Demurrage Tax is a tax on Hoarded Money. It is an excellent way of reducing Hoarded Money and returning the money to circulation.
A typical Demurrage Tax is a small tax of 1% charged monthly on money holdings. This tax is a strong incentive to spend money in a short time frame. It is a strong disincentive to the hoarding of money. Those wishing to save are thus encouraged to save in any other medium except money. Besides the disincentive to the long term holding of money, the Demurrage Tax directly moves Hoarded Money into circulation, so it dramatically boosts circulation. The tax can produce significant revenue for a government, enabling the reduction of some of the dreadful economy-damaging taxes such as Sales Tax, Payroll Tax, and Income Tax. In small community alternative currencies the fee is generally used to administer the system.
Demurrage Tax is one of the best ways of increasing the velocity of money. It is very much like a negative interest rate. If you spend money, there is no charge. If you hold onto money, there is Demurrage Tax to pay. This tax is often charged on a monthly basis. There are numerous examples of Demurrage Money in history from the successful stamp scripts during the mislabelled ‘Great Depression’ to the Grain Banks and Grain Receipts of the Dark ages, Middle Ages and Ancient Mesopotamia, and Ancient Egypt.
Here is an actual currency with a value that deliberately loses value.
Chiemgauer : A German regional currency
1 Chiemgauer = 1 Euro
When you purchase a Chiemgauer, 3 cents goes to a charity of the purchaser’s choice and 2 cents goes to the issuing organization. The Chiemgauer is only valid currency within the Rosenheim region, so they keep the money local. Every 3 months the Chiemgauer certificates (it is a strictly paper currency) expire and whoever is holding the certificate at that time must pay a 2% fee to reactive the certificate. The Chiemgauer apparently circulates at a rate 2.5x that of the Euro. You may convert the Chiemgauer to a Euro and receive 95 cents, which encourages a business paid in Chiemgauers to spend them on local suppliers rather than converting them and spending the money elsewhere. [18] There is also an electronic form: the ‘eChiemgauer’.
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 a recession. The Austrian Central Bank had presided over a contraction in the Money Supply from 1067 million Schillings in 1928, to 997 million in 1932, to 872 million Schillings in 1933. Unemployment was running at about 30% and there was hunger amongst the citizens. The town of Wörgl itself had almost no income because no one was able to pay taxes and the town was in arrears to the local bank. Factories could not sell their product and were lying idle. Farmers had problems moving their product and were selling at depressed prices. Small business had similar problems. [1] [4] Willing citizens were idle. Factories were idle and farmer’s customers had no money.
Michael Unterguggenberger, the mayor, had a solution. He had read a book by Silvio Gesell. He recognised that the problem was largely due to the slow circulation of money. Most would have thought it was the lack of money. The mayor, a former workingman, drummed up local support and created a new local currency. He avoided calling it money. The money was unusual in that the holder had to pay a 1% stamp fee each month. All businesses in the town decided to accept this ‘scripts’ except the post office. This is his reading to the council meeting: [1] [4]
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.” [1] [4]
He is saying that:
The Austrian National Bank quickly protested and claimed that money was being printed, violating the banknote issuing monopoly of the National Bank. Mayor,Michael Unterguggenberger, countered that the Bills were not money – but certificates for work done. The “Certified Compensation Bills" were given as compensation for work done. The notes circulated very rapidly. As with any good money system, the volume of transactions was many, many times more than the face value of the notes. In 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 equal 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 hoards 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. [1]
The townspeople started paying their taxes to the council and within a while, they were paying in advance of the due date. 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.[1] The local currency was redeemable, on demand, for official currency, with a 2% fee on such redemption. For each schilling of local currency issued, one schilling of official currency was deposited 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. [1] 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. 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. 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.” [1] The Prime Minister of France, Édouard Dalladier, made a visit to witness the spectacular Wörgl system. [19]
Many villages showed interest in the Wörgl system. Six other villages replicated the system. The Austrian central bank saw its monopoly rights threatened and outlawed Wörgl’s stamp scrip system on 1 September 1933. [12] The unemployment rate in Wörgl soon went back up to 30% and the town soon had all the dreadful characteristics of the economic depression.
Schwanenkirchen, Bavaria 1930.
Dr. Hebecker, the owner of a small bankrupt coal mine paid his workers in coal instead of legal currency. He issued a local script which he called the ‘Wara’. The Wara was redeemable in coal. The script note was only valid if it had a stamp for the current month on the note. This stamp charge is called ‘demurrage’. The demurrage charge discouraged hoarding. Hoarding also means saving. The workers soon found that the local businesses accepted the Wara. The use of this script was very successful. By 1931, the “Free Economy Movement" had spread across of Germany. It was soon adopted by 2 000 companies across Germany. In November 1931, the German Central Bank prohibited the use of the Wara. The prohibition caused great hardship in the communities. Hitler may not have come to power had the Wara survived. Interestingly, the Nazi’s printed their own interest-and-debt-free-money based on human labour rather than gold in 1935. The Nazi’s interest-and-debt-free-money lifted the country out of poverty in a few years. It took much propaganda and a world war to crush them. After the war, they reverted to debt-based money. [14]
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’. In another chapter, I write about the influence that Hoarded Money has on hyperinflation. Hoarded Money is like the snow on a mountainside waiting to avalanche down the slope. A financial shock can cause the Hoarded Money to join the Circulating Money in an inflationary manner in such large volumes that hyperinflation is set in motion. A demurrage tax on bank hoardings would lower the volume of Hoarded Money and reduce the chance of a hyperinflation financial disaster. A demurrage tax has another use. 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 cash for all transactions. There also exists a shortage of food, 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 not Cash Currency. Nobody pays tax by taking a wad of cash currency to the tax office. The government has no system for directly taxing in cash. So the volume and velocity of cash in society increases and this cash is chasing a dwindling supply of food. This creates what I call ‘food price hyperinflation’ to distinguish it from the 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 a 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, above the typical one percent, to five or ten percent each month. Legislating the mechanism for this needs to be enacted well before the onset of any monetary collapse. Demurrage Tax has a role in preventing hyperinflation before it occurs and another role in reducing the volume of cash at the start of the food-hyperinflation stage of hyperinflation, long after the banks close their doors.
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 1% or 0.5% or even 0.1% [$1 per $1000] per month. This is a tax of a little over 12% per annum (or 6% per annum or 1.2% 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. The benefits include:
The central bank of Austria banned demurrage money after the successful implementation in the Austrian town of Wörgl. [6] [9] President Roosevelt made an “Executive Order" that stopped U.S. cities from introducing local currencies when one hundred cities were considering or implementing local demurrage money. [10] [8] In the United States, the national currency was disappearing due to a collapse of private banks. By 1933, local governments were creating their own money. This conflicted with the monopoly held by the Central Bank. Several hundred cities and some states were at various stages of implementing local money. [9] Many of these were stamp script systems like the Wörgl currency. Despite strong support by the prominent economist Irving Fisher, President Roosevelt banned local currencies in March of 1933. [10]
Irving Fisher had observed the developments in Schwanenkirchen and Wörgl. He was a strong advocate of the stamp scrip in the USA. He wrote a handbook titled “Stamp Scrip” (1933). Schwanenkirchen had received attention in publications and newspapers. Irving Fisher believed that stamp scrip could correct the shortage of money and end the economic crisis. He tried to convince Franklin Roosevelt and the Congress to give support to stamp scrip. Franklin Roosevelt eventually prohibited emergency currencies.
Demurrage Tax corrects a problem that appears in the definition of money. Money is considered to be that which enables exchange. That which enables transactions. As money passes from person to person it enables goods and services to be transferred. If transactions are inhibited the transfer of goods and services is interrupted. A further line in the common definition is that money can act as a store of value. The problem here is that it cannot do both at the same time. If it is being stored, it is removed from circulation and no longer enables transactions and the transfer of goods and services. New money, then, needs to be created to replenish the supply of money tokens diminished by hoarding. The Hoarded Money then has no value, for returning it back into circulation at a later date creates an inflationary event only counteracted by an equal amount of money removed by the issuing authority or an equal amount of money being removed from circulation by another hoarder. Demurrage Tax discourages the practice of hoarding money and redefines money as a medium of exchange and nullifies the ‘store of value’ component from the current definition of money. I have elsewhere reasoned that the ‘store of value’ sentence should be removed from the definition of money. My reasoning is that money can never be more than a temporary store of value. Any lengthy hoarding of money requires an additional input of money tokens created at no cost to the issuing authority equal in amount to the money hoarded.
In the words of Silvio Gesell: “Gold does not harmonize with the character of our goods. Gold and straw, gold and petrol, gold and guano, gold and bricks, gold and iron, gold and hides! Only a wild fancy, a monstrous hallucination, only the doctrine of “value" can bridge the gulf. Commodities in general, straw, petrol, guano and the rest can be safely exchanged only when everyone is indifferent as to whether he possesses money or goods, and that is possible only if money is afflicted with all the defects inherent in our products. That is obvious. Our goods rot, decay, break, rust, so only if money has equally disagreeable, loss-involving properties can it effect exchange rapidly, securely and cheaply. For such money can never, on any account, be preferred by anyone to goods.
Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money.” [13]
Silvio Gesell’s words are here difficult to understand. But he is saying:
Demurrage money is money that acts as a medium of exchange, but does not act as a store of value. Demurrage money still acts as a measure of value. My thinking is that this corrects a flaw in the definition of money. Even if someone hoards money as a store of value, they are misled, because the stored money has no value. Money has value because it enables the next transaction. The Hoarded Money has to be replaced by fresh money because it was taken out of circulation. Movement of money is necessary for a functioning society. To hoard all the money would be to destroy society, and with it the money. The Hoarded Money alters the Money Supply available for commerce in such a manner that fresh money has to be issued for commerce to continue. In the limit, if all money were hoarded, there would be no commerce and the money would thus have no value. It is the constant transactions created by money that gives money its value. The definition of value is tied to the transactions of money in exchange. The hoarders damage the transactions that give money its value. The hoarding of money needs to cease. Demurrage is the best way to do this.
Some of the stamp scripts did not have a time limit but required a stamp at time of transaction. This method was inherently flawed and lacked the success of the time-based stamp scripts. Many complementary currencies were issued by private companies as a way of paying salaries during the great lack of money due to the collapse of the national money system. The issued script could be exchanged at the companies stores for goods. This gave the money a value that enabled it to be used at non-company stores. However, during the money shortage times, hoarding of conventional and un-timed money was a problem. Only demurrage script encouraged economic transactions. Bank money encourages saving by giving interest to savers and charging no penalty for hoarding. Demurrage money ensures that money does what its original inventors intended: it encourages transactions. Our human ancestors who invented money never intended humans to hoard the money that they knew had been created at no cost.
Grain Receipts were used as a form of currency in the dark and middle ages. Farmers would deposit their grain in a grain banks and obtain a receipt. Grain tends to rot and incurs a storage cost. So the grain receipts lost value with time. There was a natural encouragement to spend the money quickly. The rapid spending of the money created an economy that grew rapidly. The money was a form of demurrage money. The people spent and spent not wishing to hold for longer than essential. Towns were creating more wealth than they had ever known. When everyone in a society is busy, the local infrastructure grows. This included windmills, bridges, churches, waterwheels, roads, and solid houses. Unlike our modern economy where most money is hoarded, the money was moving rapidly. The act of issuing receipts was not to store the grain but to monetise the grain until it was reclaimed and used. Saving of grain receipts simply did not occur. Money could not be put in a bank and grow. Any hoarding caused a loss. So methods were needed to store wealth for the future. Improvements were high on the list. Great buildings started to appear and people had solid housing. Families could live from three days work of one family member. In time, the local currencies were banned in favour of metallic money that did not rot. The affluent could not successfully tax with money that rotted so currency based on precious metals was introduced. The precious metal was prone to hoarding by the affluent and whole new set of problems arose through the monopolisation of the currency. The economy changed from a money system based on plenty where grain was freely grown and the receipts were always positive and moving to a system of scarcity where the volume of money depended on the money issuing whims of the king. The king soaked up wealth through his minting and spending allowing him to purchase almost everything and anything through the action of minting money and spending. Trading money tokens that were generated locally from grain harvests and circulated locally changed to a centralised system that relied on the vagaries of the kings spending and the nobilities ability to purchase that that was previously fully available to the locals. Taxation became a drain that sucked the activity out of the local economy. Poverty arrived ion the towns. Land was created by nature or god for all living things to share and the peasants had been growing food for the local community. With the central creation of money, land became an investment. The usury of land could take place and the land could become an asset owned by the wealthy. Peasants that previously lived by subsistence farming moved to the cities to live in comparative squalor as the land was partitioned and appropriated by the wealthy. [17] [15]
Although it might appear that a grain based money devalues, this is not totally correct. The value of a fresh sack of wheat deposited remained the same year on year. Thus the devaluation that we currently experience did not exist. A fresh bag of grain was always worth the same money.
The Egyptian state provided warehouses where farmers could deposit grain and receive a receipt. These receipts were then used as local money. The grain would gradually loose value and this was reflected in the exchange value of the receipt. The consequence is this form of money was spent quickly. In Egypt, the money appears to have devalued by about 10% per annum. This is of the same order as the Demurrage money successful used on occasions during the last century.
Records written on clay tablets tell us that grain was stored and the resulting receipts were used as a means of payment. This allowed the growth of civilisation. Money tokens are one of the essential requirements for the creation of civilised life. Without money tokens, civilised life is not possible. Modern civilised life collapses immediately when a money system collapses. Again, the grain-based money depreciated. The Sumerians used grain, labour and livestock to represent money and this allowed the building of the first complex civilisations. Political and religious authorities are required to control the issued currency.
Eventually, metal money was issued by priestly kings and taxes, debts and impoverishment arrived. Metal money is well suited to taxation and financial control of the citizenry. Metal money lends itself to hoarding and the act of hoarding confers status on the hoarder. The hoarding reduced circulation of the metal money causing poverty and allowed the asset stripping of the impoverished. Thus a metal system is preferred by a nobility.
The koku in Japan was based on a specific volume of rice which also equaled the amount of rice needed to feed a person for a year. 1 koku is approximately 278 litres.
In the Middle Ages in Europe, the local lord occasionally recalled silver coins for re-minted silver coins with a smaller silver content.
The velocity of money tends to fall when kings take control of currency systems sometimes in collusion with bankers to institute a monopolised debt-based currency. Money ceases to circulate well and the affluent become politically savvy in altering the laws to assist their competitive augmentation of their hoards.
The back of the Wörgl note had this writing:
| “To all whom it may concern! Sluggishly circulating money has provoked an unprecedented trade depression and plunged millions into utter misery. Economically considered, the destruction of the world has started. - It is time, through determined and intelligent action, to endeavour to arrest the downward plunge of the trade machine and thereby to save mankind from fratricidal wars, chaos, and dissolution. Human beings live by exchanging their services. Sluggish circulation has largely stopped this exchange and thrown millions of willing workers out of employment. - We must, therefore, revive this exchange of services and by its means bring the unemployed back to the ranks of the producers. Such is the object of the labour certificate issued by the market town of Wörgl : it softens sufferings dread; it offers work and bread.” |
Demurrage is encouraged for the purpose of encouraging money to flow rather than be retained. To this end it should be necessary to encourage its flow and discourage its hoarding using the medium itself. The discouragement of hoarding is accomplished by imposing a fee on the holding of money. It would also be appropriate that the fee be waived if the money is spent within one month. The fee structure should reflect this thinking. It might also be appropriate that the demurrage fee is shared amongst those that spend money. Those that spent within one month share the proceeds of the demurrage charge imposed on the non-spenders.
The next issue is that the money should not be attractive to hold in a manner that participants prefer to keep other goods or assets as a means of storage. This runs a problem when competing against a national currency. If the national currency retains its value or gains value when put in a bank account, the national currency will be preferred over the demurrage money. To run a demurrage money parallel to a national currency puts the demurrage money at a disadvantage. The benefits of the demurrage money are difficult to realise under such arrangements. The local demurrage money needs some other benefit to thrive in this environment. Some of this may be psychological such as the happy concept of helping the local economy or being loyal to the local area. Another benefit may be local discounts for using the demurrage money.
Transaction fees do not seem to prevent people from spending and may not damage the velocity of money provided the fees are low. People continue to use cards rather than cash even when fees are involved partly due to the convenience. I use a bankcard for business transactions rather than cash to ensure that all business transactions are recorded.
The thinking behind demurrage money is to increase the velocity as if it is the velocity that is a problem. It is the hoarding that is a problem. The hoarding is reflected in the velocity. It is desirable to reduce the volume of hoarding. It is not merely a matter of making that money that is moving circulate faster. One might have a scenario where the same volume of money is hoarded but that which is moving, moves faster. Although this is not a problem, one does not desire that money should be spent unwisely and frivolously. The desire is to reduce the volume of hoarded money such that all money tokens are flowing at a satisfactory rate. It is not helpful if some tokens are stagnant and others are changing hands rapidly.
Certainly the demurrage money has the potential to increase velocity, however, the figures quoted may be incorrect. With paper based currency, it is not possible to determine how often the notes change hands. Any quoted figure is likely to be underquoted. The same problem occurs with Cash Currency transactions. It is not possible to measure the national turnover of cash notes. The GDP figures for nations with high ratios of Cash Currency are likely to be understated. It is only in a transaction recording system such as a bank balance that the turnover can be correctly evaluated.
This article is a must read for anyone wishing to control a national economy:
The Story of Wörgl compiled by Hans Eisenkolb at http://www.hanseisenkolb.de/woergl.htm Hans Eisenkolb has abbreviated various books and articles that give a comprehensive learning experience on the Wörgl money system. He uses the book by Fritz Schwarz 1951, which appears to be the most comprehensive record of the subject.
‘On Velocity in Several Complementary Currencies’ by de la Rosa, J. L. and Stodder, J. (2015). International Journal of Community Currency Research 19(D) 114127 https://ijccr.files.wordpress.com/2015/02/ijccr-2015-rosa-stodder.pdf
Does Demurrage Matter for Complementary Currencies. Hugo Godschalk. http://epca.de/sites/default/files/documents/Demurrage-IJCCR_2012.pdf