What is a Demurrage

Demurrage is a term that refers to payments made to the owner of a chartered ship by the charterer when there is a delay in the loading or unloading of goods, or any other form of break from the original charter contract.

BREAKING DOWN Demurrage

A demurrage can also be used when talking about currency trading and the cost of owning and storing the currency. It is considered to be the cost of carrying money and it stimulates currency circulation and economic growth.

When it comes to currencies, the demurrage can be in the form of a tax. When it is used in reference to commodities such as gold, it is the cost of storing the gold. These fees are generally periodic and can happen anywhere from hourly to annually, for longer term storage.

The objective of a demurrage is to prevent people from holding onto currencies and commodities for long periods of time without reintroducing them back into the economy. A single entity holding large sums of cash or gold will not have any positive impact on the surrounding economy. Also, the value of the items that are being held may shift due in part to the hoarding. The demurrage acts as a natural deterrent from these situations.

An Example of a Demurrage

Take for an example Edward Sharpe, head of the Magnetic Zero Institute. Over the years he has amassed a large stockpile of gold and silver. He keeps these bars stored with a third-party company, Home Securities, LLC. Home Securities secures Sharpe’s gold and silver for a fee and insures its safety. However, there is a demurrage attached as well, which is charged monthly. It is a fixed percentage rate that is tacked onto the security and storage fees. It is based on the volume and value of the bars. Because Sharpe feels that the cost to store these bars, including the demurrage, is a good investment given the high value of gold right now, he continues to store it.

However, the value of silver is declining, and Sharpe does not feel that it is worth the fee to keep holding onto the silver, so he sells it. He then takes the proceeds from that sale and buys a large portion of stocks on the stock market. Now that he has reentered this money into the economy, it is earning him a return on his investment. Sharpe also turns a profit since he is no longer paying fees for a depreciating commodity.