Demurrage: is it a good idea for a local currency or exchange system?
The idea known as “demurrage” was put forth by Silvio Gesell (The Natural Economic Order) almost a century ago. Demurrage is essentially a “tax” on the holding of currency out of circulation, intended to prevent the hoarding of currency and to keep it circulating at a rapid pace.
Gesell, an advocate of monetary freedom, had many important things to say and his book is well worth studying. It’s unfortunate that demurrage is the only one of his proposals that is generally remembered. On the surface, the idea has intuitive appeal; however, in practice it is problematic. It was applied during the Great Depression of the 1930s in many issues of “stamp scrip” which became a popular way of compensating for the insufficiency of official money then in circulation. It was also initially applied to balances in the Swiss WIR credit clearing system, but was quickly abandoned. On the whole, it proved unworkable for a variety of reasons. Mainly, people accustomed to earning interest on savings don’t like to see their savings depreciate over time. Further, there is a cost to administer the stamp feature, and it is inconvenient and cumbersome.
The problem with money as we’ve known it, is not so much the slow velocity of its circulation, but the lack of adequate supply of money going to the productive sector. Getting an adequate supply of exchange media (credit) to the productive sector is the basic problem that needs to be addressed in solving “the money problem,” and that is the main point in creating complementary currencies. The localization of economic activity is a desirable and very important side benefit of that.
Physical currencies (paper notes) can be hoarded, and that does become an issue during the bust phase (downturn) in the economic cycle (caused by the defects inherent in the money and banking system), but account (ledger) balances cannot be hoarded, and they comprise the bulk of the money supply. Further, banks can and do create additional money when they make additional loans to either the private sector or the public sector (government). If willing borrowers cannot be found in the private sector, or if the private sector’s capacity to carry additional debt has been exceeded, the government will take up the slack by deficit spending to borrow additional money into circulation (the so-called stimulus spending) to get the economy growing again.
I have articulated in my books better ways to the assure circulation of credits (currency) in a local exchange system, i.e., to prevent stagnation. Part of the membership agreement can be that balances that accumulate above a certain amount in a member’s account will be automatically transferred to a savings account where they will be loaned out (preferably at NO interest) for the purpose of business investment (capital formation). These balances will no longer be immediately available to the owner for the purpose of trading but will become available again at some later time as the loans are repaid. Thus, there is no loss to the member but credits are kept in circulation by making them temporarily available to those who need them for productive purposes.
For this reason, I do not favor the use of paper currencies for a local exchange system, except as an adjunct to a ledger credit clearing system. In that case, paper vouchers can be drawn against a member’s account as a temporary convenience for making small transactions or to pay non-members of the system for goods or services. These vouchers should have a limited period of validity (expiration date) to assure that the credits return promptly to the ledger system. In any case, the paper vouchers should never be more than a small portion of the credits circulating in a community exchange (credit clearing) system.
This issue has to do with the broader questions of separating the function of exchange from the function of savings/investment and the elimination of interest/usury, which requires a much more extensive conversation and has been largely covered in my first book, Money and Debt: A Solution to the Global Crisis.
# # #
December 23, 2010 at 6:39 pm |
I have some ideas for currency systems. One that involves demurrage is a warehouse receipts system. Imagine a store like walmart. Good efficient supply chain, low prices. Imagine it sourced mostly from local suppliers where possible. Imagine that when it received goods from suppliers it gave them warehouse receipts for what was delivered. Imagine those local enterprises that are delivering goods to the warehouse can pay their own staff using those warehouse receipts. Imagine that the people can then go to the warehouse and use those receipts to get whatever they need … like a trip to walmart
Only without the central bank tokens 
Anyway back to demurrage. With the above system, its like a big box store / warehouse type of place, and many different products (think food products) are subject to types of spoilage and/or have a best before date. Things could be discounted as they approach their expiry dates to encourage quicker sale. This discounting is where the demurrage would come into play. Can’t just go discounting products when you’ve already issued receipts of a set value for them without making that up elsewhere. Well you certainly can apply it to the value of other products in the warehouse, could even spread it completely even across the entire inventory. So then its not even really like demurrage either, its just a way to absorb spoilage-prevention-discounting. Also any costs to operate the network can be recovered directly from network particpants via their accounts. And of course every input and output from the whole system can be made publicly available.
I could see myself involved with managing such a thing as a line of work and programming the software to allow it on the side
ha ha.
November 10, 2010 at 5:43 am |
[...] of money and state (I also think this currently is our best option). There is also a blog post on demurrage by Tom. During the discussion Tom remarked that due to the “Bubble and Bust Cycle” of [...]
July 10, 2010 at 6:40 am |
Jct: There’s is nothing as silly as changing the value of your tokens to pay for the system when you can take a service fee and have stable value currency.
July 9, 2010 at 1:09 am |
“Further, there is a cost to administer the stamp feature, and it is inconvenient and cumbersome.”
Later you advocate a ledger based system, which would likely be implemented electronically. Why use ‘stamp script’ when the same technology is available here?
“The problem with money as we’ve known it, is not so much the slow velocity of its circulation, but the lack of adequate supply of money going to the productive sector. ”
Sounds like six of one, half a dozen of the other to me. Increased velocity allows a population to get by with a smaller numerical amount of currency to promote the same amount of business. But stated that way I don’t really see how it’s different.
“…but account (ledger) balances cannot be hoarded, and they comprise the bulk of the money supply.”
One example of ledger-based hoarding leaps readily to mind: banks taking TARP funds and not loaning them out. How is that not hoarding? Perhaps under credit clearing it couldn’t, if that’s what you mean. Though I’d need some explanation as to how.
I’m not saying demurrage is the right answer. But it’s an approach that has had success in the past and deserves consideration.
I think one of our bigger problems is intellectual monoculture about money. For deeper systemic robustness, we need to consider more ideas about different systems. I think as people develop more knowledge and creativity about how they transact, they’ll invent ways to construct economic systems ad hoc to solve problems. Check out metacurrency.org for some ideas.
I wouldn’t build an entire economic system with demurrage. But it deserves a place in the toolbox.
July 9, 2010 at 8:56 am |
“Sounds like six of one, half a dozen of the other to me. ”
Within the existing regime of monopolized credit money, yes, but we’re talking about private exchange systems in which we liberate our own credit from the banks. We don’t need to apply demurrage to OUR money because WE control the supply of it.
“…banks taking TARP funds and not loaning them out.”
Of course, in the existing regime the banks can, and do restrict the supply of credit money to the productive sector, but that’s not what demurrage is intended to remedy. The owner of the credit (the “depositor”) is not able to prevent its circulation.
“…we need to consider more ideas about different systems.”
Sure, and, I might add: implement the best ones. We’ve been arguing about these things for years now. We know how to design exchange systems that are capable of achieving significant results.
July 9, 2010 at 11:26 pm
From Bernard Lietaer’s site, at
http://www.transaction.net/money/cc/cc03.html#hand
‘The conceptual key to understanding this shift involves changing the “arrow of time” in the investment process. Under the present system, the discounted present value of any investment has to be higher than the interest rate of a risk-free government bond. This implies that anything that produces value more than twenty years in the future is basically worthless today, thus providing a systemic incentive not to care about the long-term consequences of our actions. Under the proposed system, the incentive works in the opposite way: income in the future would become more valuable than income today, thereby automatically prioritizing the long-term implications of today’s actions.’
I suppose you’ve read this. I’m curious about your thoughts about this sort of prioritizing of long-term investment. Do you think there’s a better way to ‘reprogram the invisible hand?’
July 12, 2010 at 12:35 pm
Yes, discounted present value makes future returns worthless to capitalists. The answer is not negative interest, but NO interest, and elimination of the debt-money system.
July 8, 2010 at 1:48 pm |
The conventional financial system has become increasingly manipulated and controlled by and for the benefit of a few large, multinational corporations and benefactors of the government. A quick look at the recent bailouts (AIG, GM, on & on……) is direct evidence of this. I believe that this system could be can (in theory) help avoid the inevitable global economic crisis. Unfortunately, in reality, making the transition to any new system may be next to impossible
July 9, 2010 at 8:59 am |
Not impossible, it’s already being done. now it needs to be scaled up and replicated.
July 8, 2010 at 11:59 am |
[...] Demurrage: is it a good idea for a local currency or exchange system? By Thomas H. Greco I’ve added a new monograph on the subject of demurrage to this site. You’ll find it in the sidebar to the right under Resources: Monographs: Demurrage: is it a good idea for a local currency or exchange system? [...]