Demurrage: A Miracle in the Town of Worgl

Too much of a good thing?

Flickr by Scholastica Ees

As much as there are supporters of demurrage, there are still many who have reservations about its effectiveness (no surprise here, considering demurrage is barely mentioned these days). Those who oppose demurrage rarely do so on ideological grounds, as many of the reasons argue for demurrage—like to address issues of inequity, poverty, social justice, etc—are widely supported.

The main reason demurrage isn’t supported is that it fails to meet, what Prof. Lanfranco calls, the “What, Why, How” test.

For one, supporters of demurrage usually tend to argue that money is the only commodity without a holding cost. Unfortunately, this ain’t the case.

As Prof. Lanfranco puts it, “There are three basic opportunity costs. The first is deferred consumption. The second is the interest foregone if balances are not loaned out. The third is that inflation deflates (money’s) worth as a store of value.”

The second problem one has to consider is that in today’s advanced economic system, implementing demurrage may simply have no effect. In today’s markets, adding a demurrage-like charge on money may just be absorbed into the system as yet another “cost” of holding money, like interest or inflation.

“It is hard to understand,” Prof. Lanfranco added, “how one additional element in the cost of holding money would address the long list of socio-economic ills highlighted by proponents of monetary demurrage. A fixed demurrage fee would simply be an additional fixed factor for monetary policy to deal with, and there is clearly no scope for a second independent monetary authority with demurrage fee setting rights.

“There is virtually no evidence, nor a direct link, to suggest that using monetary demurrage to alter the opportunity cost of monetary balances would do anything other than complicate the application of monetary policy in the pursuit of broader policy objectives. Unlike transaction tax proposals, designed to reduce short-term speculative activity in currency markets, demurrage (if even practical) would have no more impact on financial system stability than do changes in central bank rates.”

Charles Eisenstein Interview for Money & Life Film from Charles Eisenstein on Vimeo.

Demurrage today

With the world recovering from its most dramatic economic seizure in decades, does the idea of demurrage even considered anymore?

A clue can be found in Sweden of all places. On July 8, 2009, Sweden breached the “zero barrier.” It cut one of its key interest rates (its deposit rate) to negative 0.25%

What does this actually mean? Basically, Swedish banks are paying 0.25% interest on all the deposits they’re holding in their reserves.

Does this sound familiar?

It should. Negative interest is modern day demurrage. It turns the concept of a bank account on its head, since instead of savers earning interest on their deposits, they are actually the bank to keep their accounts!
Why is Sweden doing this? Because they want to discourage people and banks from hoarding their money and encourage them to spend, invest and loan their money to benefit the economy.

The results of this strategy have yet to fully researched, but it proves demurrage is still alive and well.

No silver bullet

Best said by Prof. Lanfranco, demurrage shouldn’t be seen as a silver bullet for what are really difficult socio-economic problems. “(This would imply) that what are ethical challenges (what should we do?) are nothing more than technocratic challenges (monetary demurrage).”

This writer remains confident that demurrage may become a great tool the future uses to shape a fairer economic system. But it’s important to remember that ending issues like poverty, disease and global warming can only happen when humanity learns to work together through shared values and morals, and not through financial incentives.

ARB Team
Arbitrage Magazine
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