Demurrage (currency)

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Demurrage is a cost associated with owning or holding currency over a given period of time. It is sometimes referred to as a carrying cost of money. For commodity money such as gold, demurrage is in practice nothing more than the cost of storing and securing the gold.

Demurrage is sometimes cited as having advantageous economic effects, usually in the context of complementary currency systems. However, the effects of demurrage have not been extensively studied, nor have its benefits (or disadvantages) been rigorously demonstrated. The study of the effects of demurrage on an economic system is a rich and largely unexplored area of research in economics and other fields such as sociology.

1 Proposed Advantages
2 Pool of currency
3 Examples
4 References
5 See also

[edit] Proposed Advantages

Whilst demurrage is a natural feature of private commodity money it has at various times been deliberately incorporated into currency systems as a disincentive against hoarding of money, as well as to achieve other perceived benefits. In particular, with regards to long term investment financing it has the effect of changing the dynamics of Net present value (NPV) calculations. All else being equal, a currency system with demurrage places an increased emphasis on the value of long term returns on an investment. As such it may create an incentive to invest in initatives which offer more in the way of longer-term returns.

Demurrage also has an effect nearly identical to inflation, but without the same underlying causes. When multiple currencies are being used, Gresham's law suggests that a demurrage fee would help a currency achieve more rapid circulation. Even if only one currency is being considered, demurrage would likely increase the velocity of circulation of the currency, encouraging economic activity.

One could also view Demurrage's effect as being similar to negative interests rates. However, unlike interest, it applies to all currency in circulation, not just that which originated as a loan. This has led some to propose it as a means of addressing injustices in the distribution of wealth.

[edit] Pool of currency

In some instances, the demurrage fee is charged by some sort of central authority, and results in the collection of currency into a large pool. What is done with this pool varies widely among both historical and proposed systems. In some cases, it is used to pay administrative costs of the system. If the currency in question is run by the government, the demurrage fee can be used as tax revenue; this parallels a proposed tax on the holding of bank deposits proposed by some economists. Other systems have been proposed^{[citation needed]} which involve redistributing this pool equally to all users of the currency.

Mutual credit systems charging demurrage do not end up with a pool of money, as they simply cancel the demurrages on both positive and negative balances against each other.

The demurrage associated with e-gold is arguably expended by the currency operator to help cover real storage costs.