Store of Value Currencies with Time-Related Step Function Valuations: There are
also currencies that are characterized by “step functions” triggered by
time, a crude form of demurrage. For instance, during the Central Middle
Ages, the practice of renovation monetae was widespread. It meant that
for instance every five years, the old currency would be withdrawn and 3
new pennies would be given in exchange for 4 old ones, implying a tax of
25% on the value of the currency at that point in time. This process
produced income for the local currency authority (typically a local lord,
bishop or monastery), and gave an incentive not to hoard this type of
currency. Stamp scrip systems – whereby a periodic stamp has to be
purchased and applied on the currency for it to keep its value – are modern
applications of this principle.
Currencies with Expiration Dates: The most radical “step function” is
when a currency has an expiration date. This process is equivalent to a
100% tax on the date of the expiration.
Trade-offs are available between functions. If one desires to
encourage the circulation of a currency as medium of exchange, one can
achieve this most effectively by charging a “parking fee” of demurrage, or
the simpler forms of step functions or expiration dates. The advantage of
interest bearing currencies is that they provide an income to those who
create the currency (called “seigniorage”). Its disadvantage is that it
implies a systematic money transfer from people who don’t have money to
those who do, so that it tends to concentrate wealth. It also gives an
incentive to save in the form of currency as opposed to real assets. Finally,
it provides a systematic incentive to think only short-term, as income
generated in the distant future is discounted to irrelevance with positive
interest-rate currencies.
In contrast, demurrage-charged currencies provide an incentive to circulate
the currency as opposed to accumulate it. It also motivates to be
concerned about long-term implications particularly for investments. The
currencies with time-related step functions or expiration dates can be seen
as cruder and more radical forms of demurrage-charged currencies.
Review Questions
1. What support medium (or media) would work best for the currency you would like to introduce?
þ Commodity Money þ Paper and Coins þ Electronic Media
2. What standard of value will you use?
þ Reference to Conventional Money þ Time Denomination þ Physical Units
3. Will your currency serve as a store of value? How?
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