Demurrage currency

Functions of money While demurrage carrying costs are a natural feature of commodity money, demurrage 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, thus creating demurrage currency. Freiwirtschaft economists propose that the function of money as a store of value is incompatible with its function as a medium of exchange for maximum economic efficiency. In The Natural Economic Order, Gesell wrote: "The power of money to effect exchanges, its technical quality from the mercantile standpoint, is in inverse proportion to its technical quality from the banking standpoint." even though the latter function was the prime reason why money was created in the first place. Since demurrage currency is deliberately designed to be bad at storing value, it is therefore great at functioning as a medium of exchange, which Gesell believed to be the only legitimate function of money. By contrast, money owners can wait for the price to fall, since there are no carrying costs for holding money. One type of stamp scrip worked this way. Each scrip certificate had printed boxes. Every month a stamp costing a certain amount (in a typical case, 1% of the face value) had to be purchased and recorded in a box, otherwise the scrip lost all its value. This provided a great incentive to spend the scrip quickly. The scheme was used successfully in Germany and Austria in the early 1930s, after national currencies collapsed. Preventing recessions One of the most important differences between demurrage and inflation is how they affect economic recessions differently: • Inflation is defined as "a general rise in prices". • During recessions, prices tend to fall. • When prices fall and we can expect them to continue falling, commerce falls too. People avoid buying commodities sooner when they expect that they can buy them cheaper later. • Recessions thus face a game theory problem: society wants to increase commerce, but nobody with hoardable money wants to increase commerce if prices will continue to fall. • If prices are falling, then there is no inflation, by definition. • If there is no inflation, then there are no penalties for withholding money from circulation during a recession. • Thus, holders of money are rewarded for withholding their money from circulation during periods of falling prices. • Inflation is thus not a viable way to increase circulation and end recessions. • By contrast, demurrage money would lose value even if prices are falling, so it can increase circulation and end recessions. If money continues to lose purchasing power (even at a slow rate), then people will use it sooner rather than later. Gesell proposed that money should have a demurrage rate 5.2% per year, or 0.1% per week, but he also believed that real-world experimentation would probably be necessary to figure out the optimal rate. By contrast, the depreciation rate of demurrage currency would stay at a fixed rate set by the government, thus leading to a more stable and predictable economy with lower prices. Interest rates, lending, and borrowing Some regard demurrage as a negative interest rate policy, but they have different effects. Under demurrage currency, hoarding money becomes impossible because the face-value of money depreciates regularly. This forces the circulation of money. By contrast, it is possible to some extent to hoard money on negative interests, since the face value of money is constant and people can use their money as a means of saving. For example, Japan's negative interest rates drove up the sales of safes and strongboxes. Negative interest rates tend to discourage people from storing their money in banks, in order to avoid having their money depreciate in value. Thus the money cannot be relent by the banks to increase the money supply, and for this reason, it can be difficult to increase the money supply, so some aspects of monetary policy could theoretically become ineffective at low interest rates. Under a demurrage monetary system, banks would be incentivized to loan money to avoid paying demurrage fees. This new incentive would lead to a further incentive for bankers to lend demurrage money without charging interest rates, in order to reduce the disincentives for borrowers to borrow demurrage money. For long-term investment financing, demurrage currency 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. Economic and environmental sustainability Freiwirtschaft economist argues that the growth imperative of modern economies is caused by interest burdens on debt, inflation, and opportunity costs created by the existence of interest. Fuders believes that the growth imperative has harmful environmental and social consequences. Fuders concludes that it is impossible to meaningfully address the problem of unsustainable growth or fulfill the sustainable development goals proposed by the United Nations without completely overhauling the monetary system in favor of demurrage currency. Bernard Lietaer and have also argued that the existence of interest has negative impacts on resource consumption and the environment. As an example, Lietaer wrote: "When it pays more to cut a tree, sell the wood and let the proceeds earn interest than simply let the tree grow, it is predictable that "economic pressures" will be felt to cut more trees than is optimal from an ecological viewpoint. Stamp Scrip would reverse that process." 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). The fee typically accrues to the administration account and thus adds to the common credit pool. == Critical analysis ==