> For the complete documentation index, see [llms.txt](https://money.web3economy.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://money.web3economy.io/money/demurrage.md). # Demurrage The previous pages have examined the asymmetry between low-cost storable money and the goods, services and labour for which it is exchanged. Gesell associated this asymmetry with the power to withhold demand, basic interest, restricted productive investment, unstable monetary circulation and the concentration of financial wealth. Demurrage is his proposed response to the underlying problem. Instead of attempting to regulate only the consequences of monetary retention, demurrage changes the incentive to retain money itself. ## Addressing low-cost monetary storability Conventional money can often be retained for long periods at a lower cost than ordinary goods. Food deteriorates, inventory requires storage, machinery becomes obsolete, buildings require maintenance and unused labour cannot be recovered later. Money may lose purchasing power or require security, but it ordinarily remains more liquid and easier to retain than many of the things it is used to purchase. This difference means money does not necessarily act as a neutral intermediary. The holder of money can often postpone spending, lending or investing, while producers and sellers remain exposed to the costs of delay. If money is to facilitate exchange without altering the bargaining position of the participants, Gesell argued that it should face a pressure to circulate comparable to the pressure faced by goods, services and labour. He writes: > “Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes,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.” Gesell did not necessarily mean that the physical monetary instrument had to deteriorate. His objective was to ensure that retaining money imposed an ongoing cost. He continued: > “So we must make money worse as a commodity if we wish to make it better as a medium of exchange. As the owners of goods are always in a hurry for exchange, it is only just and fair that the owners of money, which is the medium of exchange, should also be in a hurry.” The purpose of demurrage is therefore to reduce the advantage money obtains from its comparatively low-cost storability. ## Demurrage as a carrying charge Demurrage money is money subject to a periodic holding or carrying charge. The longer someone retains a monetary balance, the greater the total charge incurred. The charge is intended to encourage holders to spend, lend or invest money rather than leave it idle for prolonged periods. It does not prevent anyone from holding money, nor does it necessarily mean that the monetary unit itself loses purchasing power. Gesell proposed stamped money as one implementation. Holders would periodically purchase a stamp and attach it to the money for the currency to remain valid at its full nominal value. The stamp represented the cost of retaining the monetary balance. A digital system could apply the same principle without physical stamps. A small proportion of each balance could be collected periodically. The nominal unit could remain consistent while possession of a balance incurred a recurring charge. Demurrage should therefore be understood as a cost attached to holding money rather than as a requirement that the monetary unit physically deteriorate or continuously lose purchasing power. ## Creating a shared incentive to exchange In a barter transaction, both participants possess something they want to exchange. Each may incur costs if the transaction is delayed. The goods may deteriorate, require storage or become less useful over time. Conventional monetary exchange changes this relationship. One participant holds goods, services or labour that may be difficult to retain, while the other holds a generally accepted and comparatively durable monetary asset. The money holder can often wait more easily. Demurrage places a carrying cost on the monetary side of the transaction. Both the buyer and seller then face some incentive to complete the exchange rather than postpone it indefinitely. Gesell writes: > “Supply is under a direct impulsion inherent in the nature of wares, and for this reason I propose a similar impulsion for demand. In the process of settling the price, supply would then no longer be at a disadvantage in comparison with demand.” The objective is not to force every holder to purchase the first available good or accept unfavourable terms. Money holders would remain free to decide how and when to use their balances. However, prolonged delay would no longer be costless. The charge would alter the calculation facing the holder. If money remains idle, the balance gradually declines. If it is spent, it passes to another participant. If it is lent or invested, it becomes available for someone else to use productively. The incentive created by demurrage is therefore directed against prolonged monetary inactivity rather than against individual choice. ## Effects on short-term monetary use A modest demurrage charge would have a limited effect on money held for ordinary transactions. Someone receiving income and using it during the following days or weeks would incur only a small cost. A person retaining enough money to pay rent, bills, food and other regular expenses would not experience the same total charge as someone holding a large monetary balance for many years. For example, an annual demurrage rate of 5 per cent applied gradually would represent a carrying cost of approximately £50 a year on an average balance of £1,000. The actual charge would depend on the frequency of collection and how the balance changed during the year. The charge becomes more significant as the amount and duration of the balance increase. A person holding £1 million would face a proportionately larger cost than someone holding £1,000. This proportionality is central to the proposed incentive. Small working balances used for ordinary exchange would incur comparatively small charges, while large and prolonged idle balances would become increasingly expensive to maintain. ## Money as a public resource Gesell treated money as a social institution rather than as an ordinary commodity. It is created and accepted because a community requires a reliable mechanism for coordinating exchange within an advanced division of labour. Money can therefore be compared to other shared forms of infrastructure. Roads, public airwaves, parks and communication networks support activities on which many people depend. The value of these resources comes partly from their availability and continued use. Money performs a similar infrastructural role. Individuals rely on it to sell their labour, purchase necessities, invest, donate and enter agreements. Businesses rely on it to pay workers, purchase supplies and receive revenue. The monetary system may therefore be understood as a public utility even when individual monetary balances are privately controlled. The conflict arises when private control allows a participant to obstruct the use of a shared exchange mechanism and demand payment for releasing it. Gesell compared this to allowing private vehicles to block a public road and then permitting their owners to charge other people before moving them. The analogy does not mean that individuals should have no private monetary property. It means that private control of money should not undermine its public function as a medium of exchange. Demurrage seeks to reconcile these interests. Individuals retain control over their money, but prolonged withdrawal of the medium of exchange carries a cost. ## Store of value and carrying cost Demurrage does not necessarily prevent money from functioning as a store of value. As explained previously, store of value describes how effectively money preserves purchasing power, while storability describes how easily and inexpensively a monetary balance can be retained. A currency can preserve reasonably stable purchasing power while still imposing a carrying charge. Suppose the purchasing power of a monetary unit remains broadly stable but holders pay an annual demurrage charge. Someone can still transfer value from the present into the future, but the amount retained gradually declines because of the cost of possession. The relevant factor is the expected net return from holding money. If the monetary unit appreciates by less than the demurrage rate, the holder experiences a negative net return. If the expected appreciation exceeds the charge, retaining money may remain attractive despite demurrage. The demurrage rate would therefore need to take account of any expected gain in purchasing power. A low charge may be insufficient when money is appreciating rapidly. A high charge may weaken demand for the currency if holders can easily move into alternative assets. The objective is not necessarily to make money incapable of preserving value. It is to prevent money from being withheld indefinitely without a sufficient cost. ## Demurrage and inflation Demurrage is sometimes compared with inflation because both can reduce the future value of holding money. However, they operate in different ways. Inflation is a general increase in prices, meaning each monetary unit purchases fewer goods and services. It changes the purchasing power of the unit itself. Demurrage is a charge applied to the balance being held. The purchasing power represented by each remaining monetary unit can stay stable even though the number of units held gradually declines. The distinction can be illustrated by comparing two people who each hold £100. Under inflation, they may still possess £100 after a year, but it will purchase fewer goods and services. Under demurrage with stable prices, they may possess less than £100 after paying the carrying charge, but each remaining pound may preserve approximately the same purchasing power. Both conditions impose a cost on holding money, but the source and predictability of the cost differ. ## Predictability Demurrage can be established as an explicit and predictable rate. If the annual rate is 5 per cent, holders can calculate the approximate cost of retaining a balance. Inflation is not equally predictable. It varies with monetary policy, credit conditions, production, supply constraints, exchange rates and public expectations. Inflation may be high, low or negative. This difference becomes especially important during deflation. When prices fall, conventional money gains purchasing power. Holding it produces a positive real return even when it pays no nominal interest. The incentive created by inflation to avoid retaining money therefore disappears when prices begin falling. It becomes a reward for retention at the time when economic activity may already be weak. Demurrage continues to impose a carrying cost during both inflation and deflation. Its incentive to circulate does not automatically reverse when the direction of prices changes. Gesell therefore considered demurrage more reliable than inflation as a means of discouraging prolonged monetary retention. ## Existing balances and future income Inflation affects existing money and future nominal cash flows. If prices rise, a salary, pension or contractual payment fixed in nominal terms loses purchasing power. Demurrage directly affects balances that are currently being held. It does not automatically change the nominal value of income that has not yet been received. A future salary of £1,000 remains a claim for £1,000, assuming the contract does not change. Once the money is received and retained, it becomes subject to the carrying charge. This does not mean demurrage has no wider effect on wages, contracts or prices. Its economic effects could influence future negotiations. The narrower distinction is that demurrage is charged against existing monetary balances, whereas inflation changes the purchasing power of both current money and future payments denominated in that unit. For this reason, demurrage can discourage the prolonged retention of existing balances without necessarily reducing the purchasing power represented by each future payment. ## Money velocity and supply The level of monetary expenditure depends not only on how much money exists but also on how frequently it circulates. If the quantity of money remains constant while people use it less frequently, total monetary expenditure declines. If the same quantity begins changing hands more rapidly, expenditure increases. Conventional monetary policy primarily attempts to influence economic activity by changing the supply of money, the availability of credit and the interest rates attached to borrowing. During a contraction, monetary authorities may create additional reserves or lower interest rates in an attempt to encourage spending and investment. However, they cannot guarantee that the additional money will circulate through the productive economy. Banks may retain reserves, households may repay debts, businesses may refuse to borrow and investors may purchase existing assets instead of financing new production. Following the financial crisis of 2008, central banks created large amounts of monetary reserves and reduced interest rates substantially. Much of the resulting liquidity remained within financial markets or contributed to rising asset prices rather than producing a proportional increase in productive investment and employment. From a Gesellian perspective, this demonstrates the limitation of changing the quantity of money without changing the incentive to retain it. ## Regulating supply versus influencing velocity Gesell’s proposal shifts attention from monetary supply alone to the circulation of the existing supply. Conventional policy attempts to respond to weak demand by increasing the amount of money or reducing the cost of borrowing. Gesell argued that a carrying charge could make the existing money more likely to circulate. The difference can be illustrated through the analogy of a bicycle chain. Money acts as the chain transmitting force from the pedals to the wheels. If the chain contains too much slack, force is transmitted inconsistently. Sometimes the wheels respond slowly, while at other times the accumulated movement produces a sudden reaction. Increasing the money supply during every contraction can be compared to adding more links to the chain. The additional links may address an immediate problem, but they can also create more slack. Larger interventions may then be required to produce the same effect. Demurrage attempts to reduce the slack by placing the existing money under a continuing incentive to circulate. If money circulates more reliably, smaller changes in supply may have a more predictable effect on expenditure. Gesell writes: > “If money were under impulsion to circulate, minute changes in the quantity of money would suffice to make demand fit like a glove the natural variations of production.” This does not mean velocity can be increased without limit. People require transactional balances, institutions need reserves and practical constraints affect how quickly exchange can occur. The intended objective is to reduce large and unpredictable changes in monetary retention. ## Demurrage and price stability Gesell believed demurrage could help address both deflationary and inflationary instability. Its effect on deflation is the more direct of the two. When prices fall, conventional money gains purchasing power and retention becomes more attractive. Demurrage offsets part or all of that reward by imposing a carrying cost. Its proposed effect on inflation operates through the stabilisation of velocity. If money already circulates at a relatively consistent rate, there are fewer large pools of idle money that can suddenly return to active expenditure. Under conventional money, periods of uncertainty may produce large retained balances. If confidence returns, these balances may begin circulating more rapidly at the same time. A sudden increase in velocity can add to inflationary pressure. Gesell argued that more consistent circulation would reduce these abrupt changes. Monetary authorities could then adjust supply in smaller amounts to reflect changes in production. Demurrage would not make inflation impossible. Prices can rise because of supply disruption, resource scarcity, excessive money creation, credit expansion or other changes in the economy. The narrower claim is that stabilising monetary retention could remove one source of unpredictable changes in aggregate demand. Demurrage should therefore not be treated as an automatic substitute for all monetary policy. The money supply would still need to be considered in relation to the availability of goods and services. ## Money backing and hard money A separate question is whether demurrage money should be backed by a commodity such as gold. Supporters of hard money often argue that commodity backing restricts money creation and protects purchasing power. From this perspective, the rigidity of supply is an advantage because governments and banks cannot create unlimited quantities of money. Gesell distinguished between money’s quality as a store of wealth and its quality as a medium of exchange. He writes: > “The power of money to effect exchanges, its technical quality from the mercantile standpoint, is in inverse proportion to its technical quality from the banking standpoint.” By the mercantile standpoint, Gesell meant money’s effectiveness in facilitating exchange. By the banking standpoint, he meant its suitability for being retained as a liquid reserve or financial asset. Hard money may be attractive to hold because it is scarce and durable. However, these same qualities make it easier to withdraw from circulation. A rigid supply does not guarantee price stability. If demand for money increases while its supply remains fixed, the monetary unit may appreciate. Expected appreciation can encourage further retention, reducing velocity and placing additional downward pressure on prices. Commodity backing is therefore not sufficient to address the problem identified by Gesell. A backed currency can remain highly storable and can still reward its holder for postponing expenditure. Demurrage addresses the cost of possession directly, regardless of whether the monetary unit is backed by a commodity, issued as fiat money or represented digitally. ## Saving under demurrage Demurrage does not eliminate the ability or need to save. It changes the forms in which saving is most attractive. People can continue retaining money if they consider the liquidity and security worth the carrying cost. Someone preparing for a near-term expense may prefer to hold a monetary balance even though it is subject to a small charge. For longer-term saving, people may choose loans, bonds, property, productive equipment or other financial and physical assets. Their savings would then be made available for productive use or attached to assets that impose their own risks and carrying costs. Gesell writes: > “All the commodities of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!” His statement does not mean that people should consume everything they earn. It means that the medium of exchange should not necessarily be the preferred instrument for accumulating large quantities of wealth indefinitely. Under demurrage, the saver must decide whether to accept the cost of liquidity or transfer the money into another form. The alternatives may involve lending, investment or purchasing an asset. This can make savings available to other participants while preserving the individual’s ability to prepare for the future. ## Productive use and the meaning of investment Demurrage creates an incentive to move money out of idle balances, but it does not guarantee that every resulting use will be socially productive. Money might be spent on current consumption, invested in productive equipment, lent to a business or used to purchase an existing asset. These choices have different effects on production, employment and asset prices. The carrying charge changes the incentive to retain money; it does not determine the purpose for which released money will be used. The design of the broader financial and institutional system therefore remains important. If the most attractive alternatives are speculative assets, demurrage may redirect money towards those assets rather than new productive capacity. Gesell’s expectation was that as money became less attractive to hold, owners would become more willing to accept lower returns from productive lending and investment. The monetary threshold described previously would decline, allowing more projects to proceed. Risk, expected demand and real resource constraints would continue to determine which investments were viable. Demurrage would remove or reduce the additional advantage available from retaining liquidity. ## Demurrage as a counterweight The store of value function and demurrage can be understood as counterweights. Stable purchasing power makes money more desirable to receive and retain. Demurrage discourages excessive retention by attaching a cost to monetary balances. If money is too unstable or loses purchasing power rapidly, people may stop accepting it or exchange it immediately for other assets. If it is too attractive to hold, circulation may decline. A monetary system would therefore need to balance acceptance with circulation. Money should preserve enough value to remain reliable for exchange while imposing enough of a carrying cost to discourage prolonged inactivity. A variable demurrage rate could theoretically respond to changes in monetary demand. If idle balances became excessive, the rate could increase. If demand to hold the currency became too weak, the rate could decrease. Such adjustments would introduce questions of governance, measurement and predictability. A rate that changed too frequently could make the system difficult to understand and reduce confidence. A fixed rate would be simpler but less responsive to changing economic conditions. The central objective would remain the same: to prevent the medium of exchange from being withheld for prolonged periods without a sufficient cost. Demurrage therefore seeks to preserve money’s usefulness as a transferable store of purchasing power while removing the special advantage created by low-cost monetary storability. Digital ledgers and programmable monetary systems make it possible to consider how such a carrying charge could be implemented automatically, consistently and transparently within Web3 networks.