The main argument put forward for a local currency is that it keeps money in the local economy. This then boosts demand for local goods and services, so boosting local economic growth, supporters argue.
The desire from businesses to introduce a local currency is perfectly rational. Limiting where people can spend their money increases the likelihood of local spend, limits competition and so drives up potential profits. But to me there seems to be three questions that this approach poses in terms of economic development.
Firstly, if consumers feel so inclined to support local business, why can’t or don’t they do this with pounds sterling? There is nothing stopping them using the currency they already have to exercise their consumer right to buy from local businesses. And local businesses are free to advertise their use of local supply chains if they so wish.
Secondly, what are the disadvantages of limiting people’s choices through locking people into a local currency? Standard economic theory suggests increasing choice increases ‘welfare’ or wellbeing. And even if you dispute this, it certainly limits competition, which is potentially bad both for your wallet and for productivity of businesses, with the latter determining long run economic performance.
Thirdly, and most importantly, what is the impact of a local currency on the gains from external trade that local economies benefit from? The Bristol economy, for example, is better off because it uses its limited resources to do what it does best, and it pays another part of the UK or indeed the world to produce things that it is relatively less good at. So this leaves agricultural areas of Poland, say, to produce its potatoes while Bristol concentrates on, for example, designing iPhone apps.
Our report Open for Business showed how important independent businesses are to our most successful city economies. But it also showed that these cities strike a balance, supporting independent business while remaining open to ‘branch’ businesses, such as KPMG, Currys and Barclays. Being open to interaction with other economies is likely to spur economic growth, rather than stifle it. So – while the idea of a local currency is attractive – there are questions about whether it will really support the growth of a local economy in the longer term.
Of course many people will have a radically different view on this, and I write this piece to start the debate. Please leave any comments in the box below or enter the conversation on Twitter. My handle is @Paul_Swinney.