In Finance, what is a Demurrage?

Demurrage, as it pertains to finance, is an expense related to retaining or reserving currency over a period of time. Similar to inflation, demurrage deliberately diminishes the purchasing power of money over a period, thereby dissuading the hoarding of money and, theoretically, promoting economic activity. While augmentation of the money supply by the government or central banks leads to inflation, which also devalues currency, demurrage encourages spending and investing by the imposition of regular, fixed fees or taxes on the money being held. For example, if a four-percent fee were applied each year against an account with 1000 units of currency, then the value of the account would be reduced by 40 units of currency per year. This negative interest provides an incentive for someone with more money than he can use to loan it out, even at an extremely low interest rate.

Advocates of a negative interest currency cite a number of potential benefits of this system. Demurrage accommodates borrowers over lenders, making it easy to obtain credit and driving down interest rates. It encourages active circulation of money instead of accumulation. In contrast to the current interest-based system, in which simply having wealth produces more wealth due to interest, in a demurrage-based currency system, there is no advantage to the accumulation of wealth, thereby decreasing the polarization of affluence. Unlike inflation with its upward spiral of costs, demurrage does not harm persons with limited resources.

Detractors of negative interest systems point out that the presumed beneficial effects of such a system have not been comprehensively studied nor proven. There has been an enormous increase in the use of local currencies, many using the fee system, over the past 20 years, but local currencies are only accepted within the community, thereby interfering with the potential increased efficiency of large-scale operations. Barter systems, with a direct exchange of service for service or product for product, spring up, which may facilitate tax evasion. Furthermore, in a world with different forms of currency, money holders can easily dodge the demurrage fees. For these reasons, renowned economist John Maynard Keynes favored inflation over demurrage to stimulate the economy.

If a central authority charges and collects the negative interest fees, the resulting funds are used to cover operational and administrative costs. When a government is running the demurrage currency, the fees are used as tax revenue to fund government programs and services. Some proposed systems envision the redistribution of the funds equally to the population of currency users. Alternatively, the fees may cover real storage costs of commodities or gold.