Sunday, March 23, 2008

In We We Trust: The Prospect Of Local Currencies

An area that has always absolutely fascinated me is Local Currencies. Local Currencies are alternative currencies not necessarily backed by an official national government. Other terms for Local Currencies are LETS, Community Currency, Alternative Currencies, Barter Currencies, and many more. Their use is far more popular in Europe, Canada, and Australia- although there have been a number of communities here in the US who have adopted their own local monetary system, often with resounding success.



photo by by T.W. Collins


So How Does It Work?

Often people do not understand the theoretical basis of what money is. Money is simply a medium of exchange- a way to keep score amongst a group of people as various actors participate in a society in some way. Credits and Debits are made by members of a society based on their own personal criteria- they can give and take, request and spend the money as they see fit. It is important though that the money retain a level of worth to users- so in order to do this a variety of things must be employed. For one it must be relatively scarce- if I ran off endless units then there would be no value to them. Another it must be reliable- it cannot be easily forged. Yet another is liquidity- it must be easy to use, for instance if US dollars weighed 40 pounds it may pose a liquidity problem because it would be a huge chore to drag it to the marketplace to spend. So that sounds simple enough, so why is money so darned complex?

Credit: a great innovation

Money gets complex when we introduce the concept of credit. Credit is only possible in money systems where the unit of exchange does not carry a high intrinsic value. So gold pieces have a high intrinsic value, dollar bills do not (they have the same relative intrinsic value as a greeting card). So the issuer of the money (given it does not have a high intrinsic value) has an enormous power- the power to create more money and give that money to whomever they see fit. In some cases this is seen as a great advantage, because I can privilege certain parties instantly without any inhibitors whatsoever. Our modern banking system issues enormous measures of credit to various parties on a regular basis, and many people in our own country do not understand the position of privilege that these banks are in due to this special right. In this system there are haves and have-nots, all determined by fiat decree of these money masters to whom we entrust our most important medium of exchange, the US dollar. It may interest the reader that these people are (generally) not even elected by the people, they are a collection of appointees and stand-in figures from wealthy families, etc. Many, including congressman Ron Paul contend that this entire system is a farce and has been from its inception, and absolutely needs to be rooted out for our country to regain its social and economic health.



The Solution: Local Currencies

So in recognition of the problem of credit and banking and the threat it poses to open societies, many people have made suggestions to counter the effects cited above. Reinstating the gold standard is one (in other words, every dollar in circulation is exchangeable for a specific amount of gold, thus running off new money is impossible without acquiring more gold, and this acts to reduce the ability to generate credit). Another, more compelling solution is the local or community currency. In this schema, a community with common values prints their own currency or script (or in some cases implements a purely virtual schema) in limited supply. At this point they can do a number of things. They can lend them to people. They can grant them to people. It is these kind of decisions that determine the nature of the currency and the values that it represents. This is the tricky business of monetary management, if done correctly a robust medium of exchange is created and through participation and cooperation of community members, more value is created than was there initially. Remember money is a medium, it brings people together. It creates equity and cooperation. The problem doesn't lie in these principles, it is the corruption and intermediation of the money supply that is the source of problems. So a local currency stands as a possible alternatives to the corruption we have seen so much of lately in the news. Perhaps it is our only choice for the future.

A great video: "The Money Masters"...





This article has been featured in Digital Gold Currency Magazine : Community Currency Issue.

Local Currencies are a subject worth of shelves of books. But this article is a start. Here are some good links if you re interested in this subject:

The E.F. Schumacher Society

Ithaca Hours: An Early Local Currency used in Upstate NY

Yootles: A Virtual Currency System From Yahoo!

LETS: Local Exchange Trading Systems

STRO: Social Trade Organization

Complementary Currency Resource Center

13 comments:

Sepp Hasslberger said...

Hi Josh,

I saw your post on the open money ning group and came to read your article. You got it pretty much down, the question of alternative currencies, and what they are potentially good for.

Another guy who also is a programmer - Ryan Fugger - is attacking the problem from a different angle. In his ripple project

http://ripplepay.com/about/

http://ripple.sourceforge.net/

Ryan provides both an internet-based exchange mechanism and a way of creating our own "currency".

The exchange mechanism is ready and a server-based implementation is available on ripplepay.com - this could in the future be ported to a P2P version, but so far it's only in a server version.

The currency is interesting, as Ryan uses the idea of trust and credit to let us create the money ourselves by giving "credit" to our friends. This is how the system gets its liquidity, by participants saying how much they trust one particular other participant.

I think this has great potential and it's essentially there for anyone to experiment with and eventually use.

athollthegreat said...

Hi Josh

I also saw you at the Open Money group.

I *love* your image of the Queen's head imposed on (yours?!) - not cos I am missing our dear old monarch living here in Germany - but because I think it brilliantly captures the contrast between money issued by a nation state and money issued by you and I to each other.

For lots more resources and links on community currencies check out my site at: www.valueforpeople.co.uk

necronomy said...

Hi Josh,
thanks for your nice article.
I would like to add one resource:
Crom Alternative Money

Mark Herpel said...

Hi Josh,

There is a new CC out in the UK gaining popularity:

http://thelewespound.org/

It's worth a look. Cheers.
Mark Herpel

wraft said...

Anybody seriously interested in local currency needs to read The Natural Economic Order by Silvio Gesell
http://www.appropriate-economics.org/ebooks/neo/neo2.htm

Start with Part IV Free Money, Or Money As It Should Be

wizkid said...

Wraft, I am familiar with Gesell. I also recommend Bernard Lietaer.

wraft said...

64 dollar question with respect to local currencies is whether or not they enjoy First Amendment 'freedom of expression' protection or not.

2 notable successful local currencies, the Wara in Bavaria
and the Worgl experiment were quashed by the German and Austrian central banks respectively. But that was in Europe.

Does anyone have an opinion?

wizkid said...

Wraft,

Local Currencies were in heavy use during the Great Depression in the US.

While I tend to think that we have the freedom to write our own currency in America, there is the issue of 'Legal Tender' which does privilege the Federal Reserve Note (USD) over others, because only debts denominated in USD are enforced in a court of law. Perhaps there are some very subtle ethical consideration here, but that is probably best left to the Ron Paul forum.

In Europe, they take a more direct approach it would seem. There was the Beenz.com project which met with adversity from the European Authorities.

Beenz.com

wraft said...

wizkid,

I don't think scrip needs legal tender status to be successful. If the state or local government issuing it allows taxes and fees to be paid in scrip that is enough. Please visit my blog

wizkid said...

just got 2 PHX BUX at Fair Trade Cafe today...

http://www.phxbux.com/

James said...

Perhaps there are some very subtle ethical consideration here,Essay but that is probably best left to the Ron Paul forum.Research Paper | Term Paper

James said...

but because I think it brilliantly captures the contrast between money issued by a nation state and money issued by you and I to each other.
Dissertation | Thesis

Daniel Ward said...

This sounds like something that will get you whacked by the CIA.