Demurrage versus Inflation

To me, a demurrage and inflation were conceptually the same under a public usury-free and economic rent-free monetary system until I read a couple of articles talking about how a demurrage changes attitude towards the meaning of money. Demurrage is often a tool used in local scrip and was used for the famous Worgl scrip. It is also a subject of Silvio Gessel’s monetary reform proposals. While I do not fully buy into the belief that a public demurrage over inflationary printing of the government would fundamentally change how people view money, I do believe there are subtle differences and key benefits to a public demurrage over inflationary government printing.

One key difference is that a demurrage is a fixed, predictable, and tangible interest or tax on the holding of money. Inflation is a hidden and unpredictable statistical noise. Everyone knows exactly the cost of holding money and when they will encumber that charge. The cost, like inflation, can be cancelled by putting the money to use in a savings deposit, where the money is made available to others as a loan.

While both a demurrage and inflation encourage maximum velocity of money, inflation considers both population and velocity, while a demurrage only encourages a maximum velocity. If a demurrage is used, monetary expansion by the government can be fixed per capita. Separating monetary velocity from population makes monetary policy more transparent, like a white box where the internal calculations are clear and well-defined, as a opposed to a black box, where the determination of monetary expansion rates are not as clear.

The demurrage is still collected like a tax, so it can be used to fund a minimum government and a citizen dividend, like the government simply printing money to account for both monetary velocity and population needs, in order to both prevent deflation and allow for economic expansion.

The demurrage also does change attitudes about money. Inflation can be considered hidden interest, a charge on holding onto the public’s monetary supply and for not completing an economic transaction, interest on not completing a barter trade. The fundamental attitude change is that money supply is about providing goods and services, not something to accumulate as a good or service in itself. Holding onto money does affect the valuation of money and determines whether people are employed or not.  To overtly charge for holding monetary supply helps in this regard.

The demurrage also prevents money supply from constantly growing, except as a function of population. If the monetary supply is provided debt-free by the government printing press, inflation is not harmful since there is no economic rent on gold or interest to be paid to a banker for the creation of credit. Credit expansion does not need a correction with a credit contraction if the monetary supply is free of usury and economic rent.

However, inflation may be a source of fear of those who view inflation and a constantly growing money supply as something harmful with frightening numbers and horrifying charts of legal tender losing value over the years, with no real conception of what it means for money supply and what happens when money gains in value, destroying everything of any value other than the monetary unit in itself, halting production, causing bankruptcy, causing unemployment, and causing mass poverty. When money loses value, it encourages production. Monetary expansion is the giver of economic life and is necessary for job creation and economic growth. The purpose is more obvious if we can remove usury and economic rent from money with a public debt-free legal tender.

There are other factors which would require monetary expansion. Export of money supply would still be subject to a demurrage and encourage dollars to return to the domestic economy. The export would also be lessened with the elimination of national debt. However, monetary expansion could just as easily be fixed according to the currency being used internationally and as reserve currency, as well as population. Another concern would be lost currency, which could be easily measured by demurrage not collected on existing money supply.

Therefore, to reduce monetary expansion to a simple function of population and to implement a demurrage to maximize monetary velocity, there would be fundamental changes in simplifying accounting and making the meaning of money more opaque, while providing a means to fund government and provide a monetary system free of usury and exponential debt and free of the boom/bust cycle associated with monetary systems based on bank credit and the economic rent of commodities like gold. Money becomes a means of exchange and source of funding the public need of a minimum government, rather than as a store of wealth and a means to fund usurers, bankers, gold owners, and others of the aristrocratic class of the idle rich, who steal the fruits of toil and real capital in their sleep.

I will say that the primary advantage of inflation over the demurrage is that it is hidden and unobtrusive. There is no cost in the collection of the demurrage with inflation. The complaint about such taxation is lesser because of the hidden and unobtrusive nature. It also allows the calculation of inflation and necessary monetary expansion as a black box, where all the complexities which require monetary expansion can be measured as a single observation of the current inflation rate and the amount of monetary expansion made.