Why some economists believe money should rot like a potato
In short: Imagine a currency designed to lose value the longer you hold it. While most people view money as a way to store wealth, demurrage currency treats it as a perishable good. It is a deliberate economic mechanism intended to force money into constant motion, preventing the stagnation of capital.
The concept of demurrage currency, or 'depreciating money,' is rooted in the belief that the functions of money as a store of value and a medium of exchange are fundamentally antagonistic. German-Argentine economist Silvio Gesell championed this idea through his Freiwirtschaft system. He argued that 'hard' currency—money that holds its value perfectly—is actually bad for the economy because it encourages hoarding. In his view, money that is great for banking is poor for commerce. To create a more efficient economy, Gesell proposed 'Freigeld' (free money), which would lose value over time, much like a newspaper or a piece of iron, to ensure it remains a tool for exchange rather than a static pile of wealth.
The mechanism works by imposing a carrying cost on holders. For example, during the Great Depression, some emergency scrip systems required owners to purchase a monthly stamp—often 1% of the face value—or the money would lose all value. This creates a powerful incentive to spend quickly. Unlike inflation, which is a general rise in prices, demurrage specifically targets the value of currency held in circulation. Because it penalizes holding cash, it can theoretically increase the 'velocity of money' during recessions. While inflation rewards those who hoard money during falling prices, demurrage ensures that even if prices drop, the holder still loses purchasing power, forcing them to participate in commerce.
The economic implications are nuanced. Proponents argue that demurrage could eliminate unemployment and reduce recessions by keeping the circular flow of income moving. However, it changes the landscape of debt and investment; since holding cash is penalized, the value of claims to future money, such as stocks and bonds, would theoretically increase as they become more reliable stores of wealth. While most demurrage currencies were eventually banned by central banks to protect national monopolies, the concept survives in modern local currencies like the Chiemgauer. It remains a fascinating thought experiment on whether the primary purpose of money should be to preserve wealth or to facilitate its movement.
This theory highlights a core game theory problem in economics: if prices are falling and money is hoardable, no one wants to buy anything. Demurrage solves this by removing the reward for waiting. By making money 'worse' as a commodity, it becomes 'better' as a medium of exchange, aligning the incentives of the individual with the needs of the broader economy.
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- Summary by Intellect · source: Demurrage currency
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