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A demurrage currency is one in which the value of units of currency (as distinct from the value of the currency unit as a unit of account) is designed to fall over time at a fixed rate. Note that this effect is in addition to any inflation or deflation that the currency may experience (not to mention any exchange rate variations, if the value of the currency is not fixed to the value of another currency), not some magic "substitution".
In essence, the currency issuer applies a fixed "tax" rate to all currency-holders at fixed intervals, such as once a year or once a month. Note that this can be seen as an extremely crude kind of "wealth tax" — a tax on wealth solely in the form of a particular form of money — and is not an income tax. However, it should be immediately obvious that as a wealth tax it is extremely ineffective, as it is trivial to circumvent.
In early 20th century examples of demurrage currencies (such as the town of Wörgl's short-lived local currency) this "tax" was achieved by means of stamps which had to be applied every month to a physical monetary token in order for the token to remain valid, and which had the effect of cutting the value of the token.
The most notable 21st century example is probably the Chiemgauer that has operated in Germany since 2003. By 2011 it has annual revenues of the equivalent of €6 million. It is now part of a larger Regional Currencies network that operates across Germany.
What's good about them
Demurrage currencies are expected to, and do in fact, experience a relatively high velocity of money, due to the "hot potato effect" — everyone wants to pass on the money to someone else before it gets "taxed" (note: "taxed" is not the word that advocates of demurrage currencies use!). This is said to be good because it stimulates economic activity by encouraging people to spend or invest their money. It is generally agreed that increased economic activity is badly needed whenever there is a recession, to create jobs, yet quite often people and politicians don't seem to do anything effective about it (not surprisingly in the case of individuals, as their efforts would be insignificant).
Economist J M Keynes looked at demurrage currencies, and decided that simply allowing currencies to experience a reasonable rate of inflation was preferable, and had the same effect of promoting investment and spending. This is quite interesting because inflation is commonly thought of by most non-economists as an inherently bad thing,[note 1] even though central banks actually do in practice follow Keynes' advice to the extent that they try to avoid letting inflation get too close to zero.
(Side note: So, if moderate inflation is good because it stimulates spending and investment, is more inflation better — at least until a certain point? This is essentially the thinking behind market monetarism — another fringe economic idea, but one that is less obscure than demurrage currency.)
Complementary currencies which use demurrage, do not benefit the local economy as much as the observed "hot potato" effect might suggest. This is because when someone spends demurrage currency to get rid of the "hot potato", in the absence of that demurrage money, they might have spent ordinary money on the same thing in the same way instead.
Dubious claims made about them
Proponents of demurrage currencies tend to say:
- It will replace the uncertainty of inflation with the certainty of a fixed demurrage rate (i.e. tax on cash). Not true. How are they going to fix inflation at zero? This is always assumed and never explained. In fact, it is impossible to fix inflation at zero in a real economy, assuming that you don't sneakily substitute a 19th-century definition for inflation ("total quantity of money") as the Austrians do. And that's just word games.
- It discourages "money hoarding" (i.e. saving) and encourages investment. Again, not true. A savings account is (at least in conventional theory, and sometimes in practice) a way for savers to delegate investment to a bank or other body in a "protected" way, trading off lower risk for lower profits. So saving is a form of investment, and could no doubt be structured in such a way that it was treated as such by the demurrage system. But that is actually irrelevant, because there is a much simpler objection: the easiest way to save the money that you possess that is denominated in demurrage currency is to exchange it for a non-demurrage currency (or other asset), so that shouldn't even be necessary. So demurrage currencies don't discourage saving per se.
- That they could have additional rules added to reward warm fuzzy things like pro-social investment (whatever that means!), and punish bad things such as pollution. But why should demurrage currencies be any better at this than, say, ordinary Pigovian taxes, or cap and trade systems? Moreover, why wouldn't they be worse if introduced on a local level and/or on a voluntary (i.e. non-legal-tender) basis, because people and companies would have to consciously decide to opt in to using them? Why not just reward good things and penalise bad things using existing economic and legal techniques? Why bring demurrage currencies into it?
Claims of conspiracy
Allegedly, the Austrian central bank banned them after the Austrian town of Wörgl successfully introduced such a local currency, and President Franklin D. Roosevelt banned US cities from adopting them "by executive order" when 100 of them were considering doing so. These claims have unsurprisingly led to some interest in demurrage currencies from those drawn to conspiracy theories, but surprisingly, not that much interest. Perhaps this is because, unlike with the gold standard conspiracy theories, there are no seedy demurrage currency sellers online seeking to drum up interest in their products.
A 2012 attempt to raise $28,000 to start a new electronic demurrage currency, that would be similar in some ways to Bitcoin, is currently headed for failure — barring a last-minute massive donation. Perhaps not many people wanted to pay for the privilege of creating a system where they could pay more tax.
The cryptocurrency Freicoin uses demurrage.
During the final months of 2018, a new German charity organization, Access to Basic Income E.V., was founded, with ties to the Social Impact Lab Leipzig. They created a digital currency (widely believed to not technically be a cryptocurrency, though it resembles one in many ways); this digital currency, called Palai, is both a non-governmental form of basic income and a demurrage currency; however, the Palai documentation, and the small community of users, avoid the word "demurrage" completely, instead using a euphemism that appears to be exclusive to the Palai currency; "evaporation". Evaporated units of the Palai currency end up in the basic income pool and get recycled and redistributed, evaporation happens a tiny bit per day (though people with millions of Palai will see larger numbers getting subtracted than someone with a smaller amount), and the more active verified users there are on the Palai network, the fewer units per active user are given as basic income.