Local Currencies – is there a better way?

I came across an interesting article the other day about an American town called Great Barrington that has begun issuing its own currency, called Berkshares. They are traded at a rate of 1 BerkShare to 90 U.S. cents, meaning as the face dollar value is utilised by supporting businesses, to an effective 10% discount in price for anyone using them.

Indeed the Berkshare is but one of several local currencies in circulation worldwide.
Such currencies have the advantage that the encourage people to spend their money in local businesses, which ensures that as much of the local wealth as possible stays within the community, rather than leaving it for places unknown (which in the case of the major corporations means it disappearing into the accounts of offshore tax havens).

Indeed even within the US the Ithaca Hour has been around for a lot longer than the Berkshare. The Ithaca Hour also introduces the concept of a “time currency” in that you are paid or pay for things in the form of time rather than capital. In that 1 IH equals 1 hour’s labour, or $10 a current prices.

Another more radical idea was explored as part of the Worgl experiment during the great depression. Here the Mayor negotiated a loan from a credit union and printed the town’s own banknotes. These were guaranteed against the national currency though you could only get 98% of their value if you exchanged them. Every month the notes were stamped and lost 1% of their value so cost you to keep the money rather than spending it. This was important at the time because the thing you want to try and discourage in an economic downturn is the instinct of people to hoard cash (but of course if everyone hoards cash or pays off their credit cards then the economy would collapse, because nobody would be spending!). The experiment was considered (by some critics) to be a major success that was only stopped by the Austrian national bank worried it was loosing control of the nation’s currency.

This concept of “local currencies” is actually not a new idea but more of a revival of a much older principle; that of having lots of small local currencies in different regions or cities. It was normal for most of the middle ages for individual towns and baronies to have they’re own individual gold or silver coins (usually stamped with the local sovereign/Duke/Barons face). The various Bracteates of the Holy Roman Empire being a good example. One could utilise such currency freely within said area or visit a local money changer and have you’re coins from one region exchanged for those of the region you were in (based on their weight) for this service the money changer would charge a fee (which would be mild in the case of coins the money changer could easily exchange again or exorbitant fees in the case of ones he couldn’t, the coins of an enemy nation for example). Again the goal was to encourage as much local business activity as possible and keep as much of the local wealth within the community while still stimulating trade. That said, it should be noted that rulers motivation here was often related to increasing local trade so that they could increase their share of tax revenue! But the idea is still sound.

One decisive factor, and the point were various Libertarian fantasies about local currencies part company with reality, is the fact that you need something to tie all these local currencies together as well as acting as a fall back in the case of serious economic problems. In the past the feudal system (which ultimately meant the sharp end of lances! |-|) provided the backbone to support the whole system. Currently the Dollar (in America) and the Euro (in Europe) are providing the bedrock on which these currencies rely. Long term that means that such local currencies are tied to the fate of these currencies (and if you’ve been following recent events, that mightn’t be such a good idea! See my comments here and here).

Also, local currencies are prone to the same techniques used by currency speculators to prey on smaller currencies. The only thing stopping them going after Berkshares is the mere $800,000 in circulation not to mention the risk of pitch forks and banjo’s too said speculators ;D. However, if say New York were to adopt a local currency, they’d be all over it like Frat boys on a drunken cheerleader. So to be sustainable such local currencies would need to be supported by a strong national or international currency. Alternatively we could tie these local currencies to something redeemable, such as gold or silver, although that creates its own problems.

Perhaps another “globalist” solution is the idea of having four sets of currencies (see ecology of money), as proposed by economist Richard Douthwaite:
– An International Currency for international trade
– A series of national currencies for trade within individual nations
– Various user controlled currencies and
– A store-of value currency for savings and investments

Crucially the international currency would be linked to CO2 emissions or better yet linked to energy consumption, enabling its use to discourage the use of fossil fuels and encourage sustainable economic growth. The National exchange currencies would be used for buying and selling within a country, but cannot be used for storing savings. This allows the national authorities to simply print more money to match increased trade or restrict supply when the economy is overheating, without the negative effects that this behaviour would normally have on savings (as no savings would be held in these currencies).

The user controlled currencies would consist of a variety of Local Exchange Trading schemes (LETS), the aforementioned “time dollars” and a variety of other trading mechanisms. The store of value currency would be only available in fixed quantities. So if for example more shares are traded the need for this currency rises, as does its value which serves as a brake and prevents unsustainable growth. The goal of these currencies would be to keep international development going, but within the limits of what the planet can actually support, encourage economic activity to be as local as possible (where possible) and prevent unsustainable bubbles building.

My take on these ideas is that it’s this “thinking outside of the standard economic box” that’s most important. This is something we need to do more of. The current economic system is broke and we need to explore all possible options if we’re going to fix it. Economists need to realise that money isn’t everything, especially when it comes to economics. Money is only a mechanism for us to trade our good and labour from one person (or company or country) to another. Nothing more, nothing less. In theory we could get rid of all currencies altogether and there would still be an economy. After all we all need to eat, sleep, heat our homes and get around. The sole purpose currency and money serves is to facilitate such transactions. Economists fail to understand that money markets merely reflect economic reality, while they believe that they can create economic reality. As recent events have shown, while one can manipulate the markets and fool ones self into thinking you’ve defied the laws of economic gravity, unfortunately those same economic laws are as absolute as the laws actual laws of gravity themselves.

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