Is Regional Currency A Viable Economic Tool?

This is a Brixton Pound. The bill reads “Money that sticks to Brixton”
This is 10 Brixton pounts. There are about 200 stores that take Brixton Pound and about 30,000 people use the currency.
This is a 5-B note from Baltimore, Maryland
This is Witney Webre. He works at Zeke’s Coffee Shop – They’re one of over 200 Baltimore-area businesses that accept the b-note. The B-note has a 10% discount on the face value of a dollar.
These are Berkshares, they’re a regional currency in Berkshire, Massachusetts.
This is Eric Wilska, co-owner of the Bookloft in Great Barrington. You can use Berkshares to buy books,
Rent bikes
Buy pottery
Buy gourmet food.
I’d guess the biggest problem people have with Berkshares is fitting them in their wallet.
This is an Ithaca hour. One half-hour, actually. It’s a local currency used in Ithaca, New York.
The Ithaca HOUR is the oldest and largest currently-operating local currency system in the United States. It’s called an hour, because it’s generally thought to be worth an hour’s worth of work.

Even though it’s the oldest complementary currency in the U.S. – it’s still not that old, it was started in the 90s
This is the Wörgl – It was issued in 1932 during the great depression
It’s from Wörgl, Austria
The funny thing about the Wörgl is that it loses value if you don’t spend it. It carries a demurrage charge for holding on to it. That is, every month, you have to buy a stamp that is worth 1% of the bill. If you don’t buy the stamp then the bill is worth that much less. As a result, near the end of every month people try to spend the bill so that they’re not the one left who has to buy the stamp.

The idea is that this is money you spend and not a store of value.

After the Wörgl was issued, it’s reported that the area had a growth in employment – defying the rest of the country. The town generated enough money to build new houses, a ski jump, and a bridge. Neighboring villages, seeing the Wörgl’s success, started copying the idea.

Predictably, the Austrian central bank terminated the currency after about a year and unemployment shot back to 30% shortly after.

This is a map of complementary currencies in central Japan from International Journal of Community Currency Research (2004)

Why do people create their own currencies?

It’s a response to feeling marginalized by globalization. It’s an attempt at reinforcing community identity. It’s a symbol of solidarity within the community.
The movement is closely associated with the “buy-local” mentality. “Buy-local” sounds nice, but I’m technical and repeating ‘buy-local’ feels abstract and problematic. Often it feels like a marketing ploy; a grocery-store-pastoral narrative without a lot of evidence that what you’re buying actually is benefitting the local economy.
Like this bag I found on Etsy. “Don’t buy from strangers, buy local”. Of course, if you want buy this bag, you have to buy it on Etsy from a stranger. ‘Buy local’ becomes a meaningless mantra.
I think that one of the economic ideas that the “Buy Local” folks are getting at is the idea of the velocity of money.
Generally, when two people transact it’s because we both have something the other wants. We both gain the benefit of exchanging something we have for something we want. One idea behind ‘Buy Local’ is that if you can increase the velocity of transactions and keep that value within your community, the community benefits.
Another argument that is made is an ecological one. These aren’t cartons from a factory farm, these are Todd’s egg cartons and he wants them back. If Todd takes Berkshares then he’ll get your business instead of Whole Foods, we’ll be throwing away less trash, the eggs didn’t have to be transported hundreds of miles in a refrigerated truck, we’ll feel good about supporting someone we know. This all works out well, as long as we need eggs and we know Todd and Todd has enough eggs.
Business accept regional currencies because they believe it gives them an advantage over multinationals.
If the currency is offered at a discount to fiat, they consider the difference an advertising cost. At least with local currency you can recoup some of your cost so long as you have a place to spend it.
For other people, creating their own currency is an act of rebellion and way to some measure of control over their money.
Especially since the Great Recession, there’s a grass-roots discontent with monetary policy. Anecdotally, there’s feeling among many people that national monetary policy isn’t really concerned with the needs of smaller regions.
So, fringe politics aside, this opens an interesting question: could regions have their own monetary policy? It’s hard to say how widespread and and effective that could have been in the past. But maybe with software and data we could make it possible for regions to have some control on their monetary policy even if they don’t have an economist on staff.
I think it’s useful to review briefly why we even need currency in the first place.

Say I’m a fisherman and my family has eaten all the fish they want and I have fish left over. I’d like to exchange that surplus value before my fish go bad. If you’re a farmer you might be in the same situation with corn at harvest time.

If we can find each other then we can trade.

The great thing about barter is that we’re transferring value directly. The bad thing about barter is that it requires double coincident wants.
We often think of barter as an antiquated practice but, it turns out, there are lots of barter networks that still exist today. The International Reciprocal Trade Association (IRTA) is the biggest trade association for that industry and they had about 400,000 businesses in their member networks in 2010.
One of the benefits of using a barter network is that you can conserve cash. “Every trade dollar you spend is a dollar saved”, they say.

The thing is that barter networks are still pretty small when compared to the amount of global commerce. IRTA estimated that the businesses in their network transacted $12 billion globally in 2010. It’s not pocket change, but its still a fraction of the total possible trade.

But one has to wonder if we can use big data to solve the problem of double coincident wants. I expect that the folks at, say, Quickbooks or SAP have the data.

Going back to our example, maybe I’m a corn farmer and I want some fish today, but the harvest won’t be ready for 3 months. I can write an IOU promising that I’ll give you corn later if you give me fish today.

The great thing is something magical is happening – we’re creating money out of thin air almost like a bank. In effect, we’re issuing a “farmer dollar”.

The problem is – every IOU ticket has a different real value. As the IOU gets further from the issuer, you may not trust the person who issued it. The burden of vetting for the issuer of the coupon gets pushed to the users of the currency.

There’s not a good unit of account because the assets backing the notes aren’t directly comparable and some issuers are more likely to fulfill their obligations than others.

This is, essentially, the idea behind the Japanese WAT ticket system. It’s essentially a formalized IOU that is intended to be used within networks of trust.
So can we keep the benefit if being able to issue our own money, but spread the a) risk of defaulting and b) provide a consistent unit of account?
And the answer is “yes”. This is the reason for mutual credit networks. In a mutual credit system, the currency is created at the time of the transaction. A central system keeps track of the debits and credits and the accounts of the system should all sum to zero.

This is different than, say, Paypal where I have to pay dollars first and then I can send you money. Instead, I’m able to create debt from nothing but a promise to pay you later.

When you make a purchase like this, you’re saving your cash and essentially getting an interest free loan.

Additionally, the currency supply can be effectively self regulating. We create debt where it’s needed. As long as you have a public ledger of debtors, then the community can self-enforce and not continue to lend to someone who is too far in debt.

A network of mutual credit is the idea behind LETS. In a LETS system, the money needed is created when a transaction is made. This becomes interest-free local credit. You don’t need to barter goods directly and there are no physical notes: the ledger is stored in a central location.

This idea is really interesting because we’re giving individuals the power to create money, a lot like a bank.

Just to review briefly, as you know, banks are authorized by the federal reserve to engage in fractional reserve lending and this is one of the ways that money is created.
One of the problems with this system is that when interest-bearing credit-money is created, through the production of loans by the banks, there is enough circulating currency to repay the principal of the loan but not to repay the interest. This results in the so-called ‘impossible contract’ and so the economic system relies on further expansion of credit in order to service existing debt
(The Case for Monetary Diversity, 2010)
While borrowing can help the economy grow in the short term, eventually people have to repay the debt plus interest. When people are repaying their debts, they’re spending less than they’re making and this has a contracting effect on the economy
This opens the question: Is it possible to create money without debt?

Probably not – a tool for repaying debts is essentially what money is. Even if you’re engaging in a cash transaction to purchase goods, essentially what you’re doing is immediately paying off the debt you incurred by taking something of value from someone else.

But a case could be made for loans without usury. e.g. no fees on top of the cost required to service the loan.

Usurers extract a lot of productivity from the economy through interest and so maybe we can keep that productivity within the economy instead of paying interest.

A mainstream view of interest is that it is the lenders reward for delaying consumption. But, to me, it feels like getting more money back for lending your money is maybe only one of many possible rewards for lending.

There’s a school of thought that heralds “money as if people mattered”. Their hero is E.F. Schumacher, author of “Small is Beautiful”. But, to be honest, it isn’t taken very seriously by mainstream economists.

Schumacher’s book is a contrast to the idea that ‘bigger is better’. A global payment system like Bitcoin is very efficient in transferring value, but there are second-order effects that undermine the resilience the economic system as a whole.

If you want to build a resilient distributed system you have to design the system to keep running even if individual components fail. If (when?) one currency becomes the global standard, then the entire globe is affected by the same volatility, market trouble, debt crises, etc.

There’s also an open question: can we create ‘moral’ money? Can we create a medium of exchange that is good at encouraging prosperity and less good at encouraging exploitation?

While it’s a great sentiment, people generally act in their own economic self interest so it’s hard to see a purely altruistic model as being practical. So another question might be: can we create moral money that is also in people’s overall self-interest?

While it would be nice to live in an area where people voluntarily put themselves under the authority of a local currency for the common good. It seems to me that the system will have greater success if there is clearly economic self-interest involved.

One promising story of the economic effects of complementary currency is the Bangla Pesa from Kenya
The people in this Kenyan village had goods but they were willing to sell but because they were so poor, many people didn’t have the cash available to trade. So the Bangla Pesa was developed as a village-wide IOU system and it’s essentially considered “slum money”.

Emma Onyango sells tomatoes, kale, and water and she has eight children. She’s one of the founding members of the Bangla-Pesa.
When the Bangla Pesa was issued, trade jumped in the first few weeks it was in use and people were very optimistic about its effects. But before long a news story was written that declared it an attempt to replace the Kenyan shilling. The anti-fraud unit of the Kenyan central bank ordered the police to arrest the people behind it.
Emma and five others were jailed and charged with forgery. Operations of the Bangla Pesa ceased for several months.

They were able to post bail after a few days and after quite a bit of effort, the charges were dropped six months later. The Bangla Pesa is legal again and their 2014 survey showed over a hundred businesses in the area are using it and it accounts for roughly 7% of sales.

We might be tempted that this sort of extreme response could only happen in a third-world country. But it turns out, our central bank doesn’t like competition either.

This is Bernard von NotHaus.
He’s the creator of the Liberty Dollar. The Liberty Dollar was a currency that was backed by gold and silver. It’s possibly the most economically successful physical complementary currency in the U.S.

Between 1998 – 2011, von NotHaus was able to put more than $60mm worth of liberty dollars into circulation.

The idea was an inflation-proof currency for people that wanted a return to the gold standard. It turned out to be extremely popular, especially among libertarians.

They even issued a special-edition Ron Paul coin with the insignia “Vote for Truth”. The thing is, the political platform that helped him become so popular was also probably his downfall.

You see, van NotHaus was the founder of an organization called National Organization for the Repeal of the Federal Reserve and Internal Revenue Code. “NORFED” for short.

He was arrested and convicted for counterfeiting. The jury deliberated for less than two hours. The U.S. Attorney’s office said that “NORFED’s purpose was to mix Liberty Dollars into the current money of the United States.”
The U.S. Attorney Anne Tompkins said that “attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism”. (See
Despite being convicted in 2011, he hasn’t been sentenced yet.

On the one hand, his conviction serves as a warning to anyone who wants to try and create a national complementary currency.

On the other hand, when you see a hippy being labeled a terrorist for helping people trade gold, you have to wonder if he was on to something.

Do complementary currencies work? And by “work”, I mean, do they have the intended economic effect. So far, I think it’s hard to say.

In theory, regional currencies should have a counter-cyclical effect. Particularly in times of crisis, when there isn’t enough national currency available or interest rates are extremely high and so on.

But in practice, regional currencies are all so small. A study from 2007 found no difference in rates of economic growth betweens cities that had regional currencies vs. cities that did not.

But they did say that there might have been income increases for the individuals and businesses that participated. And that’s really interesting to me.
Because it seems part of the reason these systems fail is because they’re expensive and inconvenient. And maybe with new technology, mobile devices, crypto currencies, etc., we can grow (or multiply) regional currency systems to the degree where they can have a significant economic and social impact.
The blockchain also presents brand-new opportunities for community controlled digital currencies. Because the blockchain can be distributed, the company that makes the tools can genuinely claim that the currency belongs to the community (vs. being issued and controlled by a central entity). Obviously, we want to avoid pump-and-dump scams, but I think if local currencies are issued genuinely there are new opportunities here.
Everything I’ve been talking about so far emphasizes physically regional communities. But if you’ve read Balaji Srinivasan’s article “Software Is Reorganizing the World” he talks about the virtual formation of not only cloud networks, but cloud towns or cloud countries. The idea is that groups of people will come together online and have a strong community identity, even though physically they may be all over the world.

The ideas we’re talking about here apply equally to these cloud communities.

And, in fact, maybe they already are. That’s sort of what the alt coins are.
But what I’m talking about here is something different. Most crypto currencies are in a battle with bitcoin to become the new global currency. And that’s not what I’m proposing here.

For contrast, take monetary policy. If you think that the Federal Reserve isn’t appropriately concerned about the needs of your region when deciding how much money to print, Bitcoin doesn’t help because Bitcoin’s ‘monetary policy’ cares about your region even less.

We have these two sets of tools. The old tools of regional currency, mutual credit, and barter. And then we have new tools like strong social networks, ubiquitous mobile devices, and of course cryptocurrencies.

In my mind, we’re still in the very early days of understanding how they can work together.


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  • Julien

    This is a fascinating topic and once can be surprised to see that up until BTC, there has been so little innovation on the currency front, despite centuries worth of technical progress… yet, I feel like the risks associated with disruption in that area are so high that eventually, most people and organizations will just be “too scared” to change things.