This article addresses the role of demurrage (negative interest) in the design of new currencies. But it takes a roundabout route with diversions around the zero and negative interest rates being currently applied to fiat money; and a detour via positive interest which is itself a stranger idea than we have been led to believe. It suggests that demurrage is worth a place in the designer’s kitbag, but not for the reason normally postulated.
The basic idea of interest is simple. It’s a special type of rent. If we loan out something we have no immediate need for ourselves, it seems reasonable that the borrower should pay us rent for its use. So interest is a rent on money.
A fundamental problem with the rent rationale in general occurs when the ‘property’ concerned is a public good – a commons which has been enclosed – or where it has been secured by violence or some other unfair means. In that case we might feel a little aggrieved at having property we feel we should have a degree of proprietorship over sold or rented back to us. This is the way many people feel about water for example.
Another issue arises when the property owner has (and will have) no need for the property themselves and have acquired it only for its rental value. Seeking a store of value via investment is understandable but when the asset class created is a ‘stuff of life’ good, tensions are sure to arise because investors are affecting the price of essentials. The more they can corner the market the more they can increase the cost of basic living. This seems to be increasingly the case with housing.
There is some mileage in a perspective which considers Money as a Commons . But the rental of surplus money, where that surplus is the result of the ‘sweat of the brow’ – the energy and innovation of the lender – can be defended to an extent. Unfortunately very little money lent is in this category. Most of it (97% it is said ) appears in our accounts as bank loans, created ex-nihilo specifically for the purpose by commercial banks. This is mostly well understood now and any doubters who still believe loans are redeployed money from savers are usually referred to the Bank of England paper on the subject . The interest earned is a significant revenue stream for the banks  that have been given the right to create money-as-credit. This right is not merited – it is a privilege that forms part of the unarticulated Bank-State Bargain .
So interest as we know it is rather a stranger animal (with a weaker rationale) than we might have thought.
There is a huge literature on interest/ usury of which the most compelling and readable recent examples are from Tarek el Diwany and the late Margrit Kennedy. But it ain’t going away any time soon, though it almost certainly must do in the degrowth economy that the planet needs.
For a good number of years the so-called base rate – the interest rate set by a central bank for lending to other banks – was seen as the key tool in the policymaker’s kitbag. (If at this point you are wondering why a bank that can create money out of nothing needs to borrow from the central bank, you’re not alone. We’ve all been there .) During this ‘monetarist’ phase the prevailing view was that by making money cheaper (lowering interest rates) you would cause more loans to be advanced by the banks and stimulate the economy.
This view has been progressively (and inconveniently for the orthodox school) exposed as an unhelpful over-simplification (i.e. b****cks) for three reasons. First if there is lack of confidence in the future among borrowers, lowering borrowing cost will not automatically trigger more lending (the ‘pushing on a string’ argument); secondly because additional money created may be invested rather than spent, causing asset bubbles (e.g. in housing) which dilute the effect; and thirdly because the ‘call to consume’ is being increasingly resisted.
It is often said that ‘money needs to circulate’. This is not just the mantra of the consumer economy where we all have the citizen’s primary duty of consuming ourselves into oblivion. It is also quoted by currency activists who will claim a higher velocity of exchange for their currencies and a consequent incremental effect on local GDP. The implicit assumption is that more is always better – perhaps unsurprising in a society where GDP is still seen as the primary measure of progress.
More is not always better though. Economists have used the term ‘marginal utility’ to describe the additional satisfaction a consumer gains from consuming one more unit of a good or service. Indeed a key function of advertising is to emphasise the illusory status-improvement associated with purchases in order to boost the perception of marginal utility. But the zeitgeist is changing. There is a cultural emptiness associated with the ‘you are what you buy’ proposition, and this is beginning to express itself via an old-fashioned reluctance to buy unneccesarily. Add the effect of austerity and you have a recipe for resistance.
In response, central banks, who to be fair have very few policy levers at their disposal anyway, have decreased base rates down close to zero with insufficient effect and are now exploring negative interest rate policies (NIRP). So in a forlorn attempt to get banks to lend more they are effectively being charged for leaving reserves with the central bank.
The general idea of demurrage as an accelerator of exchange has been around for a long time, its full delineation often being attributed to Silvio Gesell . In a currency design context the means of exchange function is usually considered paramount, and demurrage is seen to give the holders a ‘use it or lose it’ nudge towards spending.
My problem with it is that although the idea significantly predates 20th century consumerism, it still seems to reinforce the idea that we should buy stuff that we don’t need or really want. In a complementary currency context where the currency operates alongside fiat, ‘rusty money’ would presumably be spent before fiat, giving the currency an ‘edge’, but it still feels as if we are being bounced somewhat into the transaction. Maybe this is a personal thing; or a preciousness – certainly the German Chiemgauer currencies claim demurrage as a key success factor . But its attraction in pre-consumerist times was probably related to the fact that most spending options were local then, so more spending meant more local exchange. Nowadays most spending sucks money out of local economies.
Where a currency is in its early stages or where the remit of the currency self-limits and there are a limited range of goods and services on offer, demurrage feels heavy handed. Overall it seems a somewhat artificial device encouraging users to live beyond their needs.
However demurrage in the right format may facilitate self-financing. In its classic stamp-scrip form holders of currency notes had to periodically buy a stamp for (say) 2% of the note value and attach it to the note for it to preserve its value. The stamp though was paid for in fiat currency so we are back to supping with the deprecated devil. For digital currencies, the option exists to simply deduct a percentage of the account holders balance. That deduction can be routed to the currency administration account and in the words of Pat Conaty et al  enables “cooperative accumulation”. In a mutual credit context both positive and negative balances can be adjusted in this way – an approach varied in some new designs  and reminiscent of Keynes’ design for the Bancor whcih was aimed at balancing international trade flows .
A variation on this theme was suggested by the late Richard Douthwaite, who in his design for Liquidity Networks drew a distinction between currency units that had been given into circulation and those that had been earned. The former he felt might be suitable for the application of demurrage; the latter were not. The rationale here is that ‘taxing’ earned units is on balance a disincentive, whereas taxing unearned income with the aim of increasing liquidity is on balance fair. (The example of currency units which are spent into circulation by a sponsor such as local government is a halfway-house case where the rationale could perhaps be argued both ways.)
For currency project start-ups, finding the capital for step-change developments is likely to be problematic. For those that see themselves as fiat-averse , options are further limited. For such projects an alternative (or addition) to demurrage is to levy a transaction tax and set that aside for capital investment. This traditional approach to investment via savings might seem quaint and long-winded in comparison with what is now the usual borrow-fiat-to-invest model but it does have the attraction of decreasing outside dependency – a dependency on a deprecated system we are looking to reinvent. So if we can delay our gratification (which is after all meant to be the characteristic of an adult) this may be the right approach.
A secondary benefit of a transaction tax is in controlling gaming of the system. And since we should expect gaming (typically via false transactions) as soon as we introduce any differentiated reward/ penalty scheme, this would be no bad thing.
: Graham Barnes: Money as a Commons https://www.feasta.org/2014/09/05/money-as-a-commons/
[2,3]: Michael McLeay, Amar Radia and Ryland Thomas: Money creation in the modern economy:
Bank of England Quarterly Bulletin 2014 Q1 http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
: Joseph Huber, James Robertson: Creating New Money (1997)
The authors estimated the gains possible through reclaiming seignorage from UK banks at GBP 47 billion – equivalent at the time to 15% of total UK tax take. The GBP 200 billion + figure is NEF’s updated calculation for 2012.
: Graham Barnes: The Bank-State Bargain: https://www.feasta.org/2015/03/31/the-bank-state-bargain/
: Tarek el Diwani: Tne Problem with Interest http://www.kreatoczest.com/kz_publishing_ourtitles-pwi.htm
: Margrit Kennedy: Interest and Inflation Free Money
: See Positive Money http://positivemoney.org/
Essentially it’s because when they create credit-money as a loan, they create both an asset (the loan) and a balancing liability (the credit in the borrowers account) simultaneously.
: Silvio Gesell: “The Natural Economic Order”  e.g. “Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money. So we must make money worse as a commodity if we wish to make it better as a medium of exchange.”
: Christian Gelleri: Chiemgauer Regiomoney: Theory and Practice of a Local Currency
: David Bollier and Pat Conaty: Democratic Money and Capital for the Commons
: Colin McKay’s Deror: http://www.deror.org/ has an interesting design variation, progressively cancelling both credits and debits
: Graham Barnes: New currencies and their relationship with fiat currency
Featured image: Wörgl Shilling, a demurrage currency. Source: https://en.wikipedia.org/wiki/Demurrage_%28currency%29#/media/File:Freigeld1.jpg
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Graham Barnes is a Currency Innovation Strategist. He is a Director of Feasta and co-organiser of the Feasta Currency Group. He holds a PhD in Computer Science and worked at a senior level in IT and online marketing in a previous life. His current projects include the design and delivery of currencies to be sponsored by a local authority; by a social entrepreneur to complement and enhance a well established sustainability methodology; and by a restaurant chain.