It is an almost forgotten historical fact that until the 20th century most trade was conducted in local currencies. Australia had a series of colonial currencies before federation in 1901. The United States had a series of currencies issued by private banks before the Federal Reserve Bank was established in 1913, and individual states of the European Union had their own national currencies before 1901. The megacurrency, the euro, was introduced in 1999.
However, the trend towards larger and “stronger” currencies, the excitement of the Euro, the preservation of the US Dollar as the main trading currency, is very much in the opposite direction. In contrast, more than 2,000 local currencies have been launched in one form or another in various communities around the world.
Literature on the local currency phenomenon is almost non-existent in contemporary economic literature. Therefore, the purpose of this article is to look at local currencies and try to answer the following questions; Why do communities initiate them? Do local currencies provide any benefits to these communities? and What is the real potential of these currencies?
A local currency, sometimes called a community currency, is a medium of exchange used by members of a community with some common ties. Local currencies are generally not backed by a national government and are not officially legal tender within the region in which they circulate. A local currency is usually designed for trade within a limited geographic area.
Money is essentially an agreement to use something as a medium of exchange. Any local currency can be expressed in the current national currency, or measured in any commodity, or even in units of labor, to determine its comparative unit value, so that people know how to use it as a medium of exchange. This measure of payback, if it can be realized, is often an important factor in giving users confidence in its current and future value.
Local currency is a potential tool of monetization where it can help define an economic boundary where certain groups readily accept it as a medium of exchange.
Local currencies are often created according to a value judgment, supported by E. F. Schumacher’s ideas that the focus should be on the development of the local economy. Proponents of local currencies often aim to develop a diverse local economy filled with a variety of micro-activities that will encourage local production, local self-sufficiency, and the maintenance of local profits by local businesses. They hope that the local currency and the corresponding changing spending habits (using the local currency instead of the national currency) will encourage a preference and loyalty towards local products and businesses over foreign goods and businesses.
Advocates of local currencies will likely seek to develop personal relationships in commerce and move away from the emerging monoculture of the “McDonalds landscape” of the same restaurants, shops and service businesses everywhere . The introduction of a local currency will therefore be seen as a way to encourage the de-standardization of their local communities by encouraging the development of vibrant and diverse community activities.
The success of any local currency depends on the assumption that there can be no single country’s optimum currency area, where different regions within a country may be better off with different currencies. This would allow for the development of local comparative advantage over national comparative advantage. This is very much contrary to the spirit and purpose of macroeconomic policy in the development phase of most economies, which generally encourage centralization, the transformation of SMEs into larger companies, so that economies of scale are developed to the point where firms can gain competitive advantage in the international market .
While local currencies worked extremely well in the 19th century (remember, they were mostly redeemable as gold back then), the track record of contemporary local currencies has been poor. Successful ones, such as Berkshare , have been proxy currencies with a par value that was generally accepted as a national currency. In fact, Berkshare is the only currency used in the Berkshire area of Massachusetts, and has been touted as a local currency success story. Berkshire has a large number of users, which keeps the currency circulating within the local community. But in the case of Berkshire, the community was already prepared to produce local products for the local community. Others have failed or ceased to exist due to low levels of support within the communities. Others, such as the Kelantanese Dinar, launched in 2006, have been effectively sabotaged by the Malaysian Federal Government’s repeated statements that the Dinar is not legal tender.
One of the hurdles to any successful local currency is developing a critical mass of community support that will keep the velocity of circulation high enough to maintain its perceived value.
A more familiar use of local currency was in the Cocoas Islands, where Malay workers, once managed by the Clunies-Ross family, were paid in Cocoa Rupees, a currency created by John Clunies-Ross that could only be used in the Clunies-Ross-owned company store. Large retail companies have successfully used complementary local currencies such as coupons, gift certificates and points systems to ensure customer loyalty.
While there is little evidence to date that any local currency has actually supported local economic prosperity, the mediocre track record of local currencies does not mean that they do not have great potential in the future as a means of achieving specific economic goals that are needed in many economies today. From a macroeconomic perspective, local currencies are an excellent tool for local microeconomic management, where the aim is to develop micro and SME industries to serve the immediate community. This will become an increasingly important goal in both developing and developed economies around the world due to the poor diversity of local businesses in many places.
Local currency, combined with a mix of crowd funding organised by local co-operative banks, will be a powerful alternative to provide credit to local businesses that traditional ‘big’ banks are hesitant to serve.
There may be another philosophical reason for adopting this approach. The banking sector has become so centralized that most governments around the world have deemed their local banks to be ‘too big to fail’ , where privately owned institutions are virtually above the law or, worse, a law unto themselves. All lending, trading, interest rates and other credit facilities are controlled by these banks. After 2008, no government has made any major effort to regulate these institutions because the task is too difficult and few have the political will to do so.
The nature of the national currency has given banks great power to create money through debt creation. Most of the money that makes up the currency system is actually electronic. There is no note, coin or backing wealth to back this money. It is simply a number on a computerized ledger system that would be impossible if any bank were asked to produce physical currency. Technology has allowed this system to develop, and this has arguably been one of the underlying causes of financial crises, such as electronic sales mortgages and derivatives, etc. This upsets the balance of wealth in every country where the GINI index actually expands.
Since the advent of single currencies and centralized banking, centralization has generally meant higher interest rates over time. This was a convenient government that found it easier to deal with and finance economic activity with a more centralized banking sector. This also caused a rural crisis, which in some cases was partially resolved by the establishment of specialized and subsidized rural banks.
It can be argued that the housing crisis was also caused by centralized currencies where investment in land was encouraged and incentivized as a counterweight to the inflation of the national currency.
But a local currency can challenge the dominance of these banks that impose their credit policies on communities from the outside. A local currency can help provide some economic freedom from the interest rates that banks charge communities and from the inflation rates that prevail on the national stage.
This can be done by using local currencies to obtain new loans and capital financing for businesses that banks will not finance. Where governments around the world have failed to influence the banking sector to enter the microfinance arena, this is where local currencies can be most helpful. In this period of looming deflation , when real wages are relatively low, local currencies can enable local tradesmen to exchange labor for local goods much more effectively.
The means of trade are typically changing today, with traditional means of exchange using state currencies being abandoned for electronic and cyber alternatives. One thing is for sure, the number of alternatives to currencies and banking emerging on the internet and social media today will undermine national currencies.
The potential of local currencies has become a forgotten development tool. In the future, new jobs are likely to be created by small businesses with limited capital. A small number of large companies will significantly increase employment while seeking ways to reduce it.
Many multinationals are opening and closing in the developing world, leaving gaps in employment and moving to places where they can make bigger profits. Therefore, in addition to developing micro-enterprises and SMEs, trying to diversify local economies should be an important economic goal.
Local currency should go hand in hand with the local community banking system. Any local banking system should have a simple system that is easily understood, consistent with the current system, a savior of the currency ( i.e. if the local currency can be used against a national currency, giving it real value , existing currencies cannot be used for anything), provide a sense of security, eliminate interest and establish discount rates on loan repayments – i.e. coupons – and be organized at the local and community level.
Credit unions have been around for a long time, and that is not far from the concept adopted here. However, governments have done their best to destroy such institutions through centralized credit policies, which stand in the way of banks taking control of the economy through acquisitions and aggressive business practices, by supporting the ‘big’ banks.
It is important to remember that money is a social tool. Local currencies are a ‘bottom-up’ approach to development rather than the usual policy initiatives coming from a central government. Local currencies seem to have one thing in common, which may be the primary reason why advocates create them in the first place. This is the development of a local identity and sense of community within a region. Advocates of local currencies would argue that local currencies help to create a sense of community which can lead to local entrepreneurial start-ups in enterprises that serve those communities. This would primarily be in specialist food businesses etc. Local currencies can therefore be seen as a source of social justice, helping to encourage local entrepreneurial activity. Opportunity is also a human right.
A local currency used in any imaginable way could foster a micro-business sector to fill the local economic gap that currently exists in many communities. Local businesses could be nurtured using hybrids of local currencies for alternative financing that connect to local variations of crowdfunding, thus better reflecting local economic value.
Local currencies can be more protective against international exchange rate fluctuations, thus preserving the local economic vitality that has been on the rise recently. A local currency can even help to reduce the high cost levels of many advanced economies that have destroyed the simple economic model of local production to serve local communities. It is all about going back to the future in macroeconomic policy to recreate local comparative advantage once again .
As Charles Eisenstein, author of Sacred Economies , points out, it was Taiwan, Japan, and South Korea that encouraged domestic production with import-substitution protectionist policies in the 1980s, and today the middle classes are prosperous. Compare that to Mexico, which has gained little in the way of know-how, technology, and permanent capital by opening up free trade and openly allowing foreign investors. Furthermore, countries like Brazil and Thailand are taking measures to protect their economies from the flood of cheap US dollars buying up local assets. In both cases, the currency has served as a protection mechanism from the outside world, a form of economic sovereignty. Contrast that with the situation in Greece, which has no currency of its own.
Perhaps the real reasons for introducing local currencies are not economic. Local currencies are more about building community pride and developing ‘cultural capital’ against national and international trends.
The purpose of the local currency and its associated value system is to create or recreate a local community economy of goods and services that meet the needs of the local community from the local community itself. It aims to develop a self-financing community.
This is a very powerful tool for community development to create microeconomic activity in communities that have become economically barren and then capture the value of local commerce and retain it within the community.
As Bernard Lietaer said, ‘civilization needs a new operating system, and fast’. This is really important for many parts of the world today.