Thursday, 19 January 2017

Local currencies >>> a critique of a critique

The Transition Town movement has taken an active interest in 'local currencies':
Futures Forum: Transition Towns, local currencies and the Bitcoin revolution

This is very much part of the P2P movement too:
Futures Forum: Local currencies: getting radical: a P2P perspective

And these perspectives turn out to be quite 'radical':
Futures Forum: Local currencies: getting radical: a P2P perspective >>> "The End of Banking: Money, Credit, and the Digital Revolution"

The following piece is from the Cato Institute, an American libertarian think tank founded as the Charles Koch Foundation in 1974 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of the conglomerate Koch Industries.
Cato Institute - Wikipedia
Cato Institute | Individual Liberty, Free Markets, and Peace

And as such, it won't think too highly of local currencies - the arguments being rather standard defences of 'how money and the economy works'. 
To address these points, interspersed in the piece are a few observations:

Local Currency is Like a Car That Can't Leave Town

George Selgin
How’s this for a great idea: we build a small fleet of cars, and market them to people in the local community. How do we compete with Ford, G.M., Toyota, and all those other huge car companies? Easy.
You see, our cars will have special octane requirements that will prevent them from refilling at ordinary gas stations. Instead, we’ll set up a few local stations that will be the only ones equipped with the right fuel. To top it off (so to speak), our cars will also have small gas tanks to prevent them from reaching the next town on a single tank. (Should we decide to go electric, we can instead equip them with special plugs and voltage requirements to accomplish the same result.)
This is a rather trite comparison. Of course urban transport solutions will be different to long-distance travel: towns and cities are having to encourage 'local transport' in the face of pollution and climate change anyway: Futures Forum: What to do about car emissions: from Paris to London...
“Local Exchange Trading Systems” are part of a still larger “local currency” movement.
What all this means is that unlike other cars ours—call them “LETS” for “Local Energy Transportation Systems”—can only be used around town. That way, people who go shopping with them have no choice but to shop locally, and so contribute to boosting the local economy. Who wouldn’t want to do that?
Yes, that's the point: Futures Forum: Why buy local?
The answer, to get serious, is plenty of people wouldn’t. Even people who like to buy local don’t like having to do so; and the option of driving out of town, whether to shop or for some other reason, is valuable. So a car that can go anywhere is worth more—for many a lot more—than one that can’t, which means that so long as Ford or Toyota or any other manufacturer can make a decent “national” car for no less than what the local alternative would cost, we’d better leave making cars to them.
We also know about the 'economies of scale' which enabled the likes of Ford to sell their cars across the United States: Futures Forum: Subsidies and social engineering: or why we build roads.
An alternative would be actually doing it locally: Futures Forum: Decentralized Manufacturing and Futures Forum: The DIY economy
Such reasoning presumably explains why there’s no such thing as a Local Energy Transportation System aimed at challenging existing car makers. Yet there is such a thing as LETS: it stands for “Local Exchange Trading System,” and there are now several hundred such systems in operation around the world. LETS are part of a still larger “local currency” movement.
In Reality
Like the fictional LETS we were just toying with, actual LETS and other local currency arrangements are designed to encourage people to shop locally.
The UK LETS website, for example, boasts that, unlike ordinary money which “is quickly sucked out of the area where it has been created,” LETS “stays local, benefiting the community, rather than outside-interests.” The schemes’ promoters see to it that their currency won’t “leak out” of the local economy by encouraging local merchants and banks to accept it, while scrupulously refraining from encouraging “outsiders” from doing so. In short, they make a virtue of their currencies’ limited usefulness—of the fact that, unlike most exchange media, they are not generally accepted.
This is very much the point: that the locally-generated currency is to be used within the local economy. The 1930s experiment in Woergl, Austria was so successful that central government had to step in to stop it: Futures Forum: An Exeter Pound and the Woergl: 'complementary' and 'interest-free' currencies
As for Sidmouth, of course the tourist business is about bringing 'outside cash' into the local economy and much of it 'leaks out'. However, there is a difference between circulation between locally-owned small-scale, family-owned Bed and Breakfast places and the Premier Inn which will be plonked at Port Royal and which would definitely 'export' most of its turnover: Futures Forum: The 'regeneration' of Exmouth seafront and Futures Forum: Plans for Port Royal: anticipatimg a Regeneration Board
The object the local currency movement would achieve is, like all forms of protectionism, highly dubious.
This strategy ought to make local currencies about as desirable as cars that can only run on local gas. Yet (if Wikipedia’s experts can be trusted) there are some 2500 such local currency schemes afloat, with new ones popping up all the time.
So are monetary economists wrong in supposing that to be any good money has to be generally acceptable? They aren’t, and the proof is that the 2500 local currency systems collectively represent an insignificant part of the world money stock, and that the vast majority of such schemes that manage to get off the ground collapse after a few years, if not sooner.
Maybe, but so far, the Exeter Pound is doing well: Futures Forum: Exeter Pound official launch >>> Tuesday 1st September
As for the few that have lasted longer, almost all are, by no coincidence, located in (mostly “liberal”) communities where strong “buy local” sentiments prevail. This means that there are relatively large numbers of people who feel good about shopping locally, for whom the opportunity cost of employing a strictly local currency is relatively small. For such consumers using local currency is like clipping coupons for stuff one plans to buy anyway.
Again, it's much more than that: it's about challenging the traditional way of seeing 'money' in a very practical rather than a Chicago University way. As people in the Transition Town movement would say: 'money is killing the local economy': Futures Forum: Learning about local currencies ... to develop the local economy 
As for the banks that agree to accept local currency, most do so solely for public relations reasons and despite the fact that local currency dealings eat into their profits, as is evident from the general reluctance of banks with large out-of-town networks to participate.
In fact, the banks are in a bit of a mess: Futures Forum: Communities deciding to produce their own money 
More importantly, the object that the local currency movement would achieve if it could—that of “keeping trade within the community”–is, like all forms of protectionism, a highly dubious one
Anyone who suggests that local economies matter and need some protection is a 'protectionist': which is an argument thrown at anyone to stop debate, including local people opposing unwelcome 'development' from the big guys from beyond the valley: Futures Forum: Are you a SWIMBY? >>> Something Wonderful In My Back Yard
As Tim Harford succinctly puts it, “the gains from more trade with locals are more than offset by the losses from less trade with strangers. Otherwise economic sanctions would be a blessing.” (Try telling a Palestinian or Cuban about the virtues of “buying local”!)
Admittedly, 'The Power of Community' looking at Cuba's hard-pressed circumstances - a film which was popular amongst Transition Towners some years ago - was a little stary-eyed. However, there are lots of interesting things to pick out from this 'experiment': Futures Forum: The Water, Energy and Food Nexus
That’s Not All
Besides constraining people to buy locally, many local currencies are designed to yield “negative” interest, by losing value relative to national money according to a fixed schedule, or by expiring entirely after a certain period, or both.
The further back one goes the less onerous local currency becomes since people traveled less.
The idea here—one first popularized in the 30s by Silvio Gesell—is to discourage people from holding on to local money, thereby increasing its velocity, so that a given quantity results in that much greater a boost to local spending. Here again the aim of boosting local spending is at loggerheads with that of making local currency an attractive substitute for national currency. To return to the “local car” analogy, it would be like saying to a prospective car buyer, “Look, our cars’ bodies rot fast, so you’ll have to go shopping more often to get your money’s worth!”
Actually, the 1930s is an important parallel to our times: economic dislocation and vulnerability of local economies. Since the economic crisis of 2008, there have been all sorts of responses: Futures Forum: Alternative currencies >>> responding to market and government failures 
Besides, money is all about 'circulation': Futures Forum: The Circular Economy
This isn’t to say that local currency can never serve any purpose apart from that of allowing some people to better display their kind disposition toward local merchants and producers (or, perhaps, their poor understanding of basic economics).
Historically, local currencies have played a crucial role in sustaining exchange when national alternatives were in short supply, as happened during the Great Depression (when in many communities “scrip” made up for vanished or inaccessible bank deposits), and as happened in late 18th-century England (when private mints and coin issuers made up for a dearth of official small change). Despite its inconvenience local money is of course better than no money at all; besides, the further back one goes the less onerous local currency becomes, since people traveled less anyway. 
National Currency Substitutes
Though the shortcomings of local currency are serious ones, they are far from being inherent shortcomings of all substitutes for official (national) currencies. On the contrary: far from being inherent, the shortcomings of local currencies are ones which have been purposely built into those currencies by persons seeking to make them serve an end quite at odds with that of making it as easy as possible for people to exploit potential gains from exchange.
There is, in fact, nothing to prevent other kinds of unofficial currency from commanding a national market. The key to having them do so is that, like modern bank deposits, they must be fully compatible with the existing monetary standard, and readily useful throughout the national economy, if not beyond it.
Historically, private banknotes have possessed these qualities wherever legal restrictions haven’t prevented banks from establishing branch networks or taking other measures to make their notes current beyond the banks’ headquarters; and it is conceivable that other forms of private currency, including privately-issued token coins, could also take the place of government-supplied alternatives, if only the government would let them.
So, while I applaud the effort of local currency proponents to break the Federal Reserve’s currency monopoly, I regret that they’ve chosen to sabotage this merit-worthy mission by linking it to the much less worthy one of keeping people from trading with “outsiders.” As the ever-sensible Bastiat once observed, “The worst fate that can befall a good cause is not to be skillfully attacked, but to be ineptly defended.”
Which could take us into all sorts of discussions about 'fiat money', the fact that Central Banks are actually 'private banks' and that money is credit: Futures Forum: An Exeter Pound: What came first: money or debt? ......... David Graeber's "Debt: The First 5000 Years"
Republished from Alt-M
Local Currency is Like a Car That Can't Leave Town | Foundation for Economic Education

No comments: