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 such as gold, demurrage is the cost of storing and securing the gold. For paper currency, it takes 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 systems.
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, for long-term investment financing, it affects the dynamics of net present value (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.
Like inflation, demurrage gradually reduces the value of currency held: it is in effect a negative interest rate on 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 by a central monetary authority distributing newly issued currency or through endogenous money creation (such as fractional reserve banking). However, inflation, compared to fixed demurrage fees, is more variable, creates uncertainty, and is not usually uniform in its effect across the holders of the currency. Due to this uncertainty, rational economic action becomes more difficult under inflation than under demurrage. The non-uniform 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 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 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 was a preferable method to achieve economic stimulation.
Demurrage-charged local currency was successfully tested in the Austrian town of Wörgl 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 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 prosperity of those societies.
The major central banks' 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; this parallels a proposed tax on the holding of bank deposits proposed by some economists.[who?] 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 fund of money, as they simply cancel the demurrages on both positive and negative balances against each other.
The Islamic system of Zakat 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.
E-gold 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.
- 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 Lietaer. The Future of Money. Century; New Ed edition (February 1, 2002) ISBN 0-7126-9991-0
- Lietaer, Bernard A. (2001). The future of money: a new way to create wealth, work, and a wiser world. London: Century. ISBN 0-7126-9991-0.