What’s demurrage, alias negative interest?

It’s now a clear-cut fact that today’s positive-interest-based monetary system is a huge hurdle against our sustainable lifestyle as well as our economic activities. Silvio Gesell(1862-1930), a German-Argentinean merchant and economist, is a remarkable figure who suggested how to reform this paradigm on his masterpiece “The Natural Economic Order.

He starts his argument with the fact that money is at a privileged position in comparison with other goods. In general commodities are depreciated as the time passes by and you can’t sell yesterday’s newspaper or one-year-old apples while you can hoard your money as long as you like without suffering from any loss at all(in case of no inflation: note that Germany adopted the gold standard when he wrote that book), which allows bearers of notes to charge the compound interest on lending them to somebody in need. The more money you have the more profit you can earn by this financing, enabling the superrich to live solely on such income while most of the poor are asked to contribute to them.

So what was Gesell’s idea?: “To abolish the privilege of money.” People prefer money to goods on storing economic value because money remains the same, so he came up with charging bearers of paper notes a certain amount of “demurrage fee” regularly to prevent them from hoarding(for instance, to put the stamp of one-hundredth of the face value each month: to be depicted more next time).

This will give a fundamental shift to the financial system as it’s quite helpful for borrowers: lenders see their act as a means rather to get rid of suffering from the monetary loss triggered by the demurrage fee than to increase their asset and even negative-interest loans will be possible when the demurrage fee is high enough: In case the fee is 1% per month = roughly 11.4% per year, it’s better to lend US$1000 to receive only US$950 next year than hoarding it at home and losing more than US$100. The negative interest rate will give more chances to those businesses which haven’t been financed so far due to their low profitability, more people will have access to credits = more freedom to run the business they want and consequently our economy will be more democratically managed.

Although Gesell died in 1930 without witnessing any case at all where his theory is applied, the subsequent history proves that he was right. Next time I’ll deal with a historical success.


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