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.
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Beyond Money 
Wouldn’t the savings account scheme require continuous growth in order to avoid inflation? Even if there were infinite investment opportunities, eventually there would be wasted overproduction.
I think some form of demurrage is necessary to offset the imbalances caused by the profits made on mineral “ownership,” the work plants and animals do by growing into agricultural products, and by taking advantage of human nature. These profits are unearned and tend to accrue to increasingly few parties.
Instead of across-the-board demurrage, there could be a variable demurrage the rate of which is proportional to the rate at which a party’s selling exceeds buying. For example, the demurrage rate could be roughly equivalent to a company’s profit margin for the demurrage period. In other words, demurrage based on the rate of profit rather than the amount of profit, which solves the problem of over-taxing parties that justly make large profits. It also solves the problem of vanishing savings and it would take the joy out of making easy money at the expense of one’s neighbors or the environment.
However, if enough parties are making egregious margins (which is a problem in any system), sufficient money might become generally unavailable, so instead all of the money being destroyed, some of it could be rebated to customers, or distributed to members on a per-capita basis, a sort of self-adjusting “basic income” that would help people weather periods of artificially high prices.
Of course, the benefit of not knowing what I’m talking about is that all my ideas seem good, so for what it’s worth.
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A lot of you have been talking about how demurrage would be problematic with spending, but it absolutely would not. The way it would be implemented is by charging holders of cash, and checking account balances. Anything in a savings account would now be the responsibility of the bank to pay. So you could easily save as much money as you want. The bank would lend out the savings in the same way it does today but at zero interest, and it would put the money back into circulation. Problem solved.
Additionally, demurrage would not create inflation because inflation comes from interest. Demurrage is based upon a fixed currency supply, and would only be adjusted according to the consumer price index, and is therefore inflationary free.
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Your first paragraph seems to describe exactly what i proposed in my books. Excess transaction balances would be automatically transferred to a person’s savings account to be loaned out at zero interest. Thus balances would not lay idle but continue to circulate. No need for demurrage.
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Demurrage does not make sense from a money-centered habit of securing our future. It think it takes a transition from an idea to “make your money work for you” (meaning: make your money make more money) to an idea of “make your investments provide growth that will fulfill your future needs” (meaning: spend your money on those things that will maximize the meeting of your health-, material- and social needs for the long term).
If that transition takes place towards finding security in a growing capacity for meeting our needs instead of securing financial income, demurrage results in more creative and smart spending of money in things that can be expected to lead to growth. It seems to me that investing in one’ s community and local infrastructure is one of the best ways to gain a long-term fulfilling of needs, since it leads to growth of one’s environment, while filling a big stock of tools and food is not a good way to secure the future.
For instance: for food security it’s more important to have a sufficient amount of healthy land available to grow food and people who are able and willing to help with this, than it is to have a big stockpile of food produce, which will expire before you can eat it. So it makes more sense to invest in land, environment and community than in buying extra food.
But if this transition away from a money-based security does not take place, demurrage is just another threshold that might keep a local currency from being adopted and actively used. How much and in what ways could this depend on our trust in our social community?
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1. “people accustomed to earning interest on savings don’t like to see their savings depreciate over time.”
First of all the Silvio Gesell’s idea is to make money UNATTRACTIVE and make people to spent them or invest them, because people do not like to see their savings depreciate over time.
2. “Further, there is a cost to administer the stamp feature, and it is inconvenient and cumbersome”
We live in 21’s century. We have computers and credit cards. Is it easier to implement money system with demurrage now.
3. “the government will take up the slack by deficit spending to borrow additional money into circulation”.
That is the exactly same system that we have now. Government should issue the currency, not the other way around.
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Wouldn’t demurrage promote the spending of money without the necessity to do so? For if my dollars are going to lose value I should go and by something (even though I do not need it) in order to keep my purchasing power intact. Thus I would then have an abundance in things that I do not need. Demurrage just promotes unnecessary spending.
Demurrage is a stupid idea. It does not reflect the actual loss in value of a good. Therefore if money is not accurately representing the good or services exchanged value the money is not doing its job. Whoever promotes this kind of erosion of purchasing power either has no idea what the effects of demurage will have, or knows precisely what it will do and will use the scheme to take advantage of people.
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No, credits can be invested. But demurrage is unnecessary in a ledger system. ledger credits, unlike paper currency, cannot be hoarded. Upper limits can be set on transaction accounts and when the limit is reached, the surplus can be shifted to that person’s savings account to be invested in productive enterprises. Nothing is lost, but those credits will not be available to be spent by the owner until some time later.
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What I’m coming to understand that is that the issue is myopia about the money lifecycle. Money comes into and goes out of existence in different ways in different monetary systems. If you can create it arbitrarily, hoarding might not be an issue, but inflation will be.
Actually one thing demurrage advocates don’t seem eager to address is that lifecycle is actually more important under demurrage, not less. When new currency is floated, it’s more valuable, which grants even more power to the issuers. Which might have been socially beneficial to the Egyptians, but not so much under a banking system like what we have now. It’s a blind spot for them.
One other argument I’ve heard for demurrage is equalization of relations between buyer and seller. It forces the value of currency to model the depreciating value of other things in the economy. Which i do like–maybe it’s not a ‘capitalist’ argument, but that feels like a very 20th century concern to me. I’m unpersuaded that it’s important in the 21st century. But I’m also unconvinced that demurrage is the best way to do that.
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You can do this now. You do not need demurrage currency to buy thing that you do not need.
In demurrage money system the demurrage should be something between 5 and 8% per year. That is not so much, but will serve the main goal. The main goal is to prevent long term saving of money and to prevent charging interest on that savings. If you want to save something that would be shares of companies, not money. You will receive dividends on this shares and you can sell them if you need money for exchange.
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Tom Greco: Credits cannot be allowed to remain idle for too long a period of time.
Jct: Why? How long is too long?
TG: Anyone having a surplus of credits should either spend them or allocated them to someone else as an investment.
Jct: Why would someone else need your chips as an investment when they can get their own chips interest-free at the cage?
TC:That person will then spend them and enable the original issuer to thereby redeem them.
Jct: Why does the original emittor need to redeem that particular chip. Why not just pay his debt off by earning others?
TC: Ledger credits, above a specified amount, can be reallocated to investments as part of the membership agreement, (your credits are not lost, just reallocated to savings) but paper can be hoarded or permanently lost. That’s the reason for the expiration feature.
Jct: Because someone may lose their poker chips, there should be an expiry? I see no reason what should be so. Someone else will find them and cash them in. Just like regular chips or money. Do we want an expiry feature on our money because some people may lose some?
TC: Loss can be avoided by spending the vouchers or depositing them to your ledger account. I believe i explained this in my book, Money: Understanding and Creating Alternatives to Legal Tender.
Jct: And loss can be avoided by not having chips that expire for no good reason.
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Tom Greco: 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.
Jct: Why would my poker chip IOU have an expiry date? What use does that serve? How long is too long?
And that means someone gets stuck with a useless piece of paper if they don’t manage to spend it back to you in time.
TG: 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.
Jct: Why?
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John, the health of an exchange system depends upon the continual circulation of credits and timely redemption of obligations. A system credit, whether represented on a ledger or as a paper voucher, is evidence of someone’s obligation to deliver goods or services.
Whoever issued the credits in the first place by receiving goods and services is obliged to redeem them by later accepting them as payment for his goods/services.
Credits cannot be allowed to remain idle for too long a period of time. Anyone having a surplus of credits should either spend them or allocated them to someone else as an investment. That person will then spend them and enable the original issuer to thereby redeem them.
Ledger credits, above a specified amount, can be reallocated to investments as part of the membership agreement, (your credits are not lost, just reallocated to savings) but paper can be hoarded or permanently lost. That’s the reason for the expiration feature.
Loss can be avoided by spending the vouchers or depositing them to your ledger account.
I believe i explained this in my book, Money: Understanding and Creating Alternatives to Legal Tender.
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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.
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I like ur ideas! I will launch a new local currency (local for now!) soon so let’s find out if we can work together, yes?!
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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.
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“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.
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“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.
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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?’
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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.
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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
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Not impossible, it’s already being done. now it needs to be scaled up and replicated.
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THG: , it’s already being done. now it needs to be scaled up and replicated.
Can you link or note some examples of where there’s been success in America?
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