Social Credit with Demurrage
(Left: Sylvio Gesell, the man who devised demurrage and popularized Georgist thinking in Europe)
The easiest and most transparent way of migrating to a usury-free economy is by simply replacing the usurious credit based money supplies of today with interest-free credit. In this way we would be able to do exactly what we always did, but better. However, demurrage is an equally viable way. It may be a little esoteric for most Americans, but demurrage money mimics the ways of the ancients who built the wonders of the world in Antiquity and the Cathedrals in the Middle Ages.
Ross Noble is well known here at Real Currencies as REN for sharing his wisdom generously. He has been creating an approach based on debt-free money, spent into circulation by the people, basically Social Credit. The problem with Social Credit is that it does not end Usury and Noble suggests a demurrage to achieve that.
A demurrage is a negative interest, a tax on holding money. This strongly discourages hoarding cash. This is a hard concept for many people to get their heads around. But the fact is that hoarding the means of exchange has negative implications for others using the money. Hoarding cash hinders circulation and this is a fundamental monetary problem.
Saving should be done through assets, not cash.
Money is not wealth, it’s a means of exchange. It derives its value from the agreement to use it as such. The ‘store of value’ function is a result of the agreement, but the agreement does not have the purpose of creating a store of value.
Demurrage is based on the idea that money should perish as does produce. It is because money does not perish as quickly as produce (and other products), it is used to store wealth. But using it to store wealth destroys its use as a means of exchange, which needs unhindered circulation.
In older times, farmers stored their harvest at central warehouses. They got a receipt in exchange. This receipt was used to pay others. But because the receipt represented decaying goods, it lost value over time.
The great boon of demurrage is that the negative interest is a clear incentive for those holding money to lend it out interest-free. Better still, it would greatly encourage paying in advance. This is even better, because it diminishes the need for debt. Many investments would become viable without any debt at all, simply because consumers would pay up front for much of the production of what they need.
It is important to understand that the cost of society to the demurrage (negative interest) is a tiny fraction of the cost of usury. The reason for this is that the money supply is very small, because it circulates very quickly, up to a hundred times faster than usurious units. As a result the demurrage is typically not even enough to finance the operation of the monetary system, let alone as a tool of plunder.
Ross has been so kind as to work out a number of the details and issues related to his proposal, you can find them below.
I post this purely for discussion purposes. It is an unfortunate fact of life that most monetary reformers are very much in the box of their own preferred system. Most interest-free crediters hate demurrage. But they simply don’t understand it and I’m convinced it’s equally viable as interest-free credit.
The more I think about Ross’ proposals, the more I like them. I hope the points below will enhance the discussion and awareness of Interest-free economics and help diminish the tunnel vision that I believe is badly damaging monetary reform in general.
Social Credit with Demurrage (SCD), a non-usurious economy
Ross Noble (REN)
The objective is to outline flow paths and design features for SCD.
- Monetary Authority (MA) issues new U.S. Dollar money into the accounts of Households. Each money unit has a date stamp, necessary in order to calculate holding tax. Banks are Private and do not create money. Banks do accounting functions and serve us; they make their profits from fees. Most money is already in the supply and hence represents past wealth accumulation. Money volume is held to the amount required to match goods and services production.
- Households pull money as needed from their bank accounts.
- Households spend their output and engage in transactions by using money from the money supply. Path 3 is modeled as a circle; money spins from transaction to transaction, jumping from person to person. As people buy and sell their goods and services, money effectively spins in a circle. The rate of spin is velocity. Since this money has demurrage, the spin rate is forced to some natural maximum.
- The money supply is shown as a fixed volume with some variation turbulence at the surface. Note that business sector is buried in the money supply. Business also buys and sells into the marketplace, and hence they have spinning money flow (not shown) similar to households.
- Households (and business) store their savings at the bank.
- The monetary authority charges demurrage holding tax on money stored as checking. Pipe 6 drains money from checking accounts at the demurrage rate. Money stored as bank savings is available to be lent out to borrowers. Savings are at zero percent interest, and made available to borrowers under a contract brokered by banker. Savers are Creditors and Debtors are Borrowers. Each party signs legal loan contracts, but said contract is non-usurious. In this way real saved money, representing past wealth accumulation, is available as capital for borrowers. Real money, unlike today’s bank money, stands on its own power and represents past labor energy. Borrowers are now under pressure to spend their newly loaned money, or they will be penalized with a holding tax. The holding tax is the minimum necessary to force money into maximum velocity. Three percent per year perhaps is enough – the tax rate may be derived by experience. Monetary Authority recycles demurrage money back into households via pipe 1. In my view, MA spends as redistribution, as all statistical populations follow a Gaussian bell shaped curve.
- Government taxes the population to run its affairs. Government does not create money; it is a user of existing money. Government also is under pressure to spend, as the money they taxed is date stamped.
- Government recycles the money it formerly taxed on pipe 8. Government uses money to transact their goods and services and in the process throws money back into the supply. Government may also tax and redistribute if approved by the political process.
- Foreign economies transact with the U.S. via pipes 9 and 10. If there is trade imbalance, money will accumulate in direct proportion. For example, if China sells excess goods to the U.S. on pipe 10, pipe 9 drains U.S. dollars from the economy.
- If the U.S. sells excess goods to China on pipe 9, then Yuans will accumulate into the U.S. money supply on pipe 10.
- Foreign governments may grab U.S. dollars from their money supply 12, and send them back to the U.S on pipe 14, to buy Treasury bonds at zero percent. Alternatively, foreigners are compelled to spend excess accumulations of dollars, buying goods and services from U.S.; otherwise they are penalized with a holding tax.
- Foreign money supply may be many foreign economies, but only one is modeled here for simplicity. All foreign economies are eager to spend dollar accumulations; otherwise they are penalized by the demurrage holding tax.
- Excess money travels pipe 13 or 14 to buy Government Treasuries. Foreigners buying Treasury Bonds are effectively making a loan to U.S. government at zero percent. U.S. government is then compelled to spend as the former foreign money (due to trade imbalance) is date stamped. Foreign economies most likely will elect to spend their U.S. dollars into the U.S. economy acquiring goods and services from Main Street via paths 9, 10.
The new money unit described thus far is an abstract accounting identity, a bearer instrument, controlled by legal fiat. All U.S. dollars carry an information date stamp, which is updated as the demurrage is paid. Abstract accounting identities are numbers in a computer, or on a ledger. In our current bank money system, 97% of the U.S. economy is abstract bank money, carried as numbers in a database.
Physical representation of money must have high carry costs or some other negative attribute making it undesirable. Making all money coins, making them large, and possibly limiting them to $20 will incur carry costs thus propelling people away from money’s tangible form. Another alternative is to recall small denomination tangible paper notes on a regular basis, making them a hassle. The undesirable nature of physical money needs to exceed the negative attributes of demurrage money. The abstract intangible form of MA bearer money (U.S. dollars) as numbers in data bases, can easily jump from ledger to ledger at computer speeds, so actual costs are very low despite the high velocity transaction rate.
The monetary authority uses demurrage as the heart pump to propel money into circulation. In the unlikely event Government doesn’t do its fiscal policy job with appropriate taxation on land and market rents, the monetary authority may operate an inflation escape valve by injecting new money into households. Household, Government, and Business sector loops will tend to balance, money supply is recycled at the drain rate. Foreign loops are also in balance as hoarding is discouraged via the holding tax. The money supply maintains its volume with little turbulence.
- A new type of economy emerges. Capital is no longer usurious, nor does it have advantage over goods and services production. Capital no longer retreats and outwaits labor. This is a third way non usurious economy. We escape history and stop alternating between the dialectical poles of usury Capitalism or some form of Statism/Marxism.
- Government must tax the population to wrest their money away. The people own their money power through their Monetary Authority. Also, government is compelled to search for taxable rents in the marketplace; taxing rent seeking will be an easy sell to the populace. Having new money erupt in the population gives the people a measure of control over government, keeping government small and limited to its role. If there is any inflation due to excess money creation, the people get first seigniorage.
- Marginal utility on Capital drops to zero. Holders of money must spend in order to avoid demurrage taxes. Spending zero interest money means that money can find useful employment serving the economy without raping it. Formerly marginal jobs become living wages and those who want work will find it.
- About ½ of the economy demonetizes and converts back to a gift economy. Once debt peonage disappears and usury capital no longer demands exponential service, people may choose to spend their time gifting. Women may choose to stay home and raise their children rather than being forced into the workplace to make money to service money. Families are more likely to stay intact, leading to less stress, less drug use, and a healthier lifestyle.
- The market begins to work with accurate pricing signals, as pricing does not have hidden rents. Inflation is low or zero, as the monetary authority injects or subtracts money demand, based on the Consumer Price Index.
- Inflation is low or zero because demurrage keeps the money unit stable and volume is controlled. Demurrage holding taxes actually tax the holder not the unit. The money unit is made to come to par before it can be spent. Since money becomes stable, pricing becomes transparent, and market mechanisms begin to work with new efficiency.
- Wealth is stored as productive assets, like shares in companies. This further accelerates entrepreneurship, wealth generation, and local control.
- War is less likely, as compounding debts are impossible with zero interest rates. Psychopathic usurious money powers have been ejected from their citadels.
- The dual “volume x velocity” nature of money finally comes under control, as the velocity factor is made to find its natural maximum.
- The monetary authority is an agent who operates in the people’s best interests. MA is of the people, yet also above them. MA must be constrained by law and staffed by wise moral individuals who are insulated from the political process.
- SCD is a strategic goal, with no easy tactical path toward implementation. Scales must fall from eyes, otherwise people will continue to insist that money “needs to grow” with positive interest. Mutual Credit or possibly other monetary systems are necessary tactical steps toward humanity reaching the goal of an advanced non-usurious economy.