MARGOTBITS Robotics, Science, and Other Interesting Tidbits

Originally published on Medium on June 8, 2022.

This issue’s topic: How fiat demurrage leads naturally to a CBDC.

Bitcoin and degrowth aim for the same goals. Localism, end to debt money and living frugally. Photo credit: FirstPost.com

Just thoughts on the connection between bitcoin and elements of the “degrowth” movement that argues that never-ending economic growth is leading us toward an unsustainable and ecologically destructive path.

Just to recap, from our last two newsletters, demurrage is a form of “holding fee” which incentivizes spending over the holding of currency. There are many upsides to having a complementary or regional currency that works like this, but there are downsides when this kind of currency operates under centralized control.

Let’s get back to Silvio Gesell’s theory of interest for a moment. British economist, John Maynard Keynes, was fond of Gesell’s ideas and devoted five pages to him in his book, Theory of Employment, Interest and Money. Keynes was also critical of Gesell and considered his theory of interest incomplete. Instead, Keynes preferred inflation over demurrage to stimulate an economy.

Keynes and Gesell are long dead, but demurrage is making a comeback. You’re already familiar with it, even though you may not hear the word demurrage used. We’re talking about negative interests. Ever since monetary policy hit zero percent interest rates in response to the Great Recession, central banks have considered and experimented with negative interest rates.

Let’s back up for a moment. Inflation is used to devalue a currency, in a similar but different way from demurrage. Inflation devalues currency in all moments of its existence. Demurrage devalues currency only when it’s being held. In a demurrage system, if I hold a currency when it expires (let’s say every three months this happens), then I have to buy a stamp at a small percent of the value of the currency.

If I have $100 and the demurrage is 1%, then I must buy a $1 stamp to be able to keep that currency in circulation. Demurrage, in this case, is like a game of “hot potato”. You don’t want to be the one holding the $100 bill when it expires, because you’re responsible for bringing it back to life with that $1 stamp. However, if I lend $100 to someone or to a bank when that money is paid back to me, it is still worth $100, unless I hold it too long and it expires.

With inflation, if the currency experiences an annual 1% inflation and I lend $100 to someone and they pay me back a year later, that $100 is only worth $99. No matter whether I hold it or lend it, the currency devalues. Additionally, compared to demurrage, inflation is subtle, so the holder of the currency may not even realize it is happening. Whereas with demurrage, it’s obvious what is happening to the value of the currency.

Back to negative interest rates. There are two parts here. First, during a severe economic crisis where interest rates are already at zero, the central bank charges the commercial banks on their reserves, rather than crediting them. This is to incentivize spending over hoarding and is where the demurrage is applied. Second, when a borrower takes out a loan from a commercial bank, they are paid interest. In other words, the borrower is earning money on the loan.

There is an additional problem with negative interest rates. Lending may increase, but saving does not necessarily decrease. So, to resolve this problem, additional demurrage on holding would need to expand throughout the economic system to be effective in reviving an economy that is at risk of a deflationary spiral.

Here’s where this can get hairy. Economists and central banks are now looking toward Gesell for inspiration to solve the problem of hoarding cash under negative interest rates. To implement a demurrage currency at scale though, governments would need to do one of two things:

1. Create new types of bills with a magnetic strip that keeps track of the demurrage, or
2. Get rid of cash altogether and create a Central Bank Digital Currency (CBDC).

With all the talk of CBDCs, I think we know which choice the central banks are about to make. A CBDC would make it very easy for central banks to control how much money you have in your bank deposit. It also leads to massive privacy and confiscation concerns. In addition to these concerns, a CBDC could make commercial banks obsolete. This means that governments have a new tool for coercion. Do you want governments to tell you how, where, and when to spend your money? This kind of control is state capitalism in the authoritarian sense.

Therefore, we must oppose centralized demurrage currencies because the negative side of effect of increased state control of money is too dystopian. CBDCs seem to be on their way, though. Luckily, we have a lifeboat called bitcoin. As mentioned, we can still have really cool demurrage regional and complementary currencies using bitcoin. Finally, in the last installment in this series on demurrage currencies, I will touch on how we can use bitcoin to implement them democratically and transparently.

Thanks for hanging with me through these demurrage newsletters. Every time I said to myself, “this is the last one!” I found that I’d written too much for one newsletter. Until next time!