Demurrage (currency)
Encyclopedia
Demurrage is a cost associated with owning or holding currency over a given period of time. It is sometimes referred to as a carrying cost of money. For commodity money
such as gold, demurrage is in practice nothing more than the cost of storing and securing the gold. Demurrage is sometimes cited as having advantageous economic effects, usually in the context of complementary currency
systems.
(NPV) calculations. All else being equal, a currency system with demurrage places an increased emphasis on the value of long-term returns on an investment. As such it may create an incentive to invest in initiatives which offer more in the way of longer-term returns.
Like inflation, demurrage reduces the present value
of holding a unit of currency, similar to the effect of a negative interest
rate on all currency in circulation. Both inflation and demurrage reduce the purchasing power
of money held over time, but demurrage does so through fixed, regular fees while inflation does so through expansion of the money supply
through the actions of a central monetary authority
distributing the new issue of currency, which compared to demurrage fees is less certain in the magnitude of its effect, involves an uncertain time lag in the development of its effect, and is not necessarily uniform in its costs and benefits across the holders of the currency. The uncertainties in turn make the determination of net present value
of an investment in the currency more uncertain, and thus rational action with respect to future expectations becomes more difficult under inflation than under demurrage, which can undermine the ability of economic actors
to take inflation's incentives into account in their actions versus demurrage. The non-uniformity of the distribution of costs and benefits in inflation across the economy meanwhile undermines an aggregate
analysis of its effects.
Gresham's law
that "bad money drives out good" suggests that demurrage fees would help a currency achieve 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
and overall economic activity. On the other hand, influential 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 therefore inflation is a preferable method to achieve economic stimulation.
was successfully tested in the Austrian town of Wörgl
between 1932 and 1934, until the Austrian central bank stopped the experiment. Local scrip systems, many of which incorporated demurrage fees, were also used across the United States
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. Bernard Lietaer
also 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 great prosperity of these societies.
The major central bank
s' post-WWII 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 effect the goal of increasing the velocity of money and expanding the economy.
; this parallels a proposed tax on the holding of bank deposits proposed by some economists. Other systems have been proposed which involve redistributing this pool equally to all users of the currency.
Mutual credit
systems charging demurrage do not end up with a pool of money, as they simply cancel the demurrages on both positive and negative balances against each other.
is an example of a modern private currency
in which demurrage is applied. In this case there is a gold storage charge of 1% per annum. The demurrage associated with e-gold is arguably expended by the currency operator to help cover real storage costs.
Bernard Lietaer
's terra is a commodity basket currency proposal similar to Keynes' bancor
or L'Europa and bearing a demurrage charge.
The Chiemgauer
is a regional community currency in a part of Bavaria, using a demurrage system.
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
such as gold, demurrage is in practice nothing more than the cost of storing and securing the gold. Demurrage is sometimes cited as having advantageous economic effects, usually in the context of complementary currency
Complementary currency
Complementary currency is a currency meant to be used as a complement to another currency, typically a national currency. Complementary currency is sometimes referred to as complementary community currency or as community currency...
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 against the hoarding of money, as well as to achieve other perceived benefits. In particular, with regard to long-term investment financing, it has the effect of changing the dynamics of net present valueNet present value
In finance, the net present value or net present worth of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values of the individual cash flows of the same entity...
(NPV) calculations. All else being equal, a currency system with demurrage places an increased emphasis on the value of long-term returns on an investment. As such it may create an incentive to invest in initiatives which offer more in the way of longer-term returns.
Like inflation, demurrage reduces the present value
Present value
Present value, also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk...
of holding a unit of currency, similar to the effect of a negative interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
rate on all currency in circulation. Both inflation and demurrage reduce the purchasing power
Purchasing power
Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...
of money held over time, but demurrage does so through fixed, regular fees while inflation does so through expansion of the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
through the actions of a central monetary authority
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
distributing the new issue of currency, which compared to demurrage fees is less certain in the magnitude of its effect, involves an uncertain time lag in the development of its effect, and is not necessarily uniform in its costs and benefits across the holders of the currency. The uncertainties in turn make the determination of net present value
Net present value
In finance, the net present value or net present worth of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values of the individual cash flows of the same entity...
of an investment in the currency more uncertain, and thus rational action with respect to future expectations becomes more difficult under inflation than under demurrage, which can undermine the ability of economic actors
Representative agent
Economists use the term representative agent to refer to the typical decision-maker of a certain type ....
to take inflation's incentives into account in their actions versus demurrage. The non-uniformity of the distribution of costs and benefits in inflation across the economy meanwhile undermines an aggregate
Aggregation problem
An aggregate in economics is a summary measure describing a market or economy. The aggregation problem refers to the difficulty of treating an empirical or theoretical aggregate as if it reacted like a less-aggregated measure, say, about behavior of an individual agent as described in general...
analysis of its effects.
Gresham's law
Gresham's Law
Gresham's law is an economic principle that states: "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation." It is commonly...
that "bad money drives out good" suggests that demurrage fees would help a currency achieve more rapid circulation than competing forms of currency. This led some such as German-Argentine economist Silvio Gesell
Silvio Gesell
Silvio Gesell was a German merchant, theoretical economist, social activist, anarchist and founder of Freiwirtschaft.-Life:...
to propose demurrage as a means of increasing both the velocity of money
Velocity of money
300px|thumb|Similar chart showing the velocity of a broader measure of money that covers M2 plus large institutional deposits, M3. The US no longer publishes official M3 measures, so the chart only runs through 2005....
and overall economic activity. On the other hand, influential British economist John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
contended that Gesell's proposed demurrage fees could be evaded by the use of more liquid competing forms of money and that therefore inflation is a preferable method to achieve economic stimulation.
History
Demurrage-charged local currencyLocal currency
In economics, a local currency, in its common usage, is a currency not backed by a national government , and intended to trade only in a small area. As a tool of fiscal localism, local moneys can raise awareness of the state of the local economy, especially among those who may be unfamiliar or...
was successfully tested in the Austrian town of Wörgl
Wörgl
Wörgl is a town in Tyrol, Austria, in the Kufstein district. It is 20 km from the state border with Bavaria.-Transport:Wörgl is an important railway junction between the line from Innsbruck to Munich, and the inner-Austrian line to Salzburg...
between 1932 and 1934, until the Austrian central bank stopped the experiment. Local scrip systems, many of which incorporated demurrage fees, were also used across the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
during the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, 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
Irving Fisher
Irving Fisher was an American economist, inventor, and health campaigner, and one of the earliest American neoclassical economists, though his later work on debt deflation often regarded as belonging instead to the Post-Keynesian school.Fisher made important contributions to utility theory and...
's book Stamp Scrip. Bernard Lietaer
Bernard Lietaer
Bernard Lietaer is an economist, author and professor. He studies monetary systems and promotes the idea that communities can benefit from creating their own local or complementary currency, which circulate parallel with national currencies.Bernard Lietaer, the author of "The Future of Money:...
also documents in his book Mysterium Geld the use of demurrage currency systems in Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
's High Middle Ages
High Middle Ages
The High Middle Ages was the period of European history around the 11th, 12th, and 13th centuries . The High Middle Ages were preceded by the Early Middle Ages and followed by the Late Middle Ages, which by convention end around 1500....
' bracteate
Bracteate
A bracteate 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...
systems and ancient Egypt
Egypt
Egypt , officially the Arab Republic of Egypt, Arabic: , is a country mainly in North Africa, with the Sinai Peninsula forming a land bridge in Southwest Asia. Egypt is thus a transcontinental country, and a major power in Africa, the Mediterranean Basin, the Middle East and the Muslim world...
's ostraka - dated receipts for the storage of grain - and credits these currency systems with the great prosperity of these societies.
The major central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s' post-WWII policy of steady monetary inflation
Monetary inflation
Monetary inflation is a sustained increase in the money supply of a country. It usually results in price inflation, which is a rise in the general level of prices of goods and services . Originally the term "inflation" was used to refer only to monetary inflation, whereas in present usage it...
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 effect the goal of increasing the velocity of money and expanding the economy.
Proceeds of the system
In some instances, the demurrage fee is charged by some sort of central authority, and results in the collection of currency into a large pool. What is done with this pool varies widely among both historical and proposed systems. In some cases, it is used to pay administrative costs of the system. If the currency in question is run by the government, the demurrage fee can be used as tax revenueTax revenue
Tax revenue is the income that is gained by governments through taxation.Just as there are different types of tax, the form in which tax revenue is collected also differs; furthermore, the agency that collects the tax may not be part of central government, but may be an alternative third-party...
; this parallels a proposed tax on the holding of bank deposits proposed by some economists. Other systems have been proposed which involve redistributing this pool equally to all users of the currency.
Mutual credit
Mutual credit
Mutual credit is a type of alternative currency in which the currency used in a transaction can be created at the time of the transaction. LETS are mutual credit systems.Typically this involves keeping track of each individual's credit or debit balance...
systems charging demurrage do not end up with a pool of money, as they simply cancel the demurrages on both positive and negative balances against each other.
Current examples
E-goldE-gold
e-gold is a digital gold currency operated by Gold & Silver Reserve Inc. under e-gold Ltd., and allowed the instant transfer of gold ownership between users until 2009 when transfers were suspended due to legal issues. e-gold Ltd...
is an example of a modern private currency
Private currency
A private currency is a currency issued by a private organization. It is often contrasted with fiat currency issued by governments or central banks. In many countries, the issue of private paper currencies is severely restricted by law....
in which demurrage is applied. In this case there is a gold storage charge of 1% per annum. The demurrage associated with e-gold is arguably expended by the currency operator to help cover real storage costs.
Bernard Lietaer
Bernard Lietaer
Bernard Lietaer is an economist, author and professor. He studies monetary systems and promotes the idea that communities can benefit from creating their own local or complementary currency, which circulate parallel with national currencies.Bernard Lietaer, the author of "The Future of Money:...
's terra is a commodity basket currency proposal similar to Keynes' bancor
Bancor
The Bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940-42 and which the United Kingdom proposed to introduce after the Second World War...
or L'Europa and bearing a demurrage charge.
The Chiemgauer
Chiemgauer
Chiemgauer is the name of a regional local currency started in 2003 in Prien am Chiemsee, Bavaria, Germany. It is named after the Chiemgau, a region around the Chiemsee. The Chiemgauer program is intended to promote local commerce...
is a regional community currency in a part of Bavaria, using a demurrage system.
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.
- Bernard LietaerBernard LietaerBernard Lietaer is an economist, author and professor. He studies monetary systems and promotes the idea that communities can benefit from creating their own local or complementary currency, which circulate parallel with national currencies.Bernard Lietaer, the author of "The Future of Money:...
. The Future of Money. Century; New Ed edition (February 1, 2002) ISBN 0-7126-9991-0