When we deposit money in the bank, we usually expect to receive interest in return. But would it be better for the economy as a whole, if instead we had to pay to have our money looked after?
The cost of keeping money, known as demurrage, has been a feature of some currency systems since ancient times. In fact any currency based on commodities will have associated storage costs. For gold, there is the cost of protecting it; for wheat, there is loss due to spoilage.
Those expenses seem like a disadvantage. But just as parking fees make the allocation of parking spaces more efficient, so currency charges can make money more efficient.
One of the problems with money is that it is susceptible to hoarding. When the economy is struggling, people try to build up their savings, which means the economy slows even more: what John Maynard Keynes called the ‘paradox of thrift’. Demurrage acts as an incentive to keep money circulating, and therefore helps to boost the economy.
Today, the loss of faith in currencies such as the US dollar and the euro has renewed interest in the search for a new global reference currency, which could play the role of the old gold standard. One proposal, which exploits the demurrage idea, is known as the Terra.
The Terra would be backed, not just by gold, but by a basket of commodities such as oil, wheat, and metals, and perhaps other items like carbon emission credits. Instead of paying interest, the Terra would charge an annual fee of about three or four percent, which would reflect the cost of storing the commodities.
The Terra would be traded in the same way as other currencies, except that each note in circulation would be a receipt for physical, stored goods. Its value would therefore be linked to the commodity prices. Since the price of commodities tends to go up in an inflationary environment, the Terra’s value would be protected against inflation, which would help justify the storage fee.
The fact that the Terra effectively pays negative interest would prevent hoarding. Furthermore, since the discount rate used to calculate the present value of future events such as climate change is linked to interest rates, use of the currency would boost the rights of future generations. The Terra would also be particularly advantageous to developing countries, since their economies are often linked to commodities anyway.
Of course, there is an alternative to demurrage which achieves some of the same goals, namely inflation. But that is even less popular than parking tickets.
See the Terra Trade Reference Currency website at www.terratrc.org.