Demurrage is the cost associated with owning or holding currency over a given period. It is sometimes referred to as a carrying cost of money. For

commodity money Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods. This is in contrast to representati ...

such as gold, demurrage is the cost of storing and securing the gold. For paper currency, it can take the form of a periodic tax, such as a stamp tax, on currency holdings. Demurrage is sometimes cited as economically advantageous, usually in the context of

complementary currency A complementary currency is a currency or medium of exchange that is not necessarily a national currency, but that is thought of as supplementing or complementing national currencies. Complementary currencies are usually not legal tender and thei ...

systems.

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 to hoard money and to achieve more efficient allocation of capital in society. In particular, for long-term investment financing, it affects the dynamics of

net present value The net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount ...

(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 Bernard Lietaer (7 February 1942 – 4 February 2019) was a Belgian civil engineer, economist, author, and educator. He studied monetary systems and promoted the idea that communities can benefit from creating their own local or complementary cu ...

transaction.net Community Currencies: A New Tool for the 21st Century.
/ref> Unlike

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

, demurrage gradually reduces only the value of currency held: it functions as a negative interest (a tax) on currency held versus inflation that also reduces the value of savings or retirement funds and increases CPI. A positive interest rate is a subsidy. Both inflation and demurrage reduce the

purchasing power Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...

of money held over time, but demurrage does so through fixed regular fees, while inflation does it in a variety of ways. Inflation is not always easy to predict and it does not stay fixed through time, but the level of demurrage is fixed by the government.

Gresham's law In economics, Gresham's law is a monetary principle stating that "bad money drives out good". For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable com ...

that "bad money drives out good" suggests that demurrage fees would mean that a currency would suffer 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 image:M3 Velocity in the US.png, 300px, Similar chart showing the logged velocity (green) of a broader measure of money M3 that covers M2 plus large institutional deposits. The US no longer publishes official M3 measures, so the chart only runs thr ...

and overall economic activity. On the other hand, influential British economist

John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...

contended that Gesell's proposed demurrage fees could be evaded by the use of more liquid competing forms of money and that therefore inflation was a preferable method to achieve economic stimulation.

: "The General Theory of Employment, Interest and Money". VI.23.vi. Reproduced i
marxists.org
/ref>

History

Demurrage-charged

local currency In economics, a local currency is a currency that can be spent in a particular geographical locality at participating organisations. A regional currency is a form of local currency encompassing a larger geographical area, while a community curren ...

was successfully tested in the Austrian town of

Wörgl Wörgl () is a city in the Austrian state of Tyrol, in the Kufstein district. It is from the international border with Bavaria, Germany. Population Transport Wörgl is an important railway junction between the line from Innsbruck to Munich, an ...

between 1932 and 1934, as a tax collected for the benefit of the unemployed, until the Austrian central bank stopped the experiment. Similarly, in 1936, the Social Credit Party-led government in Alberta, Canada, introduced prosperity certificates in an attempt to alleviate the effects of the Great Depression, with holders having to affix to the back of a certificate a 1-cent stamp before the end of every week, for the certificate to maintain its validity. Local scrip systems, many of which incorporated demurrage fees, were also used across the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...

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.''

also documents in his book ''Mysterium Geld'' the use of demurrage currency systems in

Europe Europe is a large peninsula conventionally considered a continent in its own right because of its great physical size and the weight of its history and traditions. Europe is also considered a Continent#Subcontinents, subcontinent of Eurasia ...

High Middle Ages The High Middle Ages, or High Medieval Period, was the period of European history that lasted from AD 1000 to 1300. The High Middle Ages were preceded by the Early Middle Ages and were followed by the Late Middle Ages, which ended around AD 150 ...

bracteate A bracteate (from the Latin ''bractea'', a thin piece of metal) is a flat, thin, single-sided gold medal worn as jewelry that was produced in Northern Europe predominantly during the Migration Period of the Germanic Iron Age (including the Vende ...

systems and ancient

Egypt Egypt ( ar, مصر , ), officially the Arab Republic of Egypt, is a transcontinental country spanning the northeast corner of Africa and southwest corner of Asia via a land bridge formed by the Sinai Peninsula. It is bordered by the Mediter ...

ostraka An ostracon (Greek: ''ostrakon'', plural ''ostraka'') is a piece of pottery, usually broken off from a vase or other earthenware vessel. In an archaeological or epigraphical context, ''ostraca'' refer to sherds or even small pieces of stone ...

– 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 Albert the Bear (german: Albrecht der Bär; 1100 – 18 November 1170) was the first margrave of Brandenburg from 1157 to his death and was briefly duke of Saxony between 1138 and 1142. Life Albert was the only son of Otto, Count of Ba ...

. In earlier real-life experiments, demurrage on money has been demonstrated to significantly increase the velocity of money in circulation, even incentivizing people to pay their taxes in advance. The major

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central b ...

s' post-World War II 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 increase the velocity of money in an attempt to expand the economy.

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 Tax revenue is the income that is collected by governments through taxation. Taxation is the primary source of government revenue. Revenue may be extracted from sources such as individuals, public enterprises, trade, royalties on natural resour ...

. 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). Typically the fee accrues to the administration account and so adds to the common credit pool.

Current examples

The Islamic system of

zakat Zakat ( ar, زكاة; , "that which purifies", also Zakat al-mal , "zakat on wealth", or Zakah) is a form of almsgiving, often collected by the Muslim Ummah. It is considered in Islam as a religious obligation, and by Quranic ranking, is ...

is a form of demurrage. It applies to un-utilized assets on a per annum basis, at a rate determined by the nature of the asset. For cash and gold, for instance, the rate is 2.5% per annum. The

chiemgauer Chiemgauer is a regional local currency started in 2003 in Prien am Chiemsee, Bavaria, Germany. Named after the Chiemgau, a region around the Chiemsee lake, it is intended to increase local employment, supporting local culture, and make the loca ...

is a regional

community currency A community is a social unit (a group of living things) with commonality such as place, norms, religion, values, customs, or identity. Communities may share a sense of place situated in a given geographical area (e.g. a country, village, tow ...

in a part of Bavaria, using a demurrage system.

References

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. *

. ''

The Future of Money ''The Future of Money: Beyond Greed and Scarcity'' is a book written by Bernard Lietaer, published by Random House in 2001, and currently out of print. It was written as an overview of how money and the financial system works, the effects of moder ...