Demurrage / free currency

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Demurrage / free currency

Postby stefano » Tue Nov 10, 2009 7:08 am

Demurrage is currency that is designed to depreciate, the idea being that trade then leads to the establishment of real capital instead of fictional capital that grows by devaluing everything else.

I came across this concept via Ran Prieur, who linked to quite a good essay on Reality Sandwich by Charles Eisenstein called Money: A new beginning (Part 1 and Part 2).

I'm excerpting some of Eisenstein here, then I'll be using the thread to organise my reading on the subject. If anyone knows something about it, please drop some ideas or links in here.
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The defining characteristic of money today is usury, better known as interest. It is usury that both generates today's endemic anxiety and drives the world-devouring engine of perpetual growth. To explain how, I will quote Bernard Leitaer's now-famous parable The Eleventh Round, from his book The Future of Money.

Once upon a time, in a small village in the Outback, people used barter for all their transactions. On every market day, people walked around with chickens, eggs, hams, and breads, and engaged in prolonged negotiations among themselves to exchange what they needed. At key periods of the year, like harvests or whenever someone's barn needed big repairs after a storm, people recalled the tradition of helping each other out that they had brought from the old country. They knew that if they had a problem someday, others would aid them in return.

One market day, a stranger with shiny black shoes and an elegant white hat came by and observed the whole process with a sardonic smile. When he saw one farmer running around to corral the six chickens he wanted to exchange for a big ham, he could not refrain from laughing. "Poor people," he said, "so primitive." The farmer's wife overheard him and challenged the stranger, "Do you think you can do a better job handling chickens?" "Chickens, no," responded the stranger, "But there is a much better way to eliminate all that hassle." "Oh yes, how so?" asked the woman. "See that tree there?" the stranger replied. " Well, I will go wait there for one of you to bring me one large cowhide. Then have every family visit me. I'll explain the better way."

And so it happened. He took the cowhide, and cut perfect leather rounds in it, and put an elaborate and graceful little stamp on each round. Then he gave to each family 10 rounds, and explained that each represented the value of one chicken. "Now you can trade and bargain with the rounds instead of the unwieldy chickens," he explained.

It made sense. Everybody was impressed with the man with the shiny shoes and inspiring hat.

"Oh, by the way," he added after every family had received their 10 rounds, "in a year's time, I will come back and sit under that same tree. I want you to each bring me back 11 rounds. That 11th round is a token of appreciation for the technological improvement I just made possible in your lives." "But where will the 11th round come from?" asked the farmer with the six chickens. "You'll see," said the man with a reassuring smile.

Assuming that the population and its annual production remain exactly the same during that next year, what do you think had to happen? Remember, that 11th round was never created. Therefore, bottom line, one of each 11 families will have to lose all its rounds, even if everybody managed their affairs well, in order to provide the 11th round to 10 others.

So when a storm threatened the crop of one of the families, people became less generous with their time to help bring it in before disaster struck. While it was much more convenient to exchange the rounds instead of the chickens on market days, the new game also had the unintended side effect of actively discouraging the spontaneous cooperation that was traditional in the village. Instead, the new money game was generating a systemic undertow of competition among all the participants.


There are really only three ways this story can end: inflation, bankruptcy, or growth. The same choices face any economy based on usury. The villagers could procure another cowhide and make more currency; or one of each 11 families could go bankrupt, as Lietaer observes; or they could increase the number of chickens so that new "rounds" would have the same value as before. In a real economy, all three pressures operate simultaneously. The bankruptcy pressure drives a built-in insecurity, which in turn drives people and institutions to "make" more money through inflationary or productive means. Of these two choices, inflation is only a temporary solution (as we are discovering today). It can only push the grow-or-die imperative slightly into the future.

As Lietaer's parable explains, because of interest, at any given time the amount of money owed is greater than the amount of money already existing. To make non-inflationary new money to keep the whole system going, we have to breed more chickens -- in other words, we have to create more "goods and services." The principal way of doing so is to begin selling something that was once free. It is to convert forests into timber, music into product, ideas into intellectual property, social reciprocity into paid services.

Your 13th-century peasant ancestors rarely paid money for food, shelter, clothing, or entertainment (much less in a hunter-gatherer tribe). People were self-sufficient in all these things or, more likely, depended on elaborate gift networks, sharing, and reciprocity. Of these things is community built. Today, we pay strangers to meet most of our physical and cultural needs. You probably don't know the person who grew your food, wove your shirt, built your house, or sang the songs on your iPod. Abetted by technology, the commodification of formerly non-monetary goods and services has accelerated over the last few centuries, to the point today where very little is left outside the money realm. The vast commons, whether of land or of culture, has been cordoned off and sold -- all to keep pace with the exponential growth of money. This is the deep reason why we convert forests to timber, songs to intellectual property, and so on. It is why two-thirds of all American meals are now prepared outside the home. It is why herbal folk remedies have given way to pharmaceutical medicines, why child care has become a paid service, why drinking water is now the number one beverage sales growth category.

Because money is identified with Benthamite "utility" -- that is, the good -- this entire process is considered rational in traditional (neoclassical) economic theory. Quite simply, whenever anything is monetized, the world's "goodness" level rises. The same assumption appears in the euphemism "goods" to describe the products of industry. The very definition of a "good" is anything exchanged for money. In other words, Money = Good. Got that?

By definition, when we buy bottled water instead of tap water too polluted to drink, that is good. When we pay for day care instead of caring for our babies at home, that is good. When we buy a video game instead of playing outdoors, that is good.

In terms of conventional economics, it may actually be in an individual's rational self-interest to engage in activities that render the earth uninhabitable. This is potentially true even on the collective level: given the exponential nature of future cash flow discounting, it may be more in our "rational self-interest" to liquidate all natural capital right now -- cash in the earth -- than to preserve it for future generations. After all, the net present value of an eternal annual cash flow of one trillion dollars is only some twenty trillion dollars (at a 5% discount rate). Economically speaking, it would be more rational to destroy the planet in ten years while generating income of $100 trillion, than to settle for a sustainable level of $3 trillion a year forever.

According to the parameters we have established, we are making the insane but rational choice to incinerate our natural, social, cultural, and spiritual capital for financial profit. Amazingly, this end was foreseen thousands of years ago by the originator of the story of King Midas, whose touch turned everything to gold. Delighted at first with his gift, soon he had turned all his food, flowers, even his loved ones into cold, hard metal. Just like King Midas, we too are converting natural beauty, human relationships, and the basis of our very survival into money.

Money is a most peculiar kind of property, for unlike physical inventories of goods, "rust doth not corrode nor moths corrupt" it. Cash does not depreciate in value; on the contrary, in its modern, abstracted form of bits in a bank's computer, it grows in value as it earns interest. Thus it appears to violate a fundamental natural law: impermanence. Money does not require maintenance like a plot of farmland to maintain its productivity. It does not require constant rotation of stock like a store of grain to keep it fresh. No accident, then, was money's early and enduring association with gold, the metal most famously impervious to oxidation. Money perpetuates the fundamental illusion of independence from nature; financial wealth endures without constant interaction with the environment. Other forms of wealth are bothersome, because they require a continuing relationship with other people and the environment. But not money, which is now wholly abstract from physical commodities and thus abstract as well from natural laws of decay and change. Money as we know it is thus an integral component of the discrete and separate self.

Obviously, there is a problem when something that does not decay but only grows, forever, exponentially, is linked to commodities which do not share this property. The only possible result is that these other commodities -- social, cultural, natural, and spiritual capital -- will eventually be exhausted in the frantic, hopeless attempt to redeem the ultimately fraudulent promise inherent in money with interest.

Given the determining role of interest, the first alternative currency system to consider is one that structurally eliminates it. One such system, called Frei Geld or "free-money" was proposed in 1906 by Silvio Gesell in The Natural Economic Order. Gesell's free-money bears a form of negative interest called demurrage. Periodically, a stamp costing a tiny fraction of the currency's denomination must be affixed to it, in effect a "user fee" or a "maintenance cost"; another way to look at it is that the currency "goes bad" – depreciates in value – as it ages. (Of course, today this would be done electronically.)

If this sounds like a radical proposal that could never work, it may surprise you to learn that no less an authority than John Maynard Keynes praised the theoretical soundness of Gesell's ideas (with one critical caveat [1]). What's more, the system was actually tried out with great success, and is again in use today.

The best-known example was instituted in the town of Worgl, Austria, in 1932. To remain valid, each piece of this locally-issued currency required a monthly stamp costing 1% of its face value. This anti-hoarding measure spurred citizens to spend their money quickly, even to pay their taxes early. Instead of generating interest and growing, accumulation of wealth became a burden—much like possessions are a burden to the nomadic hunter-gatherer. Worgl's economy took off; the unemployment rate plummeted even as the rest of the country slipped into a deepening depression; public works were completed, and prosperity continued until the Worgl currency (and hundreds of imitators) were outlawed in 1933 at the behest of a threatened central bank.[2]

A similar story transpired in the United States. With national currency evaporating through an epidemic of bank failures, citizens and local governments created their own. By 1933, several hundred cities and even states were preparing to launch, or had already launched, "emergency currencies." [3] Many of these were stamp scrips like the Worgl currency. Despite the vigorous advocacy of prominent economist Irving Fisher, Roosevelt banned all emergency currencies when he launched the New Deal and declared a bank holiday in March, 1933, fearing the new currencies' decentralizing effects. [4]

Conceptually, demurrage works by freeing material goods which are subject to natural cyclic processes of renewal and decay from their linkage with a money that only grows, exponentially, over time. Demurrage currency merely subjects money to the same laws as natural commodities, whose continuing value requires maintenance. Gesell writes:

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. [5]


In other words, demurrage redefines money as a medium of exchange instead of being a store of value. No longer is money an exception to the universal tendency in nature toward rust, mold, rot and decay—that is, toward the recycling of resources. No longer does money perpetuate a human realm separate from nature.

Gesell's phrase, "... a monstrous hallucination, the doctrine of 'value'..." hints at another effect of demurrage—it makes us question the notion of “value.” Value assigns to each object in the world a number. It associates an abstraction, changeless and independent, with that which always changes and that exists in relationship to all else. It is part of humanity's descent into representation, the reduction of the world into a data set. Demurrage reverses this thinking and removes an important boundary between the human realm and the natural realm. When money is no longer preferred to goods, we will lose the habit of defining a thing by how much it is worth.

Whereas interest promotes the discounting of future cash flows, demurrage encourages long-term thinking. In present-day accounting, a forest that has the capacity to generate one million dollars a year every year into the foreseeable future is considered more valuable if immediately cut down for a profit of 50 million dollars. (The net present value of the sustainable forest calculated at a discount rate of 5% is only $20 million.) This state of affairs results in the infamously short-sighted behavior of corporations that sacrifice (even their own) long-term well-being for the short-term results of the fiscal quarter. Such behavior is perfectly rational in an interest-based economy, but in a demurrage system, pure self-interest would dictate that the forest be preserved. No longer would greed motivate the robbing of the future for the benefit of the present. The exponential discounting of future cash flows implies the "cashing in" of the entire earth as opposed to an immediate wholesale “liquidation” of our remaining resources.

Whereas security in an interest-based system comes from accumulating money, in a demurrage system it comes from having productive channels through which to direct it – that is, to become a nexus of the flow of wealth and not a point for its accumulation. In other words, it puts the focus on relationships, not on "having". The demurrage system accords with a different sense of self, affirmed not by enclosing more and more of the world within the confines of me and mine, but by developing and deepening relationships with others. It encourages reciprocation, sharing, and the rapid circulation of wealth.

In a system where affluence comes from sharing, our focus is no longer on how to make a living. We focus instead on how to best give of our gifts. A corollary is that money and art are no longer at odds.

Imagine a life where you simply focus on your art, on your gifts, on being of service, in the serene knowledge that your needs will automatically be fulfilled as a matter of course--such an economy is possible. In it, competition is reduced to its proper domain: a yearning for excellence in all that we do. In it, productive work comes from a desire to create a more beautiful world, not to own it; to live and not just survive. We all know in our hearts such an economy is possible. We know it in our dreams, those we deny because we have to "make a living". Life becomes a grim business, a struggle. The Age of Usury presents us with an ineluctable pressure that we can resist but never escape: to make a living is to deny art, purpose, and beauty.

The locution "cannot afford to" reveals just how often money impedes our innate tendencies toward kindness, generosity, leisure, and creativity. Interest-money generates the greed that we mistake as human nature and perpetuates the illusion that security and wealth come from gathering more and more of the world unto the self, carving out a larger and larger exclusive province of "me" at the expense of every other living person, animal, plant, and ecosystem. As well it seems to directly contradict the teaching of karma, which says that what we do to the world, we do to ourselves. In our current money system, giving out to the world means less for me, not more! Free-money reverses this role and brings money into line with karma, reinforcing rather than denying its fundamental principle that by enriching the world we enrich ourselves.

When wealth is separate from accumulation but refers to a richness of relationships, each person's wealth makes everyone wealthier. Art will no longer be limited by what we can afford, for money will be art's ally not its enemy. Business will be the seeking of ways to bestow wealth upon others rather than the stripping of wealth from others. No longer, then, will our lives be full of cheap stuff. Work will no longer be bound to the search for money, but will seek out ways to best serve each other and the world, each according to our unique gifts and temperament. That will be, self-evidently, the way toward riches—both spiritual and financial, for no longer will the two be in conflict.

Notes

[1] Keynes discusses Gesell's work in his 1936 classic The General Theory of Employment, Interest, and Money. He says that the demurrage solution is sound but incomplete. Since currency is not alone in having a liquidity premium, the danger in a demurrage system would be that other forms of money, such as marginal reserve bank-money and commercial paper, would take over the role currency exercises today, with similar results. This is not a theoretically insuperable difficulty, but it does require a more comprehensive transformation in money than I can describe in this space.

[2] This history draws on Bernard Lietaer's 2001 book The Future of Money.

[3] A list and description appears in Stamp Scrip. Irving Fisher, LL.D. New York, Adelphi Company, 1933

[4] Birch, Dave. "When Monopoly money was real", Digital Money Forum, June 12, 2007, http://digitaldebateblogs.typepad.com/d ... oly_m.html

[5] Gesell, Silvio. The Natural Economic Order, 1906. Trans. Philip Pye. Ch. 4.1
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Postby stefano » Tue Nov 10, 2009 7:18 am

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Postby §ê¢rꆧ » Thu Nov 12, 2009 10:48 pm

§

I haven't gotten to The Natural Economic Order by Silvio Gesell yet, but I did read the two articles and the quoted material in your post.

It's a fascinating concept. Sort of slap-you-in-the-face obvious, yet counterintuitive. Not only should 'interest' be abolished, but there should be negative interest! I'm sure the very thought is enough to give a financier a stroke :)

One thing that occurs to me, though: what about older folks, who work their whole life to have a little something to retire on do? How does demurrage help them plan for a time when they can't be so productive, and engaged in lots of trades and negotiations?

I've thought quite a bit about the nature of money, just being a living human being and needing to use it. I agree that fundamentally changing the rules of what money is will be necessary for any real change to occur. Some of the ideas I've had (or read about and assimilated, I'm not claiming these as mine or anything) in no particular order...

(@) what if money were 'smart', and could remember what it did and was used for? This might have the effect of making money from, say, the arms industry valueless in a community espousing progressive, life-affirming values.

(@) What if each person could 'mint' a certain amount of money, just by virtue of being alive? And that was the only way new money could come into being? It had to be tied to a living being. This would tie into a social wage idea - everyone receiving the very basics to live. The money they mint could represent their productivity, and also their future productivity, somewhat how bets are made in the market now on future productivity. This might have the negative effect of encouraging overpopulation though...

These are just some ideas I've had. I'd like to see more discussion on the OP, and ideas about what can be done to make money serve everyone's interests.
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Postby stefano » Fri Nov 13, 2009 6:17 am

§ê¢rꆧ wrote:what about older folks, who work their whole life to have a little something to retire on do? How does demurrage help them plan for a time when they can't be so productive, and engaged in lots of trades and negotiations?

Well it doesn't really help them... But if demurrage works the way it's meant to, inflation will be 0, so your savings will depreciate only by the amount of the demurrage, which is almost nominal. Demurrage can be zero, as well, then it's called a free currency, which gold was in Europe for almost a century between the Napoleonic Wars and WWI. If you take into account the amount you lose in inflation and banking costs under the current system, and consider that you'll be able to put more aside during your working life if you aren't paying interest, then I don't think pensioners will be worse off. That's without taking into account the possible broader social effects of free currency, what Eisenstein calls Reunion (as opposed to the Separation that is the consequence of the usury system).

I'm reading The Natural Economic Order at the moment, he's got some social Darwinist ideas that I don't really like, e.g. one of his main objections to inherited wealth is that it acts as a brake on competitive selection and allows the idle rich to have more children than their uselessness should allow... I'll suspend judgment until I'll got to the bit about demurrage though.

Another subject that could be interesting here is Lincoln's greenback, a free (i.e. non-appreciating) currency that circulated in the Union during the Civil War. According to that Zeitgeist film the banking interests were viciously against it, so I want to find out more about that.
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