Chapter 16 - Demurrage

Demurrage is most easily thought of as a small monthly fee charged on money. A typical example would be a town issuing its own currency notes and requiring a one percent fee each month. Each month the currency note would need a rubber stamp on its reverse side to keep the note valid. Although this sounds tedious, there are some surprising advantages. I will first tell you about the best-known use of demurrage currency. The town of Wörgl in Austria began to issue its own local currency which it called 'Labor Certificate', in July 1932. For the Labor Certificate to retain its face value, the currency holder had to pay a monthly one percent fee. This local demurrage currency, taxed at one percent per month, circulated fourteen times faster than the national currency. [163] This means that the velocity was fourteen times greater. Velocity is an indicator of the proportion of the money supply that is hoarded. In Wörgl, they were not hoarding money. They were spending it within the month because they knew it was costing them.

The Wörgl

The Wörgl is the best-known use of demurrage currency in the form of a 'Stamp Scrip'. in 1932, a small town in Austria of about 4500 citizens called Wörgl was suffering dreadfully from hyperinflation. Besides unemployment of about thirty percent and hunger amongst the citizens, the town itself had almost no income because no one was able to pay taxes and the town was in arrears to the local bank. Factories were idle as they could not sell their product. Farmers could barely sell their products at depressed prices. Small business suffered similarly. [161] [164]

Michael Unterguggenberger, the mayor had read a book by Silvio Gesell which had stated: "An economic crisis, that is the falling off in sales and employment with all the attendant symptoms, is a consequence of falling prices." Michael sensed that the solution must be: 'prices must never be allowed to fall'. The popular mayor, a former workingman, got local support and created a new local currency, although he was careful not to call it money. The money had a special characteristic where the holder had to pay a stamp fee each month equal to one percent of the face value of this stamp script. All businesses in the town decided to accept these 'stamp script' except the post office. This is his reading to the council meeting about his proposed 'Distress Relief Program'. [161] [164]

Slow circulation of money is the principal cause of the faltering economy. Money as a medium of exchange increasingly vanishes out of working people's hands. It seeps away into channels where interest flows and accumulates in the hands of a few, who do not return it back to the market for the purchasing of goods and services but withhold it for speculation. As money is an indispensable wheel in the machine of production, an accumulation of great sums in a few hands means a gigantic danger for peaceful production. Every time the flow of money is interrupted, so is the exchange of goods and services, with a consequent fall in employment. Uncertainty about the state of the economy makes the owner of money careful, causing him/her to hoard it or to spend it reluctantly. He or she distrusts investment. Money circulation is thus slowed down, the turnover of goods and services shrinks and jobs disappear. Such a situation denies incentives to the population, ... In the Wörgl area the sluggish, slow-circulating National Bank currency shall be replaced with a medium of exchange with a better-circulating performance than ordinary money. "Certified Compensation Bills" shall be issued in denominations of 1, 5 and 10 Schillings and put into circulation. The council shall issue the Bills and the public shall undertake to accept such Bills at their full nominal value in payment for goods and services. In order to turn around the economy of the township, public works shall be planned and paid for with the same Bills." [161] [164]

Even before the "Money" reached the hands of the welfare subcommittee, the Austrian National Bank protested, claiming that money was being printed, thereby violating the banknote issuing monopoly of the National Bank. The mayor answered that the Bills were not money - only certificates of work done. The notes were spent into society as wages, but the notes circulated so rapidly that the volume of transactions was many many times more than the face value of the notes. Imagine a town with no currency: no transactions can occur. You only need to introduce a few notes to get a rapid string of transactions as the note travels from citizen to citizen. For example, let us consider a single note equals about one hours work. The council pays a worker to dig a hole. The worker buys a chicken from the farmer. The farmer gets a haircut. The hairdresser buys a dress. The dressmaker buys a box of apples. The apple farmer buys a meal at the café. The café owner buys a bottle of wine. The wine cellar gets his shoes repaired. And so on. If it were a ten schilling note, it may enable one hundred schillings of transactions in one day, until some clown hoards the note. This is a common problem when giving money to people with more money than they need. Hoarding of money is a serious problem. [161]


Demurrage discourages hoarding by raising velocity.

The townspeople started paying their taxes to the council. The money circulated so quickly, that the taxes paid actually exceeded the volume of money in circulation as the council also spent the money straight back into society. The secret of this money was that a one percent demurrage had to be paid on the script each month.[161] At the start of the chapter, you probably thought that the tax was a punishment. It is the opposite. Instead of a ten schilling note in your wallet, you might have one hundred schillings of services and services instead.

The local currency was redeemable, on demand, for official currency, but there was a 2% fee on such redemption. For each schilling of local currency issued, one schilling of official currency was deposited (at interest) in a bank account to cover demands for redemption.

At that time, the National Bank of Austria had about 914 million Schillings in circulation for a population of about six million which was 153 schillings per person. There were about 7443 Wörgl bills in circulation which was less than two schillings per person. The Wörgl two Schillings gave more income and profit to each person than the 153 Schillings of the National Bank. [161] The Wörgl 'stamp-script' were brilliant at creating transactions and strongly discouraged the detrimental effects of hoarding. Hoarding is still a serious problem in modern monetary systems. The hoarding of money seriously compromises the ability of money to enable transactions and create real wealth.

Claude Bourdet, master engineer from the Zürich Polytechnic wrote this in a report:

"I visited Wörgl in August 1933, exactly one year after the launch of the experiment. One has to acknowledge that the result borders on the miraculous. The roads, notorious for their dreadful state, match now the Italian Autostrade. The Mayor's office complex has been beautifully restored as a charming chalet with blossoming gladioli. A new concrete bridge carries the proud plaque: "Built with Free Money in the year 1933." (Remark: Sadly no longer there!) Everywhere one sees new streetlights, as well as one street named after Silvio Gesell. (Remark: Sadly the name has been changed!) The workers at the many building sites are all zealous supporters of the Free Money system. I was in the stores: the Bills are being accepted everywhere alongside with the official money. Prices have not gone up. Some people maintained that the system being experimented in Wörgl prevents the formation of equity, acting as a hidden new way of exploiting the taxpayer. There seems to be a little error in that view. Never before one saw taxpayers not protesting at the top of their voices when parting with their money. In Wörgl no one was protesting. On the contrary, taxes are paid in advance; people are enthusiastic about the experiment and complain bitterly at the National Bank's opposing the issuing of new notes. It is impossible to dub it only a "new form of tax" for the general improvement of Wörgl. One cannot but agree with the Mayor that the new money performs its function far better than the old one." [161]

Many villages showed interest in the Wörgl system and six other villages managed to replicate the system. The Austrian central bank saw its monopoly rights threatened and outlawed Wörgl's stamp scrip system on 1 September 1933. The unemployment rate in Wörgl soon went back up to 30% and the town soon had all the dreadful characteristics of the economic depression.

Food Price Hyperinflation

All the commentaries I can find on the Wörgl demurrage stamp script highlight the discouragement of hoarding (saving) and the consequent high velocity of the notes. However, there is one more characteristic that I do not see talked about. This stamp script requires a monthly stamp fee or tax equal to one percent of the face value. This is one marvelous way of reducing the volume of notes in circulation in the latter stages of hyperinflation. This is the stage of hyperinflation that I have called Food Price Hyperinflation. As you remember from a previous chapter, in the last and most unpleasant stages of hyperinflation, when the banks have closed their doors and Bank Credit disappears from use, the citizens and the government use government created cash for all transactions. There also exists a shortage of food due to farm production problems, food transport problems and payment problems. There has also been a collapse of tax collections partly due to business failures and high unemployment but also because taxes are collected as Bank Credit and put into government bank accounts. The government has no system of directly taxing in cash. So both the volume and the velocity of cash increase whilst chasing a dwindling supply of food. This creates what I call food price hyperinflation. While food is hyper-inflating other prices fall. Food price hyperinflation is selective inflation food products only. Demurrage money, in the form of stamp script, would be an excellent way of reducing the volume of currency notes in circulation under such circumstances. It may be necessary to have at the demurrage rate at five or even ten percent each month. Legislation and organisation for this demurrage mechanism needs to be enacted well before the onset of any monetary collapse.

Lesson for Hyperinflation

Food Price Hyperinflation could be stopped by demurrage.

A Lesson in Taxation

The 'miracle of Wörgl' may give us a guide to a better system of taxation and money. I offer, for serious consideration, a Demurrage on bank accounts of perhaps 1/2% or 1% per month. This is a tax of a little over 6% per annum or 12% per annum. This will enable a significant drop in income tax and sales tax. As a tax, it would not be felt as a punishment. As a boost to productivity and wealth generation for individuals and businesses, it could be miraculous.

Another Definition of Demurrage

   Demurrage is the cost associated with owning or holding currency over a given period. For paper currency, it takes the form of a periodic tax, such as a stamp tax, on each currency note.

Another Definition of Demurrage

   A term used in currency trading to denote the cost of currency ownership and/or storage. It is essentially considered to be the cost of carrying money. [165 Investopedia]

Demurrage is a small fee on currency that is held out of circulation. It is intended to reduce the hoarding of currency for longer than one month and to keep money circulating at a rapid pace. Under demurrage systems, money has a high velocity, it circulates very rapidly and very little is hoarded. Demurrage is a negative interest and a tax on Hoarded Money. It overcomes the fundamental flaw that hoarding creates in our monetary system.

Money derives its value from the goods for which it can be exchanged. Without the potential exchange, it has no value. Money has no intrinsic store of value. Money is not wealth other than it can be used in exchange. Its value purely derives from its exchangeability as a medium of exchange and whilst it functions as such, it also happens to be a store of wealth and a measure of value. Value and store are totally dependent on its viability in exchange. Thus, storage is to be avoided. Storage of wealth needs to be in the form of assets, not currency. My favourite example is growing trees as a store of value rather than cutting them to gain money.

The Nineteenth Flaw of Economics

   Money is not a store of value.

The Twentieth Flaw of Economics

    Hoarded Money is a money avalanche waiting to create hyperinflation.

 Demurrage Money System  Usury Money System 
 Grow trees  Cut trees 
 Leave minerals in the ground  Mine minerals for quick profit 
 Spend and obtain services and goods  Hoard and stop money from creating exchange 
 Invest in production  Leave money in the bank 
 Low sales tax  High sales tax 
 Saving done with assets  Saving done with currency 

Money can be used as a store of wealth because it has exchange value. However, to do so compromises its ability to do so and creates an instability. The instability displays its power when the Hoarded Money comes back into circulation in a hurry as might occur when a financial crisis occurs.

Usurious system, where money can obtain interest, incentivizes greed and excess and promotes a short term thinking. Assets are converted to money because money gains interest. If money does the opposite and costs money to keep, this does not occur and the opposite characteristics tend to appear. Trees are planted and assets are valued for their ability to store value.

In current money system money is constantly hoarded which removes it from circulation. This slows the economy to a halt. An army of talking heads ignores the obvious cure of forcing the Hoarded Money back into the circulating portion of the money supply and recommend an increase in the money supply. Under current bank dominated money system, the cure is often to encourage more borrowing in the private sector by the crude method of adjusting the interest rate. If the citizens cannot be enticed to borrow, or the public as a whole has reached its capacity to carry debt, then the government takes on more debt to spend into the money supply. Then the velocity falls even further as the new money supply get hoarded by those with more money than they need. The situation deteriorates and money starts to lose value and so the Hoarded Money is released into the circulating component of the money supply causing horrendous inflation. And all the learned men still think it is a money supply issue.


Exchange is circulation. Hoarding destroys circulation.

Rotting Vegetables

In times gone by farmers would store their product in warehouses and receive a receipt for the goods. The receipt was used as a form of money. Because goods were perishable, the receipts gradually lost value. Demurrage money has a similar characteristic to vegetables in that it loses value with time. Other goods such as oil or coal do not deteriorate but incur storage costs of a few percent each year. Because regular money does not lose value like perishable goods, it is used as a store of value. We should store goods, not money. We should stock up on non-perishable goods and other assets, rather than money. When money is used as a store of value, it no longer acts as a means of exchange and the economy grinds to a halt. Money needs unhindered circulation. There is no choice in out society but to discourage hoarding and demurrage is the best discouragement method. Demurrage allows money to perish in the same manner as farm produce.

Buy Assets

Do not hoard the means of exchange. Buy real assets.

Another characteristic of demurrage is that it encourages the lending of money at zero interest. This is a boon to entrepreneurial business people. Those with more money than they can use try to find a place to park it that incurs no demurrage fee. Local business is an ideal place to put money to use and it just happens to be where it is most needed. It also happens to be a place that the government has problems trying to extend credit. Demurrage also encourages early payment which again reduces the critical trading money short felt by business and reduces the need for business to rely on debt. Many consumers would pay businesses in advance.

Although the demurrage charge appears to be a burden, it is actually the opposite. By rapid spending, we all get at many haircuts as our head will tolerate. The money circulates so fast that as soon as you spent it, it comes rushing back at us. It is a form of 'pass the parcel'. You can have as much money as you want but you must spend it within a month. So you buy, buy, buy. If you wish to save, buy some silver or enhance your property, or plant some orange trees, or buy some solar panels, or put up a windmill, or insulate your house, or invest in a local business on a local crowdfunding site.

Stop the Hoarding

Demurrage successfully prevents money from becoming a store of money.

The cost to society of the demurrage charge is a very small fraction of the current costs of usury. Under demurrage, the money supply is much smaller because it circulates quickly. So the task of expanding the money supply is less expensive. Inflation in the current system is robbing you of purchasing power. Demurrage makes that process more visible and so you get many times more value because money moves so fast. The financial activity in your life would be greatly enhanced, so inflation or demurrage are going to be of consequence.

As a hyperinflation tool, demurrage could not be better. Firstly it prevents a dangerous buildup of Hoarded Money that has the potential to avalanche into the circulating portion of the money supply with little notice. If the hoarders get cold feet about the economy and suddenly spend their hoards, the economy will not cope and you thus have an ideal trigger for hyperinflation. High hoarding characterised by low velocity along with high debt levels and a few other factors are fertile grounds for hyperinflation. Demurrage is also the ideal tool to damp hyperinflation because it is a useful way of removing money from circulation in the event of hyperinflation. When banks close their doors during a financial crisis, the government has no way of collecting tax. As business collapses and people become unemployed, tax collection falls, but because the banks have closed their doors there is no tax collection mechanism. So the government uses the only money medium available, which is printed currency notes. There in no mechanism to collect tax as cash. So the combination of excess currency, reduced hoarding, vastly increased velocity and an inability to collect tax spells doom for any national government. Silvio Gesell predicted hyperinflation for the type of currency that we use in our nations at present. When a central bank lowers the interest rate to zero, hyperinflation starts when all the Hoarded Money suddenly comes out to be spent into the marketplace with exactly the same effect as a massive increase in the money supply.

In time gone by, money might be 'clipped' or reminted and re-issued from time to time. This had some of the effects of demurrage. Many of the great wonders of the world and the cathedrals were created in times where money was closer to a demurrage currency.

Silvio Gesell

Silvio Gesell proposed a demurrage fee on money to make money work better for civilization. Silvio believed that a demurrage fee would correct the advantaged position held by those with money, reduce the boom bust business cycles and reduce the advantage held by the financial elite.

[Reference: Shwarz, Fritz. The Experiment in Wörgl. Verlags-Genossenschaft Freies Volk. Bern, Switzerland. 1951.]

[Reference: The Wörgl Experiment With Depreciating Money. By Alex. Von Muralt]

[Reference: A French View of The Wörgl Experiment: A New Economic Mecca. By M.Claude Bourdet]

[Reference: The End Results of the Wörgl Experiment. By Michael Unterguggenberger, Burgomaster of Wörgl (Austria)]




[164] Shwarz, Fritz. The Experiment in Worgl. Verlags-Genossenschaft Freies Volk. Bern, Switzerland. 1951.

[165] Investopedia