depression.

The Great Depression

Europe

Schwanenkirchen, Bavaria was among the first towns ever to test Gesell's Freiwirtschaft proposals.
In 1929, the owner of a bankrupt coal mine, Max Hebecker, decided to pay two-thirds of his workers' salaries in a currency known as the Wära, which was pegged to the Reichsmark.
By 1931, the coal mine was restarted, the Wära was widely used in Schwanenkirchen and the local economy greatly improved, and the currency was used by over 2000 businesses from all over Germany.
In November 1931, the German Central Bank outlawed the currency, and economic stagnation continued.

Demurrage-charged local currency was tested in the Austrian town of Wörgl between 1932 and 1934, as a tax collected for the benefit of the unemployed.
Due to the local currency's success in reducing unemployment and increasing economic activity, at least 200 cities across Austria formed plans to mimic the currency system in Wörgl.
However, these plans were never realized since Austria's central bank Oesterreichische Nationalbank outlawed complementary currencies in the country on 1 September 1933, so that the federal government would maintain a monopoly on the country's currency and legal tender.

In 1933, a National Committee of the Mutual Exchanges was formed in Nice

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