Time For Local Currencies to Rise?
It's almost forgotten that most trade was denominated in locally based currencies right into the 20th century and beyond, although in at least one case, if the Hong Kong dollar, issued by HSBC, Standard Chartered Bank and Bank of China (HK), is included, it still is. The Hong Kong dollar is the 13th most heavily traded currency on the planet.
In fact, more than 2,000 local currencies in some form or the other have been launched in communities around the world. Australia had several such currencies before federation in 1901. The US had a number issued by private banks before the Federal Reserve Bank was formed in 1913, and individual states of the European Union had their own national currencies before the mega-currency, the euro was launched in 1999. However given the trend to larger and "stronger" currencies, the hype of the euro and the protection of the US dollar as the major trading currency, a very quiet trend has been going the other way.
The phenomenon of the local currency almost doesn't exist in contemporary economic literature. Therefore why do communities launch them? Do local currencies have any benefit to these communities, and what is their real potential?
A local currency, sometimes referred to as a community currency, is a means of exchange used by members of a community that have some common bonds. They are usually not backed by a national government, nor are they officially a legal tender within the region they circulate. A local currency is usually intended for trade within a limited geographical area.
A local currency is a potential tool of monetarism, where it helps to define an economic boundary which accepts it as a medium of exchange by certain groups within that location. They are usually created on the value judgment, supported by E.F. Schumacher's ideas that there should be a focus on the development of local economies.
The proponents of local currencies usually aspire towards developing a diverse local economy full of diverse micro-activities which would promote local production and self-sufficiency, and the maintenance of profits within the local area by local businesses. They would hope that the local currency and the corresponding changing spending habits (use of a local rather than national currency) would promote a preference and loyalty to local products and businesses, rather than goods and businesses from outside.
The success of any local currency depends upon the assumption that a single country may not be an optimum currency area, where different regions within a country may be better off with different currencies. This would allow the development of local comparative advantage rather than national comparative advantage. This is very much against the spirit and purpose of macro-economic policy during the development phase of most economies, which has generally promoted centralization, the growth of SMEs into larger corporations so that economies of scale are developed to the point where firms can exercise competitive advantage in the international market.
Even though local currencies worked extremely well in the 19th century, they were most often redeemable in gold. The track record of the contemporary local currencies hasn't been good. The successful ones like the Berkshare have been proxy currencies with a generally agreed par value with the national currency. In fact, it is only the Berkshare, used in the Berkshire region of Massachusetts, that has been touted as the success story of local currencies. The Berkshare has a large number of users to keep the currency circulating within the local community which importantly, was already predisposed to producing local products. Many others have failed or ceased to exist through low levels of support. Others like the Kelantan dinar launched in 2006 were effectively sabotaged by the Malaysian federal government through repeated statements that the dinar was not legal tender.
One of the impediments of any successful local currency is developing a critical mass of community support that would keep the circulation velocity high enough to maintain its perceived value.
More notoriously, the Malay workers on the Cocos Islands in the Indian Ocean, once ruled by the Clunies-Ross family were paid in Cocos rupees, a currency John Clunies-Ross created and which could only be redeemed at the Clunies-Ross owned company store. Large retail corporations have successfully used forms of complementary local currencies as coupons, gift certificates, and point systems, to enlist customer loyalty.
Although there is scant evidence that any local currency to date has actually promoted local economic wealth, their mediocre track record does not mean they don't have great potential for achieving specific objectives. From a macroeconomic point of view, a local currency is a perfect tool for local micro-economic management, where the objective is to develop micro and SMEs to serve the immediate community. This will more and more become an important objective both in developing and developed economies around the world due to poor local enterprise diversity.
A local currency, coupled together with a hybrid of crowd funding organized by local cooperative banks, would be a powerful alternative for providing credit to local enterprises that the conventional 'big' banks have been hesitant to service.
There may be another philosophical reason for adopting this approach as well. The banking sector has become so centralized that most governments have deemed their local banks too big to fail, where these privately owned institutions are almost above the law, or worse still, become a law unto themselves. All lending, trade, interest rates, and other credit facilities are controlled by these banks. No government took any great effort to regulate these institutions post 2008, because the job was too difficult and very few had the political will to do it.
The nature of a national currency has given banks great power to create money through debt creation. Most money that makes up the currency system is actually electronic. There are no notes or coins or supporting wealth to back up this money. It's just a figure on a computerized ledger system where, if any bank was asked to produce the physical currency, it would be impossible. Technology has allowed this system to evolve, which arguably has been one of the underlying causes of financial crises i.e., electronic selling mortgages and derivatives etc. This is upsetting the balance of wealth in every country, where GINI indexes are actually widening.
Centralization has generally meant higher interest rates over time since single currencies and centralized banking came into existence. This suited government which found it easier to deal with a more centralized banking industry and fund economic activity. This also caused a rural crisis which was partly solved through the formation of specialized and subsidized rural banks in some cases.
One could also argue that the housing crisis was also caused by central currencies where investments made in land as a ledge against inflation of a national currency was encouraged and promoted.
However, a local currency may be able to challenge the dominance of these banks, which impose their credit policies upon communities from outside. The local currency may help to provide some economic freedom from the interest rates banks apply to communities, and the prevailing inflation rates on the national scene.
This can be done by using local currencies to provide new means of obtaining credit and capital fund, for businesses that banks won't fund. It is here local currencies can help most, where governments all over the world have failed to influence the banking sector to step into the area of micro-finance. In this period of nearing on deflation, i.e., real wages are relatively decreasing, a local currency may enable local trades people to exchange labor for local goods much more effectively.
The means of trade is typically changing today where the traditional means of exchange with state currencies are being discarded for electronic and cyber alternatives. One thing is for certain is that national currencies will be weakened by the number of alternatives to currencies and banking that are springing up on the internet and social media today.
The potential of local currencies has become a forgotten tool of development. New employment in the future is likely to be created through small business with limited capital. Very few large corporations will dramatically increase employment as they are looking for ways to reduce employment.
Many multinationals open and shut in the developing world, to places where they can make larger profits, leaving vacuums in employment. Therefore micro enterprise and SME development and diversifying local economies should be a major economic objective.
A local currency should go hand in hand with a local banking system. Any local banking system should have a simple system that is easily understood, be consistent with existing system, be redeemers of currency (i.e., current currencies are not redeemable in anything, if a local currency is redeemable against a national currency gives it intrinsic value), provide a universal measurement of value to provide a sense of security, eliminate interest and install discount rates on loan repayments - i.e., voucher, and be organized at a local and community level.
Credit unions have existed for a long time and this is not far away from the concept espoused here. However governments through their support for 'big' banks, and banks through acquisitions and aggressive commercial practices have done their best to destroy this type of institution, which has stood in the way of banks taking over control of the economic through central lending.
One must not forget that money is a social instrument. Local currencies are a 'bottom-up' approach to development rather than usual policy initiatives which come from a central government. Local currencies seem to have one thing in common, which may be the primary reason that promoters create them in the first place. That is the enhancement of local identity and sense of community within a region. Advocates of local currencies would argue that a local currency helps to form a sense of community which may lead to localized entrepreneurial start-ups in ventures that serve these communities. This would primarily be in specialized food businesses, etc. Thus local currencies could be seen as a source of local justice in helping to promote local entrepreneurial activities. Opportunity is also a human right.
A local currency, imaginably used, may be able to promote a micro-business sector to cover the local economic void that now exists in many communities. Local businesses can be nurtured through using hybrids of local currencies for alternative financing linking into variations of local crowd funding, and thus reflect local economic value better.
Local currencies may be more protective of international exchange rate fluctuation, thus protecting local economic buoyancy, which appears to be on the rise of late. A local currency may even be able to assist in lowering the high cost levels many developed economies, which has destroyed the simple economic model of local production to serve local communities. It is all about going back to the future in macro-economic policy and recreate local comparative advantage once again.
Perhaps the real reasons why local currencies are introduced are non-economic. Local currencies are more about building community pride and developing 'cultural capital' against national and international trends. The objective of a local currency and the attached value system to it, is to create or recreate a local community, product and service economy that meets the needs of local society from the local society itself. It aspires to develop a self-financing community.
This is a very powerful tool for community development, to create micro-economic activity back in the communities that have become economically barren, and then to capture the value of local trade and hold it within the community. As Bernard Lietaer said, 'civilization needs a new operating system and fast'. This is indeed very relevant for many parts of the world today.
Murray Hunter is an Australian academic and a regular contributor to Asia Sentinel