Demurrage: A Miracle in the Town of Worgl

The brief history of money

The history money is a study unto itself. But generally speaking, money wasn’t so much an invention as it was evolution where form followed function.

As Sam Lanfranco, Professor Emeritus & Senior Scholar, Economics, York University, explained through an online interview, “Money was not invented in one place and then spread by knowledge migration. It evolved in many places in response to a troika of needs: for a unit of account, for a unit of exchange and for a durable store of value.

“Originally all monies were commodity monies, be that stones, shells, or various metals, so long as they were durable and relatively fixed in supply. Gradually, fiat (paper) monies evolved first as a convenience (as in the case of Italian goldsmith receipts) and then as a business, with the emergence of fractional reserve banking.
“Finally, in all cases, fiat monies in circulation have become a government monopoly.”

The concept of demurrage

Flickr by Patricia Laz

When talking about money’s history, the topic of demurrage tends to come up. The modern omnibus term for stamp scrip (described above) and ‘negative interest’, demurrage refers to any system that places additional (per diem) cost to holding (or hording) money. One can argue other factors like inflation or interest share this same trait, but these have very different characteristics, as we will soon see.

The concept of demurrage has a long history, as long as the notion of rent. For centuries, different cultures used demurrage as a way to account for products with a limited shelf life or charge for holding items of worth. The Egyptians, for example, used this system when managing their stores of grain; the reason being that since grain eventually went bad, it made sense to charge a monthly fee to account for the spoilage. In Europe, demurrage was simply the fee charged for holding gold in the goldsmith’s vault.

These examples continue into the modern day, even if they’re no longer referred to as demurrage. Prof. Lanfranco noted how this concept is heavily used in the area of transportation: “(demurrage) commonly refers to the additional per diem cost of keeping possession of a transport unit (truck, railcar, vessel, etc.) that is tied up by loading or unloading delays beyond the time agreed upon. Railroads frequently keep each other’s rail cars for extended periods of time and settle up payments from a demurrage balance sheet.”

But as a theory, while notable greats like John Maynard Keynes and Irving Fisher supported demurrage as an ideal, economist Silvio Gesell has always been known as its greatest champion.

Velocity

Using Gresham’s law that “bad money drives out good,” Gesell argued that demurrage fees did the best job of speeding up a currency’s circulation (as seen in Worgl, where people couldn’t spend their money fast enough). Especially on the open market, when people know that keeping money is equal to losing money, then buyers and sellers will more actively engage with each other to meet in the middle and make deals and sales.

As any ecomonist would say, when the velocity of exchanges and liquidity increases, so does overall economic activity. That is what Gesell believed was most prone to offer society.

In fact, such a system even has the potential to work wonders during economic downturns. Since during recessions, the natural inclination is to save and hoard money (thus worsening the recession), demurrage encourages the opposite—thus, cutting down the recession’s life span and improving economic resiliency.