Chapter 70 - Demurrage

These are some typical definitions and descriptions 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.

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. [705]

Comments About Demurrage

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.

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 must pay a monthly 1% fee. This local demurrage currency, taxed at 1% per month, circulated fourteen times faster than the national currency. [703]

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 30% 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 had similar problems. [701] [704]

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 1% of the face value of the money. All businesses in the town decided to accept this 'scripts' except the post office. This is his reading to the council meeting: [701] [704]

Distress Relief Program. "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." [701] [704]

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. You should be to imagine that in the 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 10 shilling note, it may enable 100 shillings of transactions in one day, until some clown hordes the note. It is a common problem when giving money to people that have more money than they need. Hoarding of money is a serious problem. [701]

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 1% demurrage had to be paid on the script each month.[701] 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 6 million which was 153 Schillings per person. There were about 7443 Wörgl bills in circulation which was less than 2 Schillings per person. The Wörgl 2 Schillings gave more income and profit to each person than the 153 Schillings of the National Bank. [701] The Wörgl shillings 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 wealth.

Claude Bourdet, a 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." (H.E. remark: No longer!) Everywhere one sees new streetlights, as well as one street named after Silvio Gesell. (H.E. remark: Name long changed) The workers at the many building sites (H.E. remark: No more building sites two months later) 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. Taxpayers were not protesting 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." [701]

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 1% 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, temporarily or permanently and Bank Credit disappears from use, the citizens and the government use cash for all transactions. There also exists a shortage of food due to farm production problems, food transport problems and payment problems due to the rapidly devaluing money. 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 in bank accounts. The government has no system of directly taxing in cash. So the volume and velocity of cash in society increases and is chasing a dwindling supply of food. This creates what I call food price hyperinflation to distinguish it from earlier stages of hyperinflation. While food is hyper-inflating, other prices fall. Food price hyperinflation is selective inflation of 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 raise the demurrage rate to five or ten percent each month. Legislating the mechanism for this needs to be enacted well before the onset of any monetary collapse. However, food price hyperinflation could be stopped by demurrage.

A Lesson for Taxation

The of miracle Wörgl may give us a guide to a better system of money and taxation. I offer, for consideration, a demurrage on bank accounts of perhaps 0.5% 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. It could be an amazing boost to productivity and wealth generation for individuals, businesses and the nation.

[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)]




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

[705] Investopedia