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.
# # #