(I wrote this Nov 11, five months before the post on the same topic below, and I used subscript characters which wordpress doesn’t seem to accept, so if you find the formatting confusing because the subscripts have been lost, please see this googledoc version: https://docs.google.com/document/d/1LJyZf_BD_91WPJq4B5wMnK2LiPB65IoKSKdIBhyNvTU/edit)
General formula of compound interest:
T = P (1 + r/ 100)n
(T is total, P is principal, r is rate, n is number of years.)
General formula for the proposed interest + demurrage system:
T = P (1 + ri/ 100)n + (1 – rd/ 100)n
Variable rates of interest and demurrage
To distinguish interest (1 + ri/ 100)n and demurrage (1 – rd/ 100)n
ri and rd are the rate of interest and the rate of demurrage respectively
ri1, ri2, ri3 etc. and rd1, rd2, rd3 signify different rates of interest and demurrage linked to different grades of social and ecological net cost-benefit or impact.
Daily accounting of interest and demurrage
T = P (1 + ri/ 100 x 365)n + 365 + (1 – rd/ 100 x 365)n + 365
Some investments or deposits are socially and ecologically beneficial, i.e. in terms of the real (or natural) economy, they have benefits, or profits, to society and the ecosystem as a whole. These positive balances may be incentivised by society by the payment of interest.
All investments or deposits are also socially and ecologically costly to a greater or lesser extent, since the money system itself incurs costs, and accumulating rather than circulating money causes inflation, which tends to affect those on lower incomes more than those in higher incomes and to impact on investment in long-term, pro-social and pro-environmental enterprises more than on short-term enterprises primarily for individual and private gain.
Therefore, the costs and benefits of holding and spending money can in principle be calculated for every condition of any account (or company balance sheet) in question, and in general all accounts in this system would have both an interest and a demurrage rate, each of which may be equal to or greater than zero.
For example, for accounts which are being held and have on balance a greater social and ecological benefit (profit) than their costs, the sum of interest and demurrage rates will be a net positive, i.e. it will effectively bear interest.
On the other hand, where an account being held has on balance greater social and environmental costs than benefits, then the sum of interest and demurrage rates will be a net negative, i.e. it will effectively be subject to demurrage.
Further, the rates ri and rd can be further distinguished into their real economic factors and categorised so that we will have ri1, ri2, ri3 etc. and rd1, rd2, rd3 to signify different categories of social and ecological profitability and costliness. Effectively, the higher rates of ri (let us say ri2, ri3 represent higher rates than ri1) will be analogous in function with the CITR (Community Investor Tax Relief) and CDFI (Community Developing Finance Initiative) funds; and conversely, the higher rates of rd will function analogously to the different tax brackets of a conventional progressive taxation system, but here ‘high net worth’ individuals and companies would be able to invest in socially and environmentally beneficial enterprises with a net interest rate and effectively without ‘tax’ (in the form of demurrage), because the demurrage rate set by HMRC or the BoE Monetary Policy Committee (it would be similar to the BoE Base Rate, but for demurrage) would be lower than the maximum interest rate also set by HMRC and-or the BoE MPC, on account of their net positive social & environmental impact grading.
In other words, this system could eliminate the need for all other, more complicated, therefore easier to avoid and more costly to administer forms of progressive taxation, and it would be incontrovertibly fairer, because the rates of interest and rates of demurrage would be directly linked to the Social & Environmental Impact quantitative reporting figures in the bank’s or other financial service provider’s annual report, in a strengthened form of the annual company return that is already required by law to be filed with the FSA or Companies House.
There would thus be no arbitrariness in the rates of taxation, and no grounds for accusations of unfairness or party-political arguments over changes in rates of interest and demurrage. Effectively, the rates of interest and demurrage-taxation charged by HMRC under the direction of the BoE Monetary Policy Committee would treat our society as a Mutual Co-operative, where there is no surplus that is not immediately in the same year re-invested in the membership community.