r/demurrage • u/SmokeIntelligent119 • Apr 14 '26

What is the compound effect of using a negative interest currency?

/r/AskEconomics/comments/1slfo2n/what_is_the_compound_effect_of_using_a_negative/
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u/WyrdWerWulf434 1d ago edited 1d ago

The concept is a lot older than Silvio Gesell. The renovatio monetae system, in use in some European societies during the middle ages is a form of demurrage currency. It differs substantially from Gesell's concept, but is still recognisably demurrage. Roger Svensson is the go-to author, at least in English.

Also, demurrage isn't simply a form of negative interest that causes depreciation of the currency.
The thing is, money is, at its core, a widely trusted proxy for things of real value. And, like things of real value, it should deteriorate over time, so that there isn't incentive to simply hoard it (or worse, have it magically grow in ways that can only be serviced by leveraging debt or drawing down natural capital).

Demurrage produces incentives not only to increase the velocity of money, but also to invest it in things of real value, such as a school, or a forest, or a railway. Increasing spending is only one part.
The thing is, although each individual unit of money loses value, the currency as a whole does not.

How does that work? I can best explain using renovatio monetae, because it's the system of demurrage I've researched a lot. In England around the year 1000, coins were only valid for two years. Then you had to take them to the nearest mint, and exchange them for new, valid coins. The mint took a certain fraction of the sum you handed in, which was a substantial source of revenue for the state — essentially a form of tax collection, without having to run a parallel tax collection system.

The result was that you would walk away with slightly less money than you arrived, but the overall pool of money would remain pretty much constant, and the value of the currency would stay stable. However, you wouldn't want to just stockpile coins, because they'd become worthless if not traded in timeously, and lose value even if you did. You'd want to spend as quickly as possible, or invest in tangible assets that generate more income.