Demurrage is part of the wider system called EnMo economics. In this model the main business of the state is ensuring that people have enough of everything they need of essential goods and services. To this end the state ensures that anyone who wants to work is able to do so, helping to provide those essential goods and services.
There are a couple of basic concepts to understand before explaining a little detail about demurrage.
- For the purpose of this essay, demurrage would apply only to state-produced money. For the example shown below, I’ll assume the British state is using the system, and to distinguish its currency from the normal British pound its currency is called UK dollars (UK$). The £ still exists, but is managed by the private banking system pretty much as it has always done.
- UK$ are legal tender, and must be accepted by any British business at a nominal exchange rate determined by the state.
- UK$ cannot be used to purchase any other currency, but other currencies may be used to purchase UK$, at an exchange rate determined by the state.
- UK$ are originally spent into the economy by the state, through paying the salaries of public servants, and for purchasing British-made products and services.
- The sole purpose of UK$ is for spending. They are not intended to be saved. People who wish to save money need to do so using other currencies, or through purchasing other exchangeable assets (such as land, precious metals, artwork etc) – pretty much as some people do now.
Demurrage in Action
Each year the state produces whatever new money it needs to pay for essential British-made goods and services. Every citizen who wants one is given an account at the state bank – a public bank entirely owned and managed by the state. Citizens are free to have accounts in private banks and building societies, as they have long been able to do, and able to use foreign currencies as well as traditional British pounds at those banks, as always.
The following example applies only to the new state bank, where a demurrage period of 5 years is used. This means that money produced in year one decays in value at a fixed rate, so that by year six it no longer has any official exchange value and has been completely removed from the banking system.
State bank money, UK$, are very similar to existing western currencies in that the vast majority of them exist only in cyber-space. To facilitate small cash transactions, a relatively small quantity of paper notes are produced each year, which also decay in value, and also become officially worthless after five years. Metal coins are used too, but because their relative value is insignificant (none is worth more than 1UK$) they maintain their face value indefinitely. Control against the hoarding of metal coins can be achieved by imposing high bank charges for bulk transactions.
Demurrage is managed through the state banking system. Consider an example of an individual customer account at the state bank, for a Mr Stevens, say:
Assume that at the end of the first year when the system of demurrage is introduced, Mr Stevens has a balance of UK$386.84. With a demurrage rate of 20% this means that UK$77.37 will be deducted from Mr Stevens’ account for the next five years.
Closing balance 386.84
Demurrage rate of 20%
Therefore Yr1 deductions = 77.37 for next five years
Mr Stevens’ opening balance for year 2 is 20% less than it was at the close of year one; i.e., 386.84 – 77.37(yr1 deductions) = UK$309.47
Assume that at the end of year 2 the account balance of new money Mr Stevens used throughout the year is UK$440.00. Therefore year 2 demurrage rate = 20% of 440.00 = UK$88.00 for the next five years.
Mr Stevens’ closing balance for the year = opening balance + new money added (309.47 + 440.00 = UK$749.47)
At the start of year 3, Mr Stevens opening balance = Year 2 closing balance – total deductions for years one and two:
= 749.44 – 77.37(yr1) – 88.0(yr2) = UK$584.07
Assume 208.96 of new money is added in Yr3, setting Yr3 deduction rate of 41.79
Therefore closing balance = 584.07 + 208.96 = UK$793.03
Opening balance = Year 3 closing balance – total deductions for first three years:
793 – 77.37(yr1) – 88(yr2) – 41.79(yr3) = 585.84
Assume no new money is added in Yr4
Therefore Yr4 deductions = 0
Closing balance = 585.84
Opening balance: 585.84 – 77.37(yr1) – 88(yr2) – 41.79(yr3) – 0(yr4) = 378.68
Assume new money added in Yr5 = 589.40, setting Yr5 deduction rate of UK$117.88 for the next five years.
Closing balance = 378.68 + 589.40 = UK$968.08
Opening balance: 968.08 – 77.37(yr1) – 88(yr2) – 41.79(yr3) – 0(yr4) – 117.88(yr5) = 643.04
New money added in Yr6 = 129.40, setting Yr6 deduction rate of 25.88 for next 5 yrs.
Closing balance = 643.04 + 129.40 = UK$772.44
Opening balance = 772.44 – 88(yr2) – 41.79(yr3) – 0(yr4) – 117.88(yr5) – 25.88(yr6) = 498.89
So by year six all state money produced in year one in the form of bank notes and the bank’s computer accounts, has been removed from official circulation. There is a possibility that some bank notes could be collected and acquire an exchange value of their own (like old postage stamps do), but this market would be unofficial and relatively small.
The Philosophy of Demurrage
The whole point of allowing the state to have the power to produce and control whatever money it needs is to liberate the state from the control of the private banking system. In the whole history of economics the private banking system has not only failed to benefit society as a whole; it has frequently harmed it – often very severely. The private banking system has always been at the service of the super-rich. The rest of society has always had to manage the best they can off scraps from the masters’ table. The only well-known exception to this otherwise global problem is Switzerland. There, although the private banking system still works primarily for the super-rich, it is relatively tightly controlled by the state, which is itself relatively tightly controlled by the Swiss people – a true exception. This indirect control of the banking system by the people shows that capitalism can work to the advantage of society (for Switzerland is nothing if not a capitalist country), but the key condition is that the people must be in real and ultimate control.
Switzerland points the way to the real heart of the matter: state control of the economy, and popular control of the state. Despite all the propaganda to the contrary, democratic government doesn’t really exist anywhere. Although a long way from perfect, Switzerland is by far the best example of democracy in action. It’s exceptionalism in this regard proves the rule: apart from Switzerland, real democracy doesn’t exist.
Socialism is a sound economic model. The much-reported failings of socialism where it was tried on a large scale – Russia and Eastern Europe, for example – were not because of the model itself. They were because, firstly, the capitalist west was always bitterly opposed to socialism and did everything in its considerable power to destroy it; and secondly, socialist states were not sufficiently well controlled by the people: powerful and corrupt individuals were able to create elite classes of rulers who were not significantly different to western aristocrats and business moguls – whilst ignoring the conditions of the people they ruled.
EnMo economics is also a sound economic model, but it too is dependent on full democratic control of the state by the people. Therefore the model assumes a state controlled by direct democracy and a well-informed electorate.
EnMo is unquestionably a better economic model than the capitalist model that currently rules our planet, because EnMo benefits the whole of society instead of just 1% of it. But it’s also an improvement on socialism, because it establishes a fairly clear distinction between the role of the state and the role of the private sector – both of which are considered vital to a healthy economy.
At the heart of EnMo philosophy is the belief that money is a universal human right, not the personal property of the super-rich; a belief that anyone should be able to exchange a modest amount of their labour for money at any time – enough money to provide them with whatever they need in terms of essential goods and services.
The second problem
At the beginning of this essay I explained that there is a technical problem to controlling the volume of money in circulation. Because this essay has been mainly on the principle of demurrage, I should explain a little more about the philosophy of that particular element.
The heart of the matter is about how the state should manage its finances. In our existing capitalist model, the state obtains most of the money it needs for spending on public services from two main sources – taxation and borrowing from the private banking system.
The corporate business world and the private banking system currently have a symbiotic relationship, depending on each other for their permanent growth. When a government wants to provide affordable public services this is seen as competition to the private business world which, despite propaganda to the contrary, loathes competition. Therefore the private business world do their utmost to ensure that good public services cannot exist. Hence a routine requirement from the International Monetary Fund, for example, is that all countries it does business with (which is most countries in the world) must constantly reduce their public services. The logic behind this is that reduced public services create a need from which trans-national corporations can then make money.
Another device which helps facilitate corporate control of the state is a requirement for the state to impose minimal taxation – hence limiting the money the state has available to pay for public services. Low taxation is marketed as being absolutely essential in order to “attract foreign investment”.
If we put aside the obvious injustice of the way the existing system for managing money supply is controlled, it can be argued that there is also some sense to some of it – at a purely technical level.
When money is poured into the economy there needs to be a mechanism for re-circulating it, or removing it altogether. If this doesn’t happen, too much money floods the economy – a bit like what happens if the taps are left running into a bath. Too much money in the economy means that prices of goods and services are continually rising, and in extreme situations money can become effectively worthless – as has happened in the past in Germany, say, Argentina and Zimbabwe. So some sort of mechanism is needed to continually adjust the quantity of money in circulation.
In our existing system the mechanism for controlling state money is provided through taxation. Taxes are used mostly to keep paying for public services – which provides the recycling of money; but some of the taxes are spent in repaying loans to the private banking system, and loans repaid to banks is the same as destroying money – removing it from circulation altogether.
Obviously this system works – at a purely technical level – because it’s the system we’ve been using for many years. But the big problem with it is that it’s effectively controlled by the world of private banking which, being intimately connected to the world of big business, protects the interests of big business rather than the interests of society as a whole.
Therefore we need a new system, one that allows the state to finance its operations without any control whatsoever from international bankers. Demurrage tries to do this by providing a mechanism that allows the state to control the volume of state money in circulation by changing the nature of that money, by effectively giving it a known expiry date. New money is continually introduced into the economy by the state, so there’s no danger of there never being enough for the needs of the state, and old money is continually expiring. In this system there is no need for taxation of state money. The state simply creates whatever new money it needs to provide public services, money which disappears from circulation five years later. Demurrage would be a much easier and fairer system to administer than taxation.
The EnMo model provides for at least two currencies to be operating in the country at any time – at least one currency controlled by the private banking system, as now; and one currency wholly controlled by the state.
There’s actually nothing very new about the EnMo monetary model. As I’ve already mentioned, the basic philosophy is just a modern variation of the “bread and roses” dreams of early socialists – but with more practical detail of how to achieve the dream.
Different currencies circulating at the same time have long been routine in many countries. And a state currency used only for local goods and services, and which cannot be used to purchase other currencies is not original either: Cuba has been doing it for decades.
Neither is there anything original about the principle of demurrage. The German economist Silvio Gesell described the idea almost a hundred years ago.
Demurrage has never been adopted by governments as common practice not because of any significant flaws in the model, but because it would remove control of money supply from the hands of the super-rich – the people who control governments.
The bigger picture
State-managed money, to provide for essential goods and services, using demurrage as a mechanism to control money volume, is a perfectly workable solution to most of the economic problems that most countries face – in theory. But theory and the real world are two very different things.
The biggest problem of the EnMo monetary model is, as I stated at the beginning of this essay, the fact that Smith’s “masters of mankind” would hate it, and fight tooth and claw to oppose it, just as they fought against socialism – for the fairly obvious reason that it would put an end to their absolute control over money supply, the essential oil of the economy. That, however, is a political problem, which the 99% will eventually have to deal with.
But let’s now assume the 99% have sorted out the masters of mankind. There’s one other vitally important change that would be necessary to make before we’re home and hosed: for the EnMo model to work properly it would need to work on a global scale.
This would need a new global bank, controlled by the General Assembly of the United Nations – or something very similar, and able to produce and maintain a new global reserve currency. Like individual state models, this currency should be available only for essential goods and services and, like the state model, be subject to a demurrage rate making it unsuitable to hoard. Every country would have an automatic right to receive an annual allocation of the new reserve currency, according to the size of its population and its essential trading needs. Countries should be encouraged to develop their economies in such a way that they are largely self-sufficient for essential goods and services, but there will always be a need to trade with other nations. No one should ever be able to prevent trade in essential goods and services by imposing trade sanctions.
Most people know that the way our economy is managed is not only unfair, it’s also corrupt and often illegal. It’s intentionally designed to benefit the super-rich at the expense of the poor. Therefore it’s obvious that it needs to be fixed.
Lying at the very heart of this problem is control of money supply. We have an economic system that permits the super-rich to have total control of money supply – a fine example of putting the fox in charge of the hen house.
So there can be no question that we need two radical changes. The first and most important of these is political change, a complete reformation of the way our country is governed. We need a system of direct democracy by a well-informed citizenry. Then we need to ensure the state has absolute control of money supply to pay for essential goods and public services.
Demurrage would be a practical, easy and fair way for the state to control the volume of state money in circulation. Hyper-inflation, the spectre created by the super-rich to intimidate the 99%, would not happen – provided the real cause of hyper-inflations, shortages of essential goods, is prevented.
Throughout its history money has been treated as though it’s the personal property of the super-rich. It’s not. It belongs to everyone. It’s a human right.
• Read Part One here.