By Jake Towne View all 16 articles by Jake Towne Published 05/04/09  
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In January, Campaign for Liberty featured a piece I wrote explaining why the Obama stimulus plan will fail and suggesting alternatives. Very recently I resigned my job abroad in China to return home, and I thought I would take a chance to share a local stimulus idea that may be of value for your community. The following will lay out a proposed local currency idea to stimulate local economies. This idea is not original and closely follows the successful BerkShares program led by Susan Witt of western Massachusetts and Piedmont PLENTY's, a currency BJ Lawson (aka Ron Paul, Jr.) is helping to start up in North Carolina. The first section will describe how it works, and the second part will list its economic benefits and costs. The third section will list details and my thoughts on the support necessary to start a currency. The fourth section will list several ideas for neighborhood currencies and a small business stimulus plan, and the fifth section is a source list. I. HOW IT WORKS For the consumer, this concept is similar to a general coupon that could be used at local businesses. The process is very simple: 1. Consumers exchange federal dollars at a predetermined discount rate, such as 5-10%. For example, say $90 is exchanged for 100 "shares." The currency itself is printed on high-quality security paper, similar to a check and distributed by cooperating local banks. The federal dollars are physically held on deposit to honor 100% of all possible redemptions. 2. These shares can then be used at local shops and businesses that have decided to accept the shares at face value as if they were federal dollars. In this example, the consumer receives a 10% discount. Transaction for fractions of a share is resolved in federal coin. 3. The vendor may then redeem the shares for federal dollars at the local bank, disperse the shares as change to another customer during a federal dollar transaction or, better yet, spend the shares again to purchase goods or services at another local business. II. ECONOMIC COST-BENEFIT ANALYSIS The local currency is not meant and will not replace the federal dollar, especially since its backing is federal dollars. Like dollars, local currencies are a legal form of taxable income. Per BerkShares, the Federal Reserve and the IRS have no prohibitions on local currencies, as long as their value has a fixed exchange rate with the US dollar and the bills do not look like federal money. Communities utilizing local currencies need to weigh the following pros and cons: 1. Instead, local currencies are intended to stimulate localized trade. Money, and hence wealth, is kept inside the local economy. It is important to realize they will tend to discourage exterior trade, but since most consumer goods are now from China, this may not be all that bad. 2. Consumers will tend to utilize the shares locally to realize the discount. 3. Local businesses will receive business that may otherwise have gone outside the community in exchange for offering a discount. 4. Both businesses and consumers will tend to spend the shares first, which will increase the local monetary velocity -- in other words, more local trades will be transacted at the expense of less trade outside of the community. 5. Due to accounting difficulties, typically larger corporations would not participate, so this plan would likely also favor local small business owners at the expense of larger businesses. Think of trade shifting from mall-based chains like the GAP in favor of local clothes shops on Main Street, from Pizza Hut at the mall to Mom's Italian Bistro in downtown, or from Starbucks to Pop's Cup of Joe. [These are just examples. Every business and individual within the defined area can freely decide whether they wish to use the currency or not.] 6. With smaller local currencies, the total money supply needs to be tracked. If there is a build-up of currency that begins to dwarf the area's monetary velocity, this is a signal that the shares are being saved, or being withheld from the economy. A quick release of these funds could cause price inflation. However, since the currency is pegged to the federal dollar, the risk of this is extremely low, it is just something to be monitored. It is my opinion that the federal dollars exchanged for shares should be physically held on deposit in accounts that can honor 100% of all possible redemptions, and are NOT subject to fractional reserve lending. In other words, the dollars deposited should be stored at a local bank's vaults, and never lent out. If a local bank cannot be found to store the money for free, the non-profit community organization issuing the currency should pay a storage cost to the bank. This accomplishes two things. First, the citizens using the currency will have the confidence that it can always be exchanged, and is fully backed. Two, this can act as a local deposit insurance. As everyone is aware, the FDIC insurance system has its troubles, and this would be a creative way to provide this service to the community. If federal and state laws permit, perhaps citizens could be enabled to open a CD using these shares at a local bank. If the bank can locate other parties to loan to, the interest made can be shared by the bank and the citizen. [One of the more revolutionary ideas that I have had that may work in small communities is to cut out the bank and instead open a citizen's marketplace that handles the transactions and paperwork where Mr. Smith can evaluate a loan request from Mrs. Jones and decide whether he would want to lend her money and mutually agree on repayment terms.] As a proponent of honest money such as gold-backed currency, I also believe that while the community is setting up the local currency, it is also a great time to consider an emergency plan in case the federal dollar has a purchasing power crisis. Please note that although the government is granted the power to coin gold and silver coin by the supreme law of the land, the US Constitution, the IMF's Articles of Agreement prohibit the use of gold-backed currency, so silver may be a better bet. Federal and state laws would need to be reviewed, but communities should view this action as prudent disaster planning. III. NECESSARY SUPPORT My top suggestion here would be to contact BerkShares themselves as I have, AFTER first reviewing their entire website plus that of the Schumacher Society (links below), AND having a solid interest from your community to move forward. BerkShares Co-founder Susan Witt and Sarah Hearn already have the virtue of experience, and experience is irreplaceable. The printing expenses are relatively low, but a non-profit organization owned by members of the community would be created to handle this, plus its distribution, website, and legal issues. The non-profit will need to obtain its funding from someone -- perhaps the community or a well-off local business or benefactor? Prior to all these steps, consider the following steps and support necessary: * A local community discussion must take place, and citizens -- the users of the currency -- must support it. Each region will have its own thoughts and preferences. Ideally, the local press would support this by running articles and an online forum, and the community would gather multiple times to discuss locally. For some regions, a local currency may not work or be desired. * The support of small business owners is crucial for obvious reasons. * The support of local banks is crucial. Although modern local banks are mostly geared to providing universal services, it is my guess that the honest local bankers may leap at this opportunity to take part in stimulating the local economy. Actually, local banks that cooperate may gain local appreciation and hence more business from new customers currently using the larger national banks. * Hopefully the community will have one or more lawyers who are willing to assist the non-profit organization, and provide legal guidance. Here again, local appreciation will likely serve to gain them more business from the publicity. * Welcome local artists to assist with artwork for an aesthetic currency paper, perhaps put up a prize and make a contest of it. Of course, use a local printing business, if at all possible, to create the currency. * Of course, the local currency idea needs a local champion who will ensure the project is successfully executed for the community. Perhaps this person is you? 4. SMALL BUSINESS SELF-STIMULUS AND NEIGHBORHOOD CURRENCIES Small business, such as a restaurant, could consider their own stimulus plan. Besides issuing gift cards, consider a discounted time-delay coupon. For example, you could issue a coupon with a face value of $20 at a discount, say 25%. However, also add a delay before redemption can occur -- say one month. If you need to raise capital for any reason, and will stay solvent, this is a great way to reward loyal customers while securing future business and immediate capital. One caveat is to be mindful of the dollar's purchasing power. In Pennsylvania's Lehigh Valley, a small circle of friends traded "Barter Hours" between themselves in exchange for each other's work during the 1990s. Members list their services and exchange rate and receive a set # of "hours" for joining. Rather than spend money, one spends their "hours" by paying others to mow their lawn, complete a legal service, receive a massage, cook a meal or treats, build a website, et cetera. This type of model may be best fit for a small town, as in the more successful Ithaca Hours. In Ithaca, New York, citizens exchanged $10 for one "hour" and could then use this currency all over town to pay for labor, purchase a meal, or buy goods from a shop. Edgar Cahn's Time Dollars were started in the 1980s and focused on creating social work to improve a society's living standard, to mobilize "the vast reservoir of human talent untapped by the market economy to rebuild the infrastructure of caring and trust that holds us together." For instance, if a student logged 100 hours in tutoring younger students, he or she is rewarded with a computer donated by charity. They could also be exchanged for services like the Barter Hours. V. SOURCE LIST * FOX Business channel interview with Susan Witt (BerkShares) and BJ Lawson (PLENTYs) * "What are BerkShares?" * "Why Local Currency?" * Dave Block, 1998. "Local Money Strengthens Communities." * Community Currency Magazine. April 2009. * Wikipedia. "To bring the pieces back together, rediscover communication. . . There was a time that the pieces fit, but I watched them fall away. . . Doomed to crumble unless we grow, and strengthen our communication. . . Between supposed lovers. And I know the pieces fit!!" -- Tool, "Schism" |
Also by Jake Towne:
Defense Spending Reform: Appearance and Reality 05/07/10
What is an Olympic Gold Medal Worth? 02/27/10
Non-Violent Resistance Is the Way 02/22/10
Common Sense Fixes the Job Market 02/04/10
Aid for the Haiti Disaster 01/15/10
View all 16 articles by Jake Towne
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