Demurrage, in the complementary currency domain, is a built-in reduction over time of the nominal value of a currency. This discourages hoarding and incentivises spending by essentially levying a tax on currency holders. Ideally, demurrage should involve a charge of a simple negative interest, applied as regularly as practical. While this is easily done on a daily basis with electronic currencies, for paper currencies longer intervals may be necessary.
In such cases, demurrage can be achieved by requiring the regular (monthly or quarterly) purchase of stamps that need to be put on the notes to maintain them valid at face value. With the value of the currency otherwise going down over time, it is in holders’ interest to spend as quickly as possible, or before the next stamp is due.
Not every form of money is equally suitable for demurrage. Organising demurrage in electronic money is fairly easy, requiring only the application of simple bookkeeping techniques. However, as well as the potential benefits outlined above, demurrage has some drawbacks, which should be considered when deciding whether to incorporate this feature into the currency design.
Table 4: Pros and cons of demurrage Pros Cons Demurrage Creates a clear disincentive against hoarding Emphasises currency’s main function: medium of exchange Nudges consumers to spend before having to pay fee Enhances the velocity of circulation Many people do not fully understand the concept Puts collective benefits over personal preference Goes against the common assumption about money – ‘you gain money by keeping it’ Complicated in theory and practice, can keep businesses and individuals from joining