From Ethical Politics
Demurrage is a carrying cost or storage cost charged by someone holding a commodity on behalf of someone else. Applied to money, it refers to a reduction over time in the face value of currency. In other words, it is a kind of negative interest: if for example you hold one hundred units of a currency to which a 7% demurrage charge is applied, at the end of a year it will be worth only 93 units.
The idea of demurrage originated with currencies that were issued as receipts for deposits of grain and other semi-perishable commodities in ancient agricultural societies. This is quite reasonable, as it reflects the depreciation of the stored commodity due to spoilage. Some medieval currencies were also subject to a kind of demurrage: the local lord issuing coinage would recall it every few years, and replace each four old coins with three new ones.
Revival of demurrage in 20th century
The idea of demurrage was revived by the economist Silvio Gesell in the early 20th century. He articulated some of its most important advantages. Chief among these is a systemic discouragement of wealth accumulation. In contrast to the present system, in which merely owning wealth generates (because of interest) more wealth, in a demurrage-based system wealth comes with a carrying cost. If you have more money than you can use, you will be happy to loan it out, even at zero interest.
Moreover, as Gesell puts it, "Money is no longer preferred to goods." Today's money is different from any natural substance, in that it does not decay over time and return to its source. Instead, it grows with time. The problem is that it is linked to an economy that is embedded in a finite world. Interest-based money drives endless, exponential economic growth, which means that more and more of nature must be converted into "goods", and more and more of human relationships must be converted into "services". Interest thus drives the monetization of everything. Demurrage does not do this.
Benefits of demurrage
A demurrage currency system is mathematically similar to today's inflation. It has some of the same effects: it favors debtors over creditors, it encourages circulation over accumulation, it reduces the polarization of wealth. There are some important advantages to demurrage over inflation, however. For one thing, the demurrage rate is fixed, obviating the dangerous non-linear feedback loops involving inflation, expected inflation, and money velocity that can spark hyperinflation. It also does not harm people on fixed incomes as inflation does.
Another advantage of demurrage over interest-based currency is that it reverses the short-term thinking that is harming our planet. In an interest-based system, the value of an investment is calculated by discounting future cash flows by the expected interest rate. For example, if you must choose whether to clearcut a forest and turn it into a desert now for an immediate profit of one million dollars, or to log it sustainably in perpetuity for twenty thousand dollars a year, the rational choice would be to clearcut it, bank the million dollars, and collect maybe forty or fifty thousand dollars of annual interest on that million. Demurrage encourages the opposite: long term thinking, preservation of productive resources, and sustainable investment. It also supports various innovations of the new economy that Paul Hawken calls the industrial ecology: the leasing economy, zero-waste manufacturing, storage costs for toxic waste, and so on.
Several prominent economists vouched for the mathematical soundness of demurrage currency, including John Maynard Keynes and Irving Fisher. Fisher in particular became a vocal advocate of it during the Great Depression, and indeed demurrage currencies were adopted in many localities in the United States and Europe. Most famous was the town of Worgl, Austria, where a local demurrage currency was issued in 1932, sparking an economic miracle. However, when neighboring towns began to imitate the Worgl currency, the Austrian authorities banned it, and the town returned to its depression economy.
Impact of demurrageDemurrage is not a gimmick or a superficial reform. Widely applied, it would fundamentally alter our attitudes toward money, wealth, and work. For one thing, demurrage currency is inherently non-scarce, circulating at its maximum possible velocity. Just as, today, if I have more bread than I can eat, I will happily lend some to you rather than see it go stale, so also do people prefer not to hold demurrage currency. Money is no longer special, but becomes just as abundant as the things it buys. This contrasts with our world today, in which we have a huge over-abundance of the necessities of life, but because of the scarcity of money, inequitable distribution leaves many in want. Thus we have enormous waste alongside terrible poverty. Demurrage currency would end this state of affairs. As Gesell puts it,
"With Free-Money [demurrage currency] demand is inseparable from money, it is no longer a manifestation of the will of the possessors of money. Free-Money is not the instrument of demand, but demand itself, demand materialized and meeting, on an equal footing, supply, which always was, and remains, something material."
In a demurrage-based economy, wealth, power, and status no longer accord to those who own the most, but to those who give the most. It would recreate the dynamics of the potlatch societies, where leadership was associated with the inclination and capacity for generosity.
Demurrage-based currency also influences our spiritual intuitions. Today, money is something different from the rest of money, being imperishable, ever-increasing. It is an exception to the laws of nature, and leads us into a human realm that we equally pretend is exempt from nature's laws. But demurrage currency, like all natural things, eventually decays and returns to its source (the demurrage charges go to the issuer, who then issues an amount of new currency sufficient to maintain price stability). If we are to have an economy that is an extension of the ecology, it had better use money that accords with ecological principles.
- Lietaer, Bernard A. "Community Currencies: A New Tool for the 21st Century"
- Eisenstein, Charles. "The Currency of Cooperation"(Chapter VII of The Ascent of Humanity)
- Eisenstein, Charles. "Money and the Crisis of Civilization," Reality Sandwich, Feb 23, 2009.
Author: Charles Eisenstein