The information below is mostly copied from Community Currencies: A New Tool for the 21st Century by Bernard Lietaer

The Concept of Demurrage
The idea of a demurrage currency is just a variation of what has been variously described as "stamp scrip" or "stamp currency". Its theoretical concept was originally developed by Silvio Gesell about a century ago. Gesell was an Argentine businessman and economist who has been neglected by many theoretical economists because of the (at first sight) unconventional nature of his demurrage concept.

Gesell's initial premise was that money as a medium of exchange should be considered a public service good (just as public transportation, for instance) and, therefore, that a small user fee should be levied on it. Instead of receiving interest for retaining such a currency, the bearer in fact pays interest. In Gesell's time, stamps were the normal way to levy such a charge. The Sharehood is now able to levy the charge electronically on neighbour's accounts on the first of each month.

Is such an unconventional concept as demurrage a theoretically sound one? The answer is a resounding yes, and is supported by economists of no lesser stature than John Maynard Keynes. Chapter 17 of Keynes' General Theory of Employment, Interest and Money analyzes the implications of such money, and provides a solid theoretical backing to the claims made by Gesell. Keynes specifically states: "Those reformers, who look for a remedy by creating an artificial carrying cost for money through the device of requiring legal-tender currency to be periodically stamped at a prescribed cost in order to retain its quality as money, have been on the right track, and the practical value of their proposal deserves consideration.¹ He concludes with the prescient statement that "the future would learn more from Gesell than from Marx."¹

Changing Incentives
The most important structural shifts would occur in the way people would spontaneously start saving and investing. Because the demurrage concept discourages the use of currency as a saving device something else needs to be used to store value.

The conceptual key to understanding this shift involves changing the "arrow of time" in the investment process. Under the present system, the discounted present value of any investment has to be higher than the interest rate of a risk-free government bond. This implies that anything that produces value more than twenty years in the future is basically worthless today, thus providing a systemic incentive not to care about the long-term consequences of our actions. With demurrage, the incentive works in the opposite way: income in the future would become more valuable than income today, thereby automatically prioritizing the long-term implications of today's actions.

Once the basic necessities of life are covered, the logical uses of money in this new context would include investing in ways that will reduce expenses in the future (pay back mortgages, improve home insulation, improve energy efficiencies, start one's own food gardens) and investing in anything that will keep, or increase in, value (land improvements, trees and forests, and anything else that grows over time).

Consumption patterns would evolve toward products with longer lifetimes. Assume that one has $100,000 available and two types of cars are offered for sale: the usual car of today, which costs $20,000 and lasts four years, and one costing $100,000 that lasts twenty years. In today's currency environment it is logical to buy the short-lived car because one can put the $80,000 balance in a savings account and get more value in the long run. With the proposed alternative currency it is logical to buy the long-lived car. Today nobody builds such a car because there is no demand for it. But in the future, it could spontaneously become the type of car in greatest demand. Note that the total income of the car manufacturer is the same over twenty years (assuming no inflation), but that the burden on the environment is much lower. According to the same logic, people would tend to build houses intended to last forever--and spontaneously invest in further insulation and other improvements whenever they have extra cash.

It is important to recognize that there would be no need to "educate" people to do all these things. Demurrage simply reprograms the "invisible hand" of financial self-interest to provoke these actions.

Today, many people try to convince others to act in an ecologically responsible way, but it is in their financial interest to do the opposite. With demurrage, economic self-interest pulls automatically in the direction of ecologically sound actions. Only by such realignment of economic and moral motivations can we expect truly massive changes in behavior patterns.

Historical Precedents

The vast majority of the books on economic and monetary theory or history never mention the possibility of such "charge" or "demurrage money." Even the monumental History of Interest Rates, which covers interest from Sumer to today, does not mention it once.³ Is this concept then just a theoretical idea, or is it a practical possibility? In fact, history records the remarkable ability of this concept to adapt to different cultures and circumstances--and to generate spontaneously the behaviors we are trying to promote.

Egypt

Recall the biblical Joseph, who interpreted the Pharaoh's dream and saved Egypt from "seven lean years" by stockpiling food. Why would the Egyptians have kept Joseph in such high regard for inventing stockpiling? Its use had been widespread since the beginning of the agrarian revolution several thousands of years earlier. Might there have been more to it than the Bible mentions?

These stockpiles were also the basis of the Egyptian monetary system. Each farmer who contributed to the stockpile would receive a piece of pottery having an inscription of the quantity and date of delivery of his contribution, which he could then use to purchase something else. These receipts, or ostraca, have been found by the thousands and were in fact used as currency. However, what the Bible missed is the key to the system: there was a time charge on these receipts. For instance, if someone wanted to redeem an ostraca of ten bags of wheat after six months, he would only receive nine bags. This demurrage charge reflected the costs of guarding the depot and quantities lost to rodents.

So we can understand that Egyptian farmers would never hoard this currency but invest in what was most handily available to them: improvements on their land and irrigation systems.

This currency was used in Egypt for more than a thousand years, until the Romans forcibly replaced it with their own banking and currency system, more "modern" and having positive interest rates. Note the apparent consequences of this change: As long as negative interest currency was used, the Egyptians built monuments that would last forever and maintained their agricultural system in remarkable condition, making it the breadbasket of the Ancient World. All this quickly disappeared when the Roman currency was generalized. Since then, Egypt has remained for two thousand years a "developing" country.

The Middle Ages

What triggered the exceptional economic and spiritual prosperity in Europe, particularly from 1150 to about 1300, when the extraordinary blossoming of all the cathedrals took place? Few people are aware that this period coincides with the existence of the brakteaten monetary system, under which local lords issued silver plaques that were called back on the average every six to eight months and reissued a bit thinner, amounting to a demurrage rate of about 2-3 percent per month over this entire period. People would therefore automatically invest in anything that would last almost forever: improved land, tapestries, paintings, or cathedrals.

From an economic perspective, cathedrals made sense as an investment in the future. There was fierce competition among cities to attract pilgrims from all over the Christian world, and cities competed for cathedrals, just as today they compete for Walt Disney Co. investments. The main difference, of course, is that cathedrals were also symbols of faith, masterpieces for thousands of craftsmen who chose to remain anonymous, and designed as lasting beauty. Is it a coincidence that cathedrals flourished as the most grandiose symbols of community solidarity in Western history, yet declined as soon as the brakteaten system was replaced with the king's monopoly on the creation of currency?

While the previous examples might be discounted because they seem to apply only to pre-capitalistic economies, the following examples bring us to modern times.⁴

The 1930s in Germany

In 1930, Herr Hebecker, owner of a small bankrupt coal mine in Schwanenkirchen, Bavaria, decided in a desperate effort to pay his workers in coal instead of Reichsmark. He issued a local scrip - which he called "Wara" - redeemable in coal. On the back were small squares where stamps could be applied. A bill would remain valid only if the stamp for the current month had been applied. This negative interest charge was justified as a "storage cost." The workers paid for their food and local services with these Wara. For example, the baker had no real choice but to accept them, and convinced his wheat suppliers to accept them in turn. The process was so successful that by 1931 this Freiwirtschaff (free economy) movement had spread through all of Germany, involving more than 2,000 corporations and a variety of commodities as backing for the Wara. But in November 1931, the German Central Bank, on the basis of its monopoly on currency creation, prohibited the entire experiment.

The 1930s in Austria

In 1932, Herr Unterguggenberger, mayor of the Austrian town of Worgl, decided to do something about the 35 percent unemployment of his constituency (typical for most of Europe at the time). He convinced the town hall to issue 14,000 Austrian shillings' worth of "stamp scrip", which were covered by exactly the same amount of ordinary shillings deposited in a local bank.

After two years, Worgl became the first Austrian city to achieve full employment. Water distribution was generalized throughout, all of the town was repaved, most houses were repaired and repainted, taxes were being paid early, and forests around the city were replanted.

It is important to recognize that the major impact of this approach did not derive from the initial project launched by the city, but instead had its origin in the numerous individual initiatives taken in the process of recirculating the local currency instead of hoarding it. On the average, the velocity of circulation of the Worgl money was about fourteen times higher than the normal Austrian shillings. In other words, on the average, the same amount of money created fourteen times more jobs.

More than 200 other Austrian communities decided to copy this example, but here again the Central Bank blocked the process. A legal appeal was made all the way to the Supreme Court, where it was lost.

Stamp Scrip in North America

Emergency currencies have a longer history in America than most people realize. They seem to appear with a curious regularity-- the 1830s, 1890s, and 1930s--coinciding roughly with the bottom of the long-term economic cycle called the Kondratieff wave. I will concentrate on the last period because it is the best-documented example.

The theoretician behind the movement in the United States in the 1930s was Irving Fisher of Yale University. He had analyzed the Worgl case in Austria and published various articles about its success. Subsequently, more than 400 cities, and thousands of communities or organizations all over the country, issued one form or other of emergency currency. Many were stamp scrip, involving the application of a stamp at prescribed intervals (monthly, for example). There was also a movement to issue this stamp script officially nationwide: Senator Bankhead of Alabama presented a bill to the Senate February 18, 1933, and Representative Petenhill of Indiana presented a bill to the House of Representatives on February 22, 1933.

During this time Irving Fisher approached Dean Acheson, then Undersecretary of the Treasury, to obtain support from the Executive branch for the same idea. Acheson asked the opinion of one of his Harvard professors, who advised him that the system would work but that it would imply strongly decentralized decision making, which he should check out with the President. Soon thereafter, President Roosevelt prohibited any use of "emergency currency" and announced the New Deal centered around a grandiose centralized plan of large construction projects.

These examples all show that the concept worked in the modern world whenever it was allowed and correctly implemented.

Notes
1. John Maynard Keynes, The General Theory of Employment, Interest, and Money. London: Macmillan, 1936, 1967, p. 234.
2. Ibid, p. 355.
3. S. Homer and R. Sylla, History of Interest Rates, Third edition. New Brunswick, N.J.: Rutgers University Press, 1991. In the authors' defense: they were primarily bond traders, so did not look for negative interest currencies.
4. Several of these examples are also mentioned in Hazel Henderson's paper in this issue [World Business Academy Perspectives, 8(2) (1994)]. However, I limit discussion to those cases that have the demurrage concept built in, and highlight the behavior patterns they have generated.