Local currencies – do the economics stack up?

Launching your own currency appears to be the latest fad in economic development. But while the sentiment of such an idea is clear, does it make much of a difference in practice?

Bristol is the latest place to launch its own pound, following in the footsteps of places such as Brixton, Stroud and Totnes.

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.

Comments

[John Boik]

Hi Paul.
Quite true, individuals could use national currencies to support local businesses. A well-designed local currency must offer clear advantages for everyone involved, or there would be no real reason to use it. A simple local currency might offer a few advantages. For example, participating local businesses might gain extra revenue because the local currency must be used locally. But a more sophisticated local currency program could provide additional benefits.

The Token Exchange System, proposed in my book Creating Sustainable Societies is a sophisticated system that provides multiple benefits to participating individuals and businesses. For example, it provides interest-free loans to new and existing businesses. It provides an inflation-free, stable currency. As well, it generates donations for local nonprofits and schools, which help everyone in the community. Further, it offers a new, dual-purpose corporate model, where profit is balanced with social mission. The model gives individuals greater influence over corporate activity, and as well helps the corporations in multiple ways.

When considering a local currency, a community might identify the problems they are trying to solve. If it is interested in promoting substantial financial/economic/governance change, it might choose to create a local currency program that addresses all three pillars of the social/political economy. In this way, the program created might profoundly benefit everyone involved.

To address another theme in your article, I don't believe a local currency could or should be designed for exclusivity. The national currency would need to play a role, probably even a dominant role. Still, substantial benefits could be produced if even a small percentage, say 5 to 10 percent, of transactions were to occur with a local currency.

For more information, please see http://www.CreatingSustainableSocieties.com.

[Paul Swinney]

Thanks John. I wouldn't dispute that local businesses could increase revenues, at least in the short term. That's why it is rational for them to want such a scheme because it restricts the competition that they face. The problem is that this could have a negative impact on productivity in the longer run, which would drag on standard of living improvements.

Your ideas about having wider benefits attached to a scheme are interesting. The issue would be to balance any positives that this idea would have against the negatives of reduced productivity, reduced trade with outsiders and higher prices for consumers.

I'm not sure how you could have an inflation free currency in this format. Unless Sterling inflation is 0, surely this is impossible?

[Robin beveridge]

The origins of local currencies came from local exchange schemes, I think, where the rationale was that in areas of high un- or under- employment, and low incomes, there was a willing supply of labour to do odd jobs, and a need for such odd jobs, but the lack of hard cash prevented the two coming together. So, introduce an exchange mechanism based on time, and person x does some decorating for person y who provides some childcare for person z who sells some veg to person x. This in theory frees up more economic activity and increases welfare all round.

Trading currencies are a logical extension to this, enabling people to spend their accumulated exchange currency in local shops. However, as you point out, there is no real difference between doing this with exchange currency and with hard £s. The only reason this needs an alternative currency rather than £s that I can see is to get around benefit and tax rules.

The other driver, of keeping cash circulating locally - so people spend their Bristol Pounds in locally-run coffee shops rather than in Starbucks - is attractive but surely counter-productive in the long run, limiting competition and trade. It is a form of protectionism, and protectionism stifles competition and reduces overall welfare, while protecting the short-term benefits of a small group. If I choose to buy my coffee from a local Bristol co-operative cafe rather than Starbucks, surely this should be because the coffee or ambiance or cake is better, not because I have no choice?

Far better to spend our energies changing our welfare and tax systems to encourage rather than punish low levels of local exchange, and enabling local coffee shops to better compete with Starbucks (e.g. establishing co-ops to buy coffee direct from producers rather than through middle-men?) - tackling the causes of the death of local economies, rather than trying to artificially protect them.

God, I sound like a neo-liberal pro-market nut. Sorry for that!

[Paul Swinney]

I agree Robin - because they are attempting to limit competition, any short term gain to the business is likely to be outweighed by a long run productivity cost which harms the local economy, rather than supporting it.

Like you say, I'm not convinced that it's the best area to be focusing resources.