Locabucks: Are local currencies a way to escape the liquidity trap ?

Locavores, locastores and locavolts have caught my attention lately - 3 strands of the "relocalisation" idea that tends to get a lot of attention in peak oil circles.

Another localisation oriented idea that gets less press attention is the concept of local currencies (or "locabucks" as I'm now dubbing them), an idea which has its roots in the Great Depression as a mechanism for escaping the liquidity trap - and thus might be relevant again in the not-too distant future if present trends continue.



Local currencies in the 1920's and 1930's

The most frequently cited examples of local currency were issued in the Bavarian town of Schwanenkirchen and the Austrian community of Wörgl, described in this article on "Laboratory readings: Wörgl's Stamp Scrip – The Threat of a Good Example?":

On July 5th 1932, in the middle of the Great Depression, the Austrian town of Wörgl made economic history by introducing a remarkable complimentary currency. Wörgl was in trouble, and was prepared to try anything. Of its population of 4,500, a total of 1,500 people were without a job, and 200 families were penniless.

The mayor, Michael Unterguggenberger, had a long list of projects he wanted to accomplish, but there was hardly any money with which to carry them out. These included repaving the roads, streetlighting, extending water distribution across the whole town, and planting trees along the streets.

Rather than spending the 40,000 Austrian schillings in the town’s coffers to start these projects off, he deposited them in a local savings bank as a guarantee to back the issue of a type of complimentary currency known as 'stamp scrip'. This requires a monthly stamp to be stuck on all the circulating notes for them to remain valid, and in Wörgl, the stamp amounted 1% of the each note’s value. The money raised was used to run a soup kitchen that fed 220 families.

Because nobody wanted to pay what was effectively a hoarding fee [technically known as 'demurrage' and often referred to as "negative interest"], everyone receiving the notes would spend them as fast as possible. The 40,000 schilling deposit allowed anyone to exchange scrip for 98 per cent of its value in schillings. This offer was rarely taken up though.

Of all the business in town, only the railway station and the post office refused to accept the local money. When people ran out of spending ideas, they would pay their taxes early using scrip, resulting in a huge increase in town revenues. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump, and a bridge. The people also used scrip to replant forests, in anticipation of the future cashflow they would receive from the trees.

The key to its success was the fast circulation of scrip within the local economy, 14 times higher than the schilling. This in turn increased trade, creating extra employment. At the time of the project, Wörgl was the only Austrian town to achieve full employment.

Six neighbouring villages copied the system successfully. The French Prime Minister, Eduoard Dalladier, made a special visit to see the 'miracle of Wörgl'. In January 1933, the project was replicated in the neighbouring city of Kirchbuhl, and in June 1933, Unterguggenburger addressed a meeting with representatives from 170 different towns and villages. Two hundred Austrian townships were interested in adopting the idea.

Unterguggenberger was opposed to both communism and fascism, championing instead what he referred to as 'economic freedom'. Therefore, it was deeply ironic that the Wörgl experiment was first branded 'craziness' by the monetary authorities, then a Communist idea, and some years later as a fascist one.

The Wörgl experiment was watched by John Maynard Keynes and Irving Fisher, who saw a fast-depreciating currency as a possible answer to the 1930s "liquidity trap" and documented the subsequent use of "scrip" in the United States (Fisher is also infamous for predicting, a few days before the Stock Market Crash of 1929, "Stock prices have reached what looks like a permanently high plateau.").

Wörgl's venture into local currencies ended when its scrip was declared illegal by Austria's central bank in 1933, after a further 200 other communities commenced launching copycat currencies, threatening the monopoly of currency issuance by the state. The town went back to 30% unemployment. In 1934, social unrest exploded across Austria.

The Schwanenkirchen effort had a similar outcome - in November 1931, the German Government passed an emergency law ending the circulation of the "Wara".

Local Currencies Today

Local currencies are still alive in central Europe today, with something like 65 regional currencies competing with the Euro, according to Ambrose Evans-Pritchard.

The most frequently cited example is the Chiemgauer - a local currency (also called schwundgeld, scrip or specie) accepted by 550 restaurants, bakeries, hairdressers, co-operative banks and a network of supermarkets in the Bavarian region of Chiemgau (though petrol stations remain a glaring exception, other than some biofuel outlets). Notes are used like legal tender and can even be accessed by debit card.

The Chiemgauer was issued in January 2003 at a rate of 1:1 against the euro, and is designed to lose 2pc of its value every quarter. Usage is reportedly expanding by 70pc a year, though monthly turnover was a meagre €135,000 when Evans-Pritchard wrote his article.

Evans-Pritchard says the Chiemgauer is one of 16 regional currencies that have emerged across Germany, Austria and northern Italy since the launch of the euro five years ago, with another 49 regions in the pipeline. They are mostly issued by activists, farmers, eco-enthusiasts, anti-globalists, and citizen committees.

The actual turnover of these currencies remains miniscule, so the Eurozone authorities are relaxed about competition for the time being. The Bundesbank is keeping an eye on them however, publishing a report titled "Regional Currencies in Germany, Local Competition for the Euro?".

Local currencies aren't restricted to the Germanic world - there are some examples alive and well in the Anglosphere as well, including Ithaca HOURS, Berkshares (which have gathered some mainstream media attention) and the Totnes Pound. Dutch organisation STRO is also implementing pilot projects in Brazil, Central-America, Asia and the Netherlands.

John Robb thinks local currencies are a useful tool for building resilient communities, but notes that they remain "a lifestyle choice" at present. Robb believes that the Worgl experience in the 1930's indicate that scrip "adoption, velocity and robustness" could be accelerated by:

* Allowing community members to use it to pay all or part of their tax liabilities to local governments. This instantly establishes a market for the currency. Also, pay local government employees a portion of their wages in scrip.

* Deflating [devaluing] the value of the scrip (optimally, one percent per month) to promote immediate use rather than hoarding.

* To the extent possible, connecting scrip to local production rather than retail. Locally produced food (farmer's markets), energy (via local microgrids), products (personal fabs), and labor/services. Further, work with local banks to establish checking accounts for scrip and to enable conversions hard currencies (at a slight discount).

Local Currencies And The Environment

Another reason for interest in local currencies has sprung from ecological concerns, outlined by Bernard Lietaer as follows:

The most recent reason for interest in stamp scrip and similar alternative monetary systems in the West or in Japan [Otani 1981; Henderson, 1981; Kennedy, 1988 ; Suhr,1989] results from environmental concerns.

"The higher the money-rate of interest, the higher is the pressure on entrepreneurs to avoid internal costs, that is, to externalize into the environment as much as the cost as is possible. Thus under neutral money, when interest goes to zero, this additional burden on resources will cease" [Suhr, 1988, page 112].

When it pays more to cut a tree, sell the wood and let the proceeds earn interest than simply let the tree grow, it is predictable that "economic pressures" will be felt to cut more trees than is optimal from an ecological viewpoint. Stamp Scrip would reverse that process. It is interesting to notice that this point was also demonstrated in practice: indeed during the experiment with stamp scrip in Austria during the Depression of the 1930's, the incentive for not hoarding was such that people preferred to invest in replanting trees.

As ecological concerns are gradually creeping to the top of political agendas worldwide, this aspect alone justifies the experimentation suggested in this note.

These three objectives: spontaneous creation of employment, inflation control, and ecologically conscious growth are the three results that eonomists can predict from the introduction of stamp scrip.

However, even more persuasive than any theoretical discussion is compelling evidence from case histories: such systems have indeed been used in the past in a variety of cultures, sometimes for centuries, and have always had a significant positive impact.

Conclusion

Local currencies can be an effective tool for enabling communities to escape from a liquidity trap, however they appear likely to remain in common use only as long as liquidity is in short supply or inter-regional trade is heavily restricted (or, perhaps, biased).

Retaining convertibility into other stores of value (a hard currency, or a commodity such as gold) is important to avoid pitfalls like the "company store" phenomenon, where the people being paid in scrip have no way of redeeming it for goods outside a very restricted set of businesses.

Ensuring that scrip is devalued at a well understood rate is also important to keep the velocity of money high.

Postscript - Silvio Gesell and "The Ascent of The West"

The idea of local currencies was first described by Silvio Gesell, in his book "The Natural Economic Order".

Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether.

Gesell also wrote an essay entitled "The Ascent of the West", which was written to challenge the cultural pessimism of Oswald Spengler's "The Decline of the West".

Gesell hoped that humanity would gradually be able to regenerate itself under a reformed economic order and experience a new cultural renaissance.

Its worth noting that local currencies did exist prior to the (literal) Renaissance before they were replaced with centralised currencies.

Centralized currency -- invented during the Renaissance, really -- favors the kinds of business practices and centralization of power that actually works against good, honest, local commerce. In short, it favors Wal-Mart over, say, Community Supported Agriculture.

There are other kinds of money – and they were in existence until they were outlawed by kings and queens looking to centralize authority. Money that is lent into existence by a central bank will tend towards scarcity and competition. Money that is earned into existence by people in a specific place has very different properties, and works on a model of abundance.

Gesell was a German theoretical economist who grew up in Europe, before moving to Argentina in 1887. A depression stuck Argentina shortly thereafter, which caused him to study the structural problems caused by the monetary system, before moving back to Europe in 1911.

His experiences during an economic crisis at that time in Argentina led Gesell to a viewpoint substantially at odds with the Marxist analysis of the social question: the exploitation of human labour does not have its origins in the private ownership of the means of production, but rather occurs primarily in the sphere of distribution due to structural defects in the monetary system. Like the ancient Greek philosopher Aristoteles, Gesell recognised money's contradictory dual role as a medium of exchange for facilitating economic activity on the one hand and as an instrument of power capable of dominating the market on the other hand. The starting point for Gesell's investigations was the following question: How could money's characteristics as a usurious instrument of power be overcome, without eliminating its positive qualities as a neutral medium of exchange ?

He attributed this market-dominating power to two fundamental characteristics of conventional money:

Firstly, money as a medium of demand is capable of being hoarded in contrast to human labor or goods and services on the supply side of the economic equation. It can be temporarily withheld from the market for speculative purposes without its holder being exposed to significant losses.

Secondly, money enjoys the advantage of superior liquidity to goods and services. In other words, it can be put into use at almost any time or place and so enjoys a flexibility of deployment similar to that of a joker in a card game.

These two characteristics of money give its holders a privileged position over the suppliers of goods and services. This is especially true for those who hold or control large amounts of money.

They can disrupt the dynamic flow of economic activity, of purchases and sales, savings and investment. This power enables the holders of money to demand the payment of interest as a reward for agreeing to refrain from speculative hoarding thereby allowing money to circulate in the economy.

This intrinsic power of money is not dependent on its actual hoarding, but rather on its potential to disrupt economic activity which enables it to extract a tribute in the form of interest in return for allowing the "metabolic exchange" of goods and services in the "social organism". The "return on capital" is accorded priority over broader economic considerations and production becomes attuned more to the monetary interest rate than to the real needs of human beings. Long-term positive interest rates of interest disturb the balance of profit and loss necessary for the decentralized self-regulation of markets. Gesell was of the opinion that this led to a dysfunction of the social system exhibiting very complex symptoms: the non-neutrality of interest-bearing money results in an inequitable distribution of income which no longer reflects actual differences in productivity. This in turn leads to a concentration of monetary as well as of non-monetary capital and therefore to the predominance of monopolistic structures in the economy.

Since it is the holders of money who ultimately decide whether it circulates or stands still, money can't flow "automatically" like blood in the human body. The circulation and the correct dosage of the monetary supply can't be brought under effective public control; deflationary and inflationary fluctuations of the general price level are inevitable. In the course of the business cycle when declining interest rates cause large amounts of money to be withheld from the market until the outlook for profitable investments improves, the result is economic stagnation and unemployment.

... to a Neutral Servant of Economic Activity

In order to deprive money of its power, Gesell did not advocate recourse to measures aimed at outlawing the taking of interest such as the canonical prohibition of medieval. On the contrary, he envisaged structural changes in the monetary system involving the imposition of carrying costs on the medium of exchange, thereby counteracting the tendency to hoard and neutralising the liquidity advantage of conventional money. The imposition of such carrying costs on liquid monetary assets - comparable to a demurrage fee for freight containers in the field of transport economics - would deprive money of its power to dominate the market while allowing it to fulfil its designated function as a medium of exchange facilitating economic activity. Counteracting disruptions in the circulation of the medium of exchange due to speculative hoarding would allow the quantity and velocity of the monetary supply to be periodically adjusted to match the volume of production and the overall level of economic activity in such a way that the purchasing power of the monetary unit could be made to possess the same long-term stability as other weights and measures.

In his earliest works Gesell referred in particular to "rusting bank notes" as a method for implementing an "organic reform" of the monetary system. Money which had hitherto been "dead foreign matter" with respect to both the social system and the natural world, would thus be integrated into the eternal cycle of life and death, becoming transitory and losing its characteristic of limitless self-multiplication by means of simple and compound interest. Such a reform of the monetary system would constitute a regulative holistic therapy; by removing the cause of disruptions in monetary circulation Gesell envisaged that the self-healing powers of the dysfunctional social "organism" would gradually increase allowing it to recover from the diverse economic and structural symptoms of crisis, ultimately reaching a state of equilibrium, in harmony with the rest of the natural order.

In his main work, Die Natürliche Wirtschaftsordnung durch Freiland und Freigeld (The Natural Economic Order through Free and and Free Money), published in Berlin and Bern in 1916, Gesell explained in detail how the supply and demand of capital would be balanced in the case of uninterrupted currency circulation so that a reduction of the real rate of interest below the presently existing barrier of around 3-4% would become possible. Gesell used the term "basic interest" (Urzins) to denote this pure monetary interest rate of around 3-4% which is found to vary little historically. It represents the tribute of the working people to the power of money and gives rise to levels of unearned income far in excess of that suggested by its magnitude. Gesell predicted that his proposed currency reform would gradually cause the "basic interest" component to disappear from the monetary loan rate leaving only a risk premium and an administrative charge to allow lending institutions to cover their costs. Fluctuations of the market rate of interest around a new equilibrium point close to zero would allow a more effectively decentralised channeling of savings into appropriate investments. Free Money (Freigeld), a medium of exchange liberated from the historical tribute of "basic interest", would be neutral in its impact on distribution and could no longer influence the nature and extent of production to the disadvantage of producers and consumers. Gesell envisaged that access to the complete proceeds of labour brought about by the elimination of "basic interest" would enable large sections of the population to give up wage- and salary-oriented employment and to work in a more autonomous manner in private and cooperative business organisations.

In 1919, Gesell was appointed "People's Representative for Finances" in the short-lived Bavarian Soviet Republic and immediately wrote a law for the creation of Freigeld. His term of office lasted only 7 days, and he was fortunate to escape a charge of treason after the overthrow of the Soviet Republic and its integration back into Germany.

Gesell's ideas spawned a political movement in Germany called "Freiwirtschaft" (Free Economy) party, which contested the 1932 elections without success. After the Nazi Party's seizure of power in 1933, many Free Economy supporters supported the new regime in the hope that Hitler might act on the earlier rhetoric of Gottfried Feder concerning "the smashing of interest-slavery". This proved to be a false hope and in the spring of 1934 the various Free Economy organisations which had not already voluntarily disbanded were finally outlawed.

Given the final destination of the pre-war Free Economy movement, I figured it was worth checking to see if Gesell held some of the more unpalatable views common to the time, such the "blood and soil" beliefs held by some of the greens that joined the Nazi "rogue coalition". It seems from this account that Gesell was no nationalist though, and explicitly rejected this line of thought.

Towards the end of the last century Gesell extended his vision of socio-economic reform to include reform of the system of land tenure. He derived inspiration in this respect from the work of the North-American land reformer Henry George (1839-1897), author of Progress and Poverty, whose ideas about a Single Tax on the rental value of land became known in Germany through the activity of land reformers like Michael Flurscheim (1844-1912) and Adolf Damaschke (1865-1935).

In contrast to Damaschke, who only advocated taxing the increase in values for the benefit of the community while retaining the principle of private ownership of land, Gesell's reform proposals followed those of Flurscheim who called for the transfer of land into public ownership, compensating the former owners and thereafter leasing the land for private use to the highest bidder. Gesell argued that as long as land remains a tradeable commodity and an object of speculative profit, the organic connection of human beings with the earth is disturbed.

In contrast to the proponents of nationalist or racially-oriented Blut und Boden ideologies, Gesell rejected the association of "blood" with "land". As a widely travelled citizen of the world he viewed the whole earth as an integral organ of every individual. All people should be free to travel over the surface of the earth without hinderance and settle anywhere regardless of their place of birth, color or religion. ...

From his earliest writings onwards Gesell distanced himself from racist ideologies, aiming to develop an objective critique of structural defects in the economic order free from the subjective racial prejudice of anti-Semitic demagogues whose diatribes against so-called "Jewish" usurers he criticised as a "colossal injustice". Like many of his contemporaries he was greatly influenced by Darwin's Theory of Evolution and viewed his program of reform as a means for encouraging a more healthy evolution of human society. However, Gesell should not be classified as a "Social Darwinist" because he believed that extremes of wealth and poverty reflect structural defects in the economic order rather than real differences in aptitude and productivity. Opposed to ultra-nationalist triumphalism he advocated the promotion of mutual understanding between Germany and its eastern and western neighbours. He called for the abandonment of expansionist politics and the formation of a voluntary confederation of European states to promote international cooperation. Gesell also drew up proposals for an international post-capitalist monetary order, advocating an open world market without capitalist monopolies, customs frontiers, trade protectionism and colonial conquest. In contrast to subsequently established institutions such as the International Monetary Fund and World Bank, which act on behalf of the powerful within the existing framework of unjust structures, or the present preparations for European Monetary Union, Gesell called for the establishment of an International Valuta Association, which would issue and manage a neutral international monetary unit freely convertible into the national currency units of the member states, operating in such a way that equitable international economic relations could be established on the basis of global free trade.

Gesell's political leanings seem to be best described as "individualist-mutualist". I like Robert Anton Wilson's explanation of individualist-mutualist theory, so I'll let him outline the idea and a few alternatives to Gesell's ideas regarding money. From "Left and Right: A Non-Euclidean Perspective ":

In the late '50s, I began to read widely in economic "science" (or speculation) again, a subject that had bored the bejesus out of me since I overthrew the Marxist Machine in my brain ten years earlier. I became fascinated with a number of alternatives - or "excluded middles" - that transcend the hackneyed debate between monopoly Capitalism and totalitarian Socialism. My favorite among these alternatives was, and to some extent still is, the individualist-mutualist anarchism of Proudhon, Jossiah Warren, S.P. Andrews, Lysander Spooner and Benjamin Tucker. I do not have a real Faith that this system would work out as well in practice as it sounds in theory, but as theory it still seems to me one of the best ideas I ever encountered.

This form of anarchism is called "individualist" because it regards the absolute liberty of the individual as a supreme goal to be attained; it is called "mutualist" because it believes such liberty can only be attained by a system of mutual consent, based on contracts that are to the advantage of all. In this Utopia, free competition and free cooperation are both encouraged; it is assumed persons and groups will decide to compete or to cooperate based on the concrete specifics of each case. (This appeals to my "existentialism" again, you see.)

Land monopolies are discouraged in individualist-mutualist anarchism by abolishing State laws granting ownership to those who neither occupy nor use the land; "ownership," it is predicted, will then only be contractually recognized where the "owner" actually occupies and used the land, but not where he charges "rent" to occupy or use it. The monopoly on currency, granted by the State, is also abolished, and any commune, group, syndicate, etc., can issue its own competing currency; it is claimed that this will drive interest down to approsximately zero. With rent at zero and interest near zero, it is argued that the alleged goal of socialism (abolition of exploitation) will be achieved by free contract, without coercion or totalitarian Statism.

That is, the individualist-mutualist model argues that the land and money monopolies are the "bugger factors" that prevent Free Enterprise from producing the marvelous results expected by Adam Smith. With land and money monopolies abolished, it is predicted that competition (where there is no existential motive for cooperation) and cooperation (where this is recognized as being to the advantage of all) will prevent other monopolies from arising.

Since monopolized police forces are notoriously graft-ridden and underlie the power of the state to bully and coerce, competing protection systems will be available in an individualist-mutualist system, You won't have to pay "taxes" to support a Protection Racket that is actually oppressing rather than protecting you. You will only pay dues, where you think it prudent, to protection agencies that actual perform a service you want and need. In general, every commune or syndicate will make its own rules of the game, but the mutualist-individualist tradition holds that, by experience, most communes will choose the systems that maximize liberty and minimize coercion.

Being wary of Correct Answer Machines, I also studied and have given much serious consideration to other "Utopian" socio-economic theories. I am still fond of the system of Henry George (in which no rent is allowed, but free enterprise is otherwise preserved); but I also like the ideas of Silvio Gesell (who would also abolish rent and all taxes but one--a demmurage tax on currency, which should theoretically abolish interest by a different gimmick than the competing currencies of the mutualists.)

I also see possible merit in the economics of C.H. Douglas, who invented the National Dividend--lately re-emergent, somewhat mutated, as Theobold's Guaranteed Annual Wage and/or Friedman's Negative Income Tax. And I am intrigued by the proposal of Pope Leo XIII that workers should own the majority of stock in their companies.

Most interesting of recent Utopias to me is that of Buckminster Fuller in which money is abolished, and computers manage the economy, programmed with a prime directive to _advantage_ all without _disadvantaging_ any -- the same goal sought by the mutualist system of basing society entirely on negotiated contract.

Further Reading:

* Bernard A. Lietaer - A Strategy for a Convertible Currency

* Shwarz, Fritz - The Experiment in Worgl

* Werner Onken - A Market Economy without Capitalism

* FEASTA - Money Systems

* Transaction.net

* Tim Boucher - Free (Online) Banking & The Free Banking Era

Cross-posted from Peak Energy.

Thanks Gav. Local currencies are seeing a resurgence here in Wisconsin. Fiat currency is fine as long as it is back by something real and that people have trust in it. One way to really get a local currency some momentum is to have local leaders persuade the utility company to accept the local currency as 5-10% of peoples electric bill. Then it reaches a tipping point of sorts.

On a related note, as bad as the financial crisis is, if you look at the world in terms of real capital (e.g. natural capital), the recent financial losses are dwarfed by 'monetary' losses in nature

The global economy is losing more money from the disappearance of forests than through the current banking crisis, according to an EU-commissioned study.

It puts the annual cost of forest loss at between $2 trillion and $5 trillion.

Thats an amazing stat - Bucky Fuller had some interesting numbers regarding natural capital too (especially his valuation of barrels of oil, if memory serves me correctly).

It would be interesting to hear from everyone who knows of a local currency operating in their area - I couldn't find any sort of conclusive survey of the state of play globally, other than Evans-Pritchard's numbers for central Europe - but one guy I read cited a number north of 2000 (without any supporting data though).

For those inclined, please give this a vote on reddit too :

http://www.reddit.com/r/Economics/comments/76jfd/locabucks_are_local_cur...

Maybe we need a new global currency called, what else, "The Joule". I'll think I'll get to work and dust off my graphic arts skills and come up with a design.

Better. Tie the currency to BTU's.

No inflation. No indexing necessary.

No!
Just say no to funny units!

Use the kilowatt*hour as currency.

The kilowatt*hour is worth $0.10
The joule(electric) is worth $2.78E-08
The megajoule(electric) is worth $0.0278
The BTU(electric) is worth $2.93E-05
The thermal versions are worth even less, about a third.

Carnot efficiency dictates that the thermal unit is worth less than the electric one. An electric joule is almost directly equivalent to work, given that the efficiency of good motors is very high.

One must distinguish between electric and thermal units as in most applications thermal units have to be derated by a factor of about 3.
One exception is home heat. However, with a heat pump, thermal energy at a power plant is converted to thermal energy at the home at a 1:1 (or slightly better) ratio and electric energy from the power plant at a ratio of better than 3:1. So even for heating, an electric BTU/joule is worth more than a thermal one.

In transportation, the internal combustion engine has similar (worse actually) losses to the power plant and this situation is actually improved by converting to electricity first. Thus even for transportation, an electric BTU/joule is worth more than a thermal one.

One could argue an electric unit also slightly favors renewable energy (particularly wind) over fossil fuels, though in practice fossil fuel values would be simply be proportional to the average electricity they can be used to produce - and more efficient and less efficient conversion means would be very visibly rewarded and penalized as a plant that required 1.1 "KWH" of fossil fuels to make 1KWH of electricity would be at a disadvantage over one that could use 0.95KWH.

One catch, however, is that energy is likely to get more expensive thus providing positive interest for hording money if the currency notes aren't made to "rust". There would be one way obvious way to gain interest with a rusting energy currency: build a carbon free power plant. There would be others. Planting seeds. You spend todays money to be paid back in tommorrows. Probably any real investment (i.e. in actual production of energy or goods) would effectively yield "interest" as it would hold value over time. Fake financial "investments" would, at first glance, appear to lose value. Hoarded money would lose value. Hoarding fuel could be a problem.

To tie the currency to energy and yet have it rust requires stamps on bills and monthly penalties on bank accounts.

The selective inflation only when the currency is hoarded is an interesting idea. Retirement accounts for those already retired might need some special treatment (or be invested in energy production).

Ultimately, though, financial instruments (like stocks) might still work. You can buy stock in energy or food production. You can buy stock in other means of producing goods. And if that works, then derivatives will work. And who knows what kind of new contrivances will be developed and old ones will still work. There are a lot of other flaws in the economy that still aren't fixed. One could argue that the real estate disaster could still happen under such a system. Mortgages (even at 0%) returns money tomorrow in exchange for money today. Thus, it could be highly desirable as a way to hoard money, to the point of creating a bubble.

Money equals power and confers an ability to abuse that power to gain more money and power without extensive checks and balances. Just changing the flavor of money doesn't fix that.

I focused on the rust and energy basis in the above comment and ignored the local aspect and some others, indeed treating it as a national currency.
There was also some confusion about when and where the stamps where issued.

The local aspect has some interesting ramifications, some financial and others psychological.

First, lets look at the stamps. These are effectively a tax on money. Not a tax on earning money (income tax) or a tax on spending money (sales tax). In essence, this is equivalent to simply printing more money (straight inflation) each month. One difference is there is a hidden tax, that of the hassle of getting the money stamped which may have helped, beyond the inflationary aspect, in discouraging hording though end the end somebody was holding money at the end of the month and had to get it stamped. It isn't clear whether, if you failed to get the money stamped for, say, 3 months whether it was worthless or whether you had to buy three stamps.

Now, look at the 98% exchange rate to non-local currency. This encourages local consumption. An equivalent would be to tax non-local transactions (effectively an interstate or intercity commerce tax). In the US we have the opposite system. Local retail is taxed (sales tax) but interstate commerce can to some extent escape that (in states where they don't have offices). There are proposals to fix that with the original ones being objectionally onerous by requiring businesses to file returns with every state and now getting more reasonable in having a central clearinghouse. One could easily extend that regime to tax interstate commerce at a higher rate. There is also a non-governmental tax on interstate commerce - shipping cost/fuel but fuel has traditionally been at an artificially low cost. Assuming one had a interstate sales tax, a municipality could charge 2% less tax for local transactions; this could be justified in a revenue sense because since the money stays local they get to tax it again and again. But sales tax is still fundamentally different from a money tax. And one could argue that it was taxing money's existance rather than its movement (income tax from employment and sales tax from commerce) was the key aspect (or at least a significant one) that ultimately gave it velocity. Income tax, sales tax, capital gains tax, corporate income taxes all tax money for moving (something the flat tax people should take note of). Property tax is different in that it doesn't tax movement of money but taxes hoarding of certain tangible assets.

There is another aspect of a local currency: trust. The local currency was a fiat currency just as a national currency but its issuance was local. It rarely went very far out of your sight. Complicated contrivances like the stock market and arcane financial instruments that people don't really understand probably didn't exist for that currency and thus it was easier to understand and have confidence in and harder for people to charge money out of proportion to their services. Some of these complicated financial systems, however, do serve actual purposes.

The local currency was issued by the local government rather than being mostly issued by banks and was initially less leveraged (if you overlook the questionable stability of the national currency held as collateral).

The local currency was essentially facilitating a barter system. National currencies do this as well. If a local currency had not been issued, people would have had to resort to barter. The local currency provided a way to tax the barter system and use it for things like keeping government employees employed, aiding those who needed it most, and creating infrastructure (which ultimately creates wealth). Taxes on the money (within reason) is a small price to pay for the increased efficiency of barter. The government basically takes a percentage of the GDP gain and uses it for government services which is a win-win proposition.

The local currency was more likely to be embraced by those who did or could use local products, such as someone who made food products from local harvests. Thus it was easier to spend on local goods. And this lowered transportation costs and other parasitic costs. For every "dollar" spent on imports to your town, you probably see less money coming back for your exports. The further goods and money traveled, the more prone they would be to legitimate and illegitimate parasitic costs.

Ultimately, you do have to have interstate and international commerce. If you want to manufacture a wind turbine, for example, you need copper which will probably come from Chile. You need steel, concrete, and electronic components. If you want to install one, you need to buy a wind turbine that probably isn't going to be available from a local manufacturer. The local currency in this example allowed this, it just taxed it at 2%.

Both confidence in the local currency and lack of confidence may have contributed to its success. On the one hand, one could be reasonably confident that if you accepted the currency today for goods or services you could immediately turn around and spend it. On the other hand, there was less confidence you could spend it tomorrow. You were guaranteed that it would be worth less next month (and this was perhaps more psychologically apparent than inflation) and it might be worth nothing tomorrow or in a few days. Thus it was a hot potato. You were better off spending it on something you needed, or at least had intrinsic barter value, than holding it but you were better off holding it or exchanging it for something tangible than to buy something of little value. So, maybe they hit on the right balance of confidence.

Hoarding of goods may have been significant but at least that kept the money in circulation and the economy running (though it could lead to resource shortages). And as long as the money is circulating there is some confidence. In a depression, there isn't (necessarily) a shortage of materials or labor, there is just a failure of the economic system. People still need goods and services and need the jobs that producing those entail.

Thus, a couple key aspects that are different than our current economy seem to have been that money was taxed rather than the movement of money and that non-local commerce was taxed. The first aspect is similar to inflation but inflation is the result of governments printing money out of proportion to the growth of productivity - which is ok if you spend it on infrastructure that causes productivity to grow.

At the very least, energy dollars could provide a way to help keep the electric on. They utility could pay their workers in energy coupons which could be traded for things the workers need to live with people who then use those coupons for trade or to reduce their electric bills. Additional money is still needed for fuel, but people have an easier time coming up with the reduced amount of money if they can grow food in their garden or rent a room in exchange for energy coupons.

Outstanding. I like thinking of electric coupons as dollars,
BTU notes as, then, a lesser amount, then.

But electricity(value added) is less fungible as a "commodity" that would be
paid as the coupons/notes were turned into the "Treasury"
for redemption.

Sincerely yours,
James

The technocracy movement has had that same idea.

The benefit of 'watts' would be a destroyable currency. But they are not storable - thus a poor choice for currency.

The benefit of 'watts' would be a destroyable currency. But they are not storable - thus a poor choice for currency.

but isn't that the point

surely a currencey that was backed by the reality of depletion and finite non renewable and/or fixed traffic flows of renewable energy is eaxctly what we need?

What is meant by backing here? In order to backup a currency in my meaning of the word, a currency backed by "x" means you can use the currency, reliably, to buy "x". Backing with gold when you don't have gold is meaningless. Backing with energy when you don't have energy, likewise. I've made a theoretical proposal that if the government nationalized geothermal energy, developed it and then had a supply of it, you could have an energy-backed national currency. It won't be done and probably a good thing since to be benign we would have to have national governments that acted in the public interest. Transition to such a type of governance is problematical. So now we have a currency theoretically backed by the government's ability to tax its citizens and require those taxes be paid in its currency. In the midst of astonishing levels of government debt and needs to create more one of the few things our presidential candidates agree on is the need to cut taxes. True, McCain would cut taxes on the rich and Obama on the poor, but cutting taxes is not disputed. McCain's strategy has a current difficulty. A great many people who were expecting to get rich soon (or sometime) are now beginning to worry just a bit about becoming poor. Losing your house, your job, your health insurance can do that to you. Even if it just happens to a friend or a brother-in-law, it can concentrate the mind as they say.

Having the local currency "backed" by the city government (as described in the article) seems to be a key factor because then it is ALL the citizens money to exchange and not just the experiment of a small subset of the citizens.

If local taxes, utilities, newspaper service, school fees, public transit, taxi service, hospital fees, and other economic interactions that the WHOLE community participates in will also accept the local currency (at least as partial payment) then the local currency could easily replace a decent percentage of the national currency that swirls amongst a community.

But I don't quite understand all the details behind the stamps...

It sounds like you would take your local currency "somewhere" each month to get it stamped, and that the stamp was some percentage of the face value (like 2 cents per buck).

But where and who is that "somewhere"?
What is the stamp fee used for?
What happens when all the spaces are stamped? Is the buck retired or replaced?
How is additional currency added to the system?
(the article says that a deposit of city funds backed up the original issue of bucks - perhaps more funds had to be deposited - perhaps the stamp fees were used)

I'm sorry, but as long as the local currency is still backed by nothing but will of the local government aka fiat. It is still as bad as the national currency, and shares the same fate. It just has not gotten there yet.
it would be much simpler if the currency is backed by something that is hard to acquire or horde, like say human labor. for example 1 local buck is exchangeable for 1 hour of human labor.

Backing it with something as vague as an hour of labor seems to be a sure path to failure - just because nobody can agree on the value of that mysterious hour (such as "My hour of fixing you plumbing is more valuable than your hour of babysitting my kid"

Having it backed with something seems important though. Which is why I think the Austrian city was so successful after backing it with their savings account.

And let's not forget, an hour from Lazy Larry the plumber may not be worth as much as an hour from Hardwork Harry the plumber.

One of the repeated failure modes of local currencies is trying to use them to accomplish goals beyond what they are suited for. Having them backed by hours of labor is often seen as a way of having a more equitable society. (My hour is worth just as much as yours!) I think there are lots of reasons for making things more equal in certain ways, but trying to do it via a time based currency means the currency will have very limited use at best.

But your hour is definitely not worth as much as mine, for suitable values of you and me.

Differential pay serves a very good purpose when the differential is actually based on merit (or, in some cases other values like risk). The problem isn't that pay differentials exist it is that the market values of people's work have been badly distorted. When people are paid based on what they actually contribute (or could contribute, if they had money) to the economy, then it facilitates putting resources in the right hands, encourages education, etc.

Equal value of labor can work to a very limited extent when it is a small part of the overall economy. A doctor may occasionally take "your" hour sweeping his floor at home as trade for an hour of medical service because he is no more productive while sweeping the floor than you are (in some cases even less) but he is better off spending 15 minutes with a paying patient and using that to hire a maid. But he can't pay for medical school, an office, staff, equipment, etc. doing this full time. Thus, 3/4 of the doctors time is charity, not barter.
Ok, in some cases doctors are way overpaid but in other cases they are not. But one hour of good janitorial service isn't worth an hour of good medical service, any way you slice it.

A good engineer's services are worth more than a good technician's services. A good technicians services are worth more than a good short order cook's services. And a good short order cook's services are worth more than a bad short order cook's services.

Consider what two different able-bodied people can do without interacting with the economy. With the same resources (land, trees, basic tools, access to a library, etc.), one person may be able to build a large log cabin, and grow more than enough food for himself and another may manage a structurally unsound shack and barely enough food to survive, if that. Their labor isn't equal. An economy should allow both to do better, through efficiency, economy of scale, and allowing people to take advantage of their strengths and let someone else fill in for their weaknesses, than either can do by themselves, not drag one person down to the other person's level. If you assign equal value to everyones work, you either drag A down to B's level or deny B access to A's services entirely.

All that is quite obvious to some of us yet basing local currencies that way retains popularity, unfortunately.

I have the same questions as you. I hope someone will answer them. However, if all you had to do to keep your currency valuable was to take it somewhere to get stamped, then that would not prevent hoarding. If the banks issued the stamps, then the banks would be free to hoard. If the gov issues the stamps on money paid to it, then it would seem that the government would inevitably grow and grow in order to keep the velocity of money moving fast enough for a growing economy.

Money is a symbol of value. Whether it be gold, paper or kauri shells, money represents value, it has no value of itself, when used as money.
If money has to represent the value of what is available to a community, a depreciating currency is exactly right : everything else depreciates, so money should too.
In any case, as things go, money has become largely virtual : tens and hundreds of trillions of dollars have been reported as composing the volume of CDO's, CDS's and other debt derivatives. The amount of money owed no longer fits to the amount of life produced, consequently, lots of people will have miserable lives, and some happy few will go on quite comfortably, even as they frown more often.
I think a depreciating currency is the best idea since the wheel, baked bread and beer.

"It sounds like you would take your local currency "somewhere" each month to get it stamped, and that the stamp was some percentage of the face value (like 2 cents per buck).But where and who is that "somewhere"?"

The local council offices.

The shilling was issued by them, and but for the shilling to be legal tender it had to have a current stamp on it, a stamp of this month. This stamp cost 0.01 shilling.

Because the money lost value each month, this encouraged people to spend it quickly. Thus demand for goods and services was stimulated, and supply rose to meet it - ie the local economy grew.

"What is the stamp fee used for?"

The same thing council fees are used for nowadays - to pay council employees, fund works and so on.

"What happens when all the spaces are stamped? Is the buck retired or replaced?"

It's replaced - at a cost of 1% of its value.

"How is additional currency added to the system?"

By printing more. Just like regular currency.

"(the article says that a deposit of city funds backed up the original issue of bucks - perhaps more funds had to be deposited - perhaps the stamp fees were used)"

Nowadays, currency is created by debts. Someone deposits $1 million in the bank, the bank can now lend out $1 million, provided the depositor doesn't expect to withdraw their money tomorrow. In practice banks have thousands of depositors, it's unlikely they'll all withdraw their deposits tomorrow at the same time, so the bank can lend out that $1 million - in fact they can lend out even more, $10 million in total.

Obviously banks can get carried away with this, so the law sets down a reserve requirement, how much do they have to have in deposits compared to how much they lend out - historically this varies between 1% and 10%; that is, for every $1 on deposit, they can lend out $10 to $100. This fractional reserve requirement is an important thing.

Worgl, likewise, had a fractional reserve requirement, but it began as 100% - they could issue no more local currency than they had national currency.

It thus looks like they were effectively doubling the currency they had available, so we'd expect a doubling of the government part of the economy (road-building, etc). But in practice it had a greater effect. That's because the money didn't sit still, but circulated quickly within the system.

If someone got paid 100 local shillings for his day's labouring work on 20th August, he knew that on 1st September it'd become effectively 99 local shillings. So he went and spent it on (say) a 100 shilling suit. Then the tailor on the 21st August took the 100 shillings and bought (say) a guitar for his son's birthday. Then the guitar owner took the 100 shillings on the 22nd and bought (say) a week's groceries. Then the grocery shop owner took his 100 shilling on the 23rd and used it to hire the labourer for a week.

Thus, because the money circulates quickly, it stimulates a lot of activity. The 100 shillings of cash brought out two weeks of work from the labourer, one suit, a guitar, and a week's groceries.

That's the thing about money. The total amount there is doesn't mean much in terms of productive activity. What matters is how much it circulates around. So that 100 households earning $10,000 each do a lot more in terms of stimulating productive activity than 1 household earning $1 million. The 100 poor households spend all their money, and quickly; the 1 rich household will hold onto a lot of their money.

Money is the blood of the economic body; it must circulate freely, not be clotted up, in order to keep the body lively.

Geoff Davies talks about this a lot in his book Economia, which I recommend for a very good and clear description of the way money works.

What an excellent insight! Completely true! There are also water losses and arable land losses, fishery losses, etc. It adds up. Since all currency has one foot in nature, this represents a real loss in corresponding money value. this must be compensated for by increasing the quantity of money in proportion ... to its unit decrease in value.

From the value viewpoint, the amount of interest to be gained by putting it into use is marginal (as is its taxability, which is now irrelevant). It is difficult to make the marginal the entire focus of what a practical economy can produce or consume; this can only be done by greatly expanding the quantity of money in use and making speculation tools available that have nothing to do with production yet magnify yield, or return on money lent.

Respectfully disagreeing with the original Big Gav post, I believe the benefits of yield far outweigh the costs. There is a prejudice against yield, since most people connect 'interest' with 'expense' as most people are borrowers, they are compelled by advertising of circumstance to be so. The 'interest earned' aspect of money is more important, because it is a human component that can be added to the nature ocmponent, it allows for the accumulation of cash-money or 'specie' wealth, which in turn becomes the capital basis for more investments. The alternative to base capital on ever- encreasing more cheaply available credit ... which indeed centralizes economic power and places dangerous emphasis on money velocity.

Many of the characteristics of de- centralized or 'niche' money have been usurped to a large degree by modern currencies, mainly the loss of yield or the return on money at both the local and macro level. This is perhaps not an issue in smaller spheres where the difference between a 'demurrage charge' and interest returned would be small, but on a national level, the loss of yield has had the consequence of turning a nation of thrifty (and conservative) savers into a nation of (currently) dismayed savers and a small, but influential group of wild speculators.

It is confusing to view central bank money in the context of the liquidity breakdown; it's easier to examine the pre-crash circumstances. There hasn't been a money monopoly or a 'money hoarding blackmail system' but the wide availability of cheap credit. Since it earns little, any return must be earned by volume of lending and turnover. This process requires in an excess of liquidity; the sum of many loans piled on top of each other each earning a very small amount. The leverage to return ratio has been magnified; money has been accumulated, but the accompanying risk has been accumulated as well. The resulting 'wealthism' - having the appearance of money (hoarding) wealth while actually being insolvent and over leveraged - has propelled us into our current dire circumstance.

A well managed centralized fiat money system is a great benefit to all citizens which creates a general and widespread sustainable prosperity. Unfortunately, I cannot think of a practical example of such a system ...

A 'local currency' of note is the Icelandic Krona. It wasn't outlawed, simply speculated out of existence. Any successful local currency would suffer the same fate, unfortunately. 'Successful' means having the wealth- carrying characteristics of specie/coin beyond a very small area or group of people. Since this is a negative feedback loop, it limits the utility of any 'niche' currency.

On the other hand ... A more familiar form of niche currency is coupons. Coupon issuance may be a way that otherwise obsolete businesses like airlines and 'home improvement centers' may stay in business. If one can use Home Depot coupons to pay the gas bill ... and Home Depot can charge 10% a year ... that would probably keep them in business. Home Depot has sufficient capital to fend off speculators (it's bigger and more conservative than Iceland) and a legal team that could stave off the Treasury in the courts.

The Home Depot National Bank. What a nightmare!

steve writes: "I believe the benefits of yield far outweigh the costs. There is a prejudice against yield, since most people connect 'interest' with 'expense' as most people are borrowers, they are compelled by advertising of circumstance to be so. The 'interest earned' aspect of money is more important, because it is a human component that can be added to the nature ocmponent, it allows for the accumulation of cash-money or 'specie' wealth, which in turn becomes the capital basis for more investments."

Steve — the main objection to interest currently is that it fuels perpetual economic growth, which is responsible for bringing humanity to the brink of global resource depletion. The money to pay back the interest has to come from somewhere, and it comes from monetizing natural resources and cannibalizing productive human resources in the form of bankruptcies, foreclosures, etc.

"...but on a national level, the loss of yield has had the consequence of turning a nation of thrifty (and conservative) savers into a nation of (currently) dismayed savers and a small, but influential group of wild speculators."

That's interesting, do you have an example of demurrage currency that has been used on a large scale? It is very true that what works at a local level can't always be implemented successfully at national levels. I'm also not sure I understand what would motivate speculation in a demurrage currency system. It seems like it's guaranteed loss of value would mean there's nothing to speculate... the only choice it provides, really, is to trade it for something that depreciates less rapidly.

Any successful local currency would suffer the same fate, unfortunately. 'Successful' means having the wealth- carrying characteristics of specie/coin beyond a very small area or group of people. Since this is a negative feedback loop, it limits the utility of any 'niche' currency.

Local currencies are designed to maintain wealth circulation within a geographic area and not beyond. They are supposed to act as a barrier against wealth drainage out of the area.

One last note... can you explain the Home Depot gas bill scheme in more detail? I'm not following how that would work.

Thank you, I appreciate the conversation.

Steve — the main objection to interest currently is that it fuels perpetual economic growth, which is responsible for bringing humanity to the brink of global resource depletion. The money to pay back the interest has to come from somewhere, and it comes from monetizing natural resources and cannibalizing productive human resources in the form of bankruptcies, foreclosures, etc.

In theory, this is true, but in actuality, the opposite happens. First of all, resource depletion is an outcome of population growth and social mis-management rather than money or interest rate policy. An example would be the Anasazi or Maya peoples who had (as far as I can tell) no monetary policy but did strip their resource bases to nothing. In the competition for money in a low- yield environment, the irresponsible have an unfair advantage as they can promise greater yields and deliver same when circumstances are favorable.

When there is large liquidity the returns from interest are small. Largely, this is a function of supply and demand. Despite the apperance of exponential yields accumulating to monstrous amounts, in reality, the pressing down of interest rates by central bank market activites and by bank securiization strategies makes these kinds of returns impossible. One only has to compare saving and interest rates since 1982 to see that there has been no money to be made by saving. So ... people don't do it! The only savings activity taking place in the US currently is subsidised as in 401k retirement plans and most of these plans involve speculation in the asset and debt makets.

Secondly, for most classes including the most productive middle classes, there has been (since 1992) little or no actual productive economic growth that cannot be attributed to general population increase. The vast majority of Americans have had little return on either skills, education certainly not on savings. Growth for the past few years in the USA has been a atatistical anomaly that measures the 'action' in financial casinos as growth, consumption from overseas production as growth, inflation as growth. Yes, the money system monetizes natural resources (and fails to monetize others) but it monetizes itself much more profitably since there is no theoretical limit to such monetization. Resources tend to orbit near their utility; financial instruments are abstract, with no utility other than their power to compel, they are advertizing media for themselves.

Thirdly, the outcomes of bankruptcies and foreclosures is a the natural outcome of speculation because speculation multipies risk exposure as it multiplies it chances for yield. Eventually, risk cannot be contained ... In the West, the 'single function' currency allows non-productive speculative claims to be made against productive parts of economies. This is a serious flaw in the single function regime. Now, the question is it possible to have an economic system that is infinite (has infinite money supply growth and therefore allows unlimited opportunities for speculation) and the answer is obviously 'yes'. Whether this kind of economy could operate safely alongside one that involves actual production is hard to answer. Today, the answer is obviously no, because of the single function currency.

A serious examination of simultaneous currencies (eliminating uniform currency functions) has never been made to my knowledge by mainstream economists.

"...but on a national level, the loss of yield has had the consequence of turning a nation of thrifty (and conservative) savers into a nation of (currently) dismayed savers and a small, but influential group of wild speculators."

That's interesting, do you have an example of demurrage currency that has been used on a large scale? It is very true that what works at a local level can't always be implemented successfully at national levels.

Up until recently, the US dollar! Its rate of depreciation was not printed on it, but it has been common knowledge (that knowledge serving the same purpose) that it loses (or lost or will lose) value at a faily high rate over time. The best thing to do with a dollar is get rid of it - spend it! Now this issue of speculation vs. savings is important.

I'm also not sure I understand what would motivate speculation in a demurrage currency system. It seems like it's guaranteed loss of value would mean there's nothing to speculate... the only choice it provides, really, is to trade it for something that depreciates less rapidly.

You are right, and depreciation is the mother of invention! In any system, there will be a demand for yield; to earn money without toil, to earn for descendents, to earn for a rainy day. The result is a 'race' between the rate of depreciation (demurrage) on one hand, and what can be gained by using this depreciating 'money' as collateral in a speculative environment. An example is the (late, lamented) Icelandic Krona. This money was used as basis by the three large Icelandic banks to leverage speculative lending in currencies other than the Krona. This speculation had the effect of depressing the value of the Krona further, which required more leverage by the banks upon it to keep pace - the continued depreciation (demurrage) of the Krona itself beoming the risk in the regime.

These banks made every sort of loan to anyone upright around the world in the hunt for yield. The initial result was an influx of speculative returns that allowed the Icelanders to build ugly houses, drive giant SUV's, wear 'luxury shoes' and carry 'luxury handbags' -sounds familiar? When the speculations became unfundable, the 'demurrage risk' of the Krona accelerated past the rate that ANY speculation would support. The result was bankruptcy of the whole country.

Ths US ought to use some of the bailout money and buy Iceland, I'm dead serious! It would cost a couple hundred billion dollars to buy the banks, the banks' troubled assets, all the depreciated Krona and the country's obligations. Iceland, the 51st State!

This is the key to any demurrage regime; if the rate of depreciation is high enough to thwart speculation it would be so high as to render the currency valueless!

Consider Gresham's Law, which governs this sort of activity. The bad (the niche currency) drives out the good (the national currency). While the niche currency in a small town in Austria did not leave a speculative footprint like Iceland's, it certainly attracted speculation, as circumstances allowed its tendencies to become well known. There would have been a 'black money market' trading the local currency against the government bills which would have depreciated one currency against the other. Eventually, this speculation would have forced a 'run' on the niche money which would have eliminated the town's 'reserve' of government cash ... that being the goal of the black money market operators in the first place.

In other words, the long term issue with any niche currency is to be just bad enough ... but, to keep from becoming 'terrible', where the next step is worthlessness.

Local currencies are designed to maintain wealth circulation within a geographic area and not beyond. They are supposed to act as a barrier against wealth drainage out of the area.

This presupposes wealth exists in an area to begin with. Wealth is the accumulation of capital and without yield capital dissipates. Everyone in the World is living this right now! Niche currencies that exist within dominant currencies are reactions to deflation and the tendency to hoard; where there is little commerce to earn a fraction from - there is no yield, in other words. Where there is no yield, there is no wealth to conserve. In such a state, the niche currency is a 'wealth substitute'. The Worgl experiment WAS actually a good example of a well- run fractional- reserve- lending fiat regime ... :) An opposite exmaple is Haiti, which would have little wealth regardless of what form it currencies took.

Some things to keep in mind:

The dual currency idea is one I've had for a long time; one 'hard money' convertible 'Gold Dollars' that would be useful for saving and productive investment and a second 'fiat money' non- convertible (electronic) currency that would be used for financial speculation. (I had this idea as a way to eliminate the drug trade as the fiat regime equates currently worthless paper money with a transient drug 'high', convertible cash would be too valuable to waste on drugs but would be hoarded, instead.) Compounded yield on savings would be varied to keep enough Gold Dollars in circulation for day to day use and to finance improvements. In this regime, the Gold Dollars would be convertible, to gold or other precious metals and be resource- based. The Gold Dollars would not be useful for speculation because they would be generally unavailable and would cost too much; the yield on simple bank savings would be greater on a risk-adjusted basis than would speculation - there would be little reason to speculate. Gold Dollars would be the currency of the fiscally conservative and thrifty.

The other dollar currency would be zero- or negative yield fiat money (printing press money) that would only surrender yield to speculations. While some speculations would undoubtedly involve resource recovery (which is inevitable, under any regime) the natural volatility of the speculative environment would tend to keep recovery programs in the 'Gold Dollar' ambit where the poorly thought- out schemes would be wisely unfunded.

Speculators would embrace the fiat dollars because they would invariably allow certain speculators to become fabulously rich, (but not all of them, which is the purpose of speculation in the first and last place and is the case now).

The returns in fiat currency could (and would certainly) be converted to hard currency by buying gold or land, or by buying watershed easements or returning land out of suburban developmnt to open space ... or replacing carbon sources ... by husbanding the resource basis for the Gold Dollar. Here, the bad money would drive out the good ... but the good would have someplace to go! The 'high yielding safe haven' would therefore increase; a haven for all capital during speculative crashes and a place for credit capital to manifest itself as real wealth in times when speculation is successful.

All taxation and government spending would rest upon the fiat regimes' earnings as is the case now; speculation would be encouraged by the government for its own reasons, yet bailouts would be unnecessary as a new class of speculators would continually arise to take the place of the bankrupts. In the dual currency regime, the problems would always rest with the participants rather than with the system itself. There would be 'black markets' (and these encouraged) to arbitrage between the sectors but the periodic crashes of the fiat regime would put these out of business before they could harm the hard money sector. The Gold Dollar regime and the fiat regime would exist side by side with the firewall between.

One last note... can you explain the Home Depot gas bill scheme in more detail? I'm not following how that would work.

Home Depot would simply print its own currency but it would be in the familiar form of coupons. The inflator would be collected from all costomers at the cash register, (whether they used the coupons or not) so there would be no 'inflator upon the coupon' as with the demurrage example. Home Depot's coupons would be convertible against their stock value + cash on hand + good will + a percentage of available credit; this would be strictly a fiat regime. Using a conservative 'float' HD could print a couple billion in Home Depot Dollars that would used in place of US dollars, although it is likely all that liquidity would not be accessed.

This would substitute for liquidity that is currently trapped in banks and finance houses; it would insure Home Depot had a steady stream of 'customers' (some would only buy coupons ... with US dollars) and the other businesses would have an additional source of liquidity; derived from those dollars held by Home Depot. Customers bringing US dollars as well as coupons would generate sufficient cash flow for Home Depot that it could operate with less credit exposure while expanding its 'fractional lending' of Home Depot Dollars.

The challenge would be for Home Depot's suppliers to accept its coupons as promissory notes against eventual repayment in US Dollars. If effective Fed/Treasury credit evaporates, it might be the only atlernative for all concerned. People will hate Home Depot less or will hate it for different reasons than they do now, but the business will survive. (Putting a 5Mw wind turbine @ every store would help them survive, too!)

I believe that an effective local currency would be helped by distinguishing between the functions of medium of exchange and store of value. In truth, in my private definition of money we already have (or had) such a system where Federal Reserve stuff was our trading currency and Treasury paper was our store of value currency. Such local currencies as LETS can be redesigned as effective trading currencies. In LETS there are positive and negative balances within the system. Put an interest charge on both of them since they provide a service to both parties. That will encourage people to not hold onto their balances but use them in trading. Provide a means to convert a LETS balance into and out of the national currency from where it can be directed to some means of storing value. I believe that interest on both types of balances was suggested by Keynes for the IMF. His best ideas got ignored.

You're hired!

I believe that interest on both types of balances was suggested by Keynes for the IMF. His best ideas got ignored.

Gresham's Law works with Keynes' ideas as well, the bad far outweigh the good. His tendency to borrow and lend while suspending disbelief at the same time simply drives interest rates down (since the borrower's advantage increases as he continues to borrow). This is one reason why we are in the terrible mess we are in today.

That ... and in the long run, we are all dead!

...do you have an example of demurrage currency that has been used on a large scale?

Oh, please, let's not be silly about this. One such is called the US dollar, especially as it existed from about 1971 to 1982. For ordinary citizens, the practical effect of having inflation far exceed government-limited savings account rates was identical to the practical effect of demurrage. The Baby Boomers learned not to save and invest, but instead, to borrow as much as possible (below the inflation rate) to "own" as big a house as possible (above the inflation rate.) The lesson seems to have become deeply and permanently ingrained, and it seems to be the biggest factor at the root of the current mess. (The next-biggest factor seems to be a touching but foolish faith that averaging together a bunch of worthless mortgages to form "securities" can magically remove systemic or correlated risk. This may have arisen when the finance industry got into the habit of hiring failed physicists to play at maths. Alas, the failed physicists chose to forget that averaging only reduces risk (or variance) with respect to uncorrelated random variables. And corrupt Congresscritters who sought votes by promising free palaces all around were only too happy to go along.)

The stamp feature (demurrage) of the Wörgl currency amounted in practice to a huge effective annual inflation rate. I'm not (yet) seeing desperation on any scale even remotely approaching what occurred in 1937 Wörgl; indeed the roads here in Wisconsin seem to be about as busy as ever with evening and weekend discretionary travel. So why in the world would any sane person accept vanishing locabucks in lieu of comparatively hard "real" currency? If the locabucks are convertible, then exchange charges or demurrage simply represent a deadweight cost, so why bother? If not, then why take a chance on being stuck when you need something that can't be produced casually by somebody puttering in their backyard, such as an antibiotic?

More broadly, "we" created the current mess by insisting that our Congresscritters should make life more "fair" by providing instant gratification in the form of quasi-free houses (via interest-only liar loans ultimately made possible because Fannie, Freddie, and Ginnie injected outrageous quantities of surplus money into the "markets" over the years) for people who could never conceivably afford to keep them up. How could we possibly expect that locking in an already runaway free-spending instant-gratification meme even more tightly could ever help us with such fundamentals?

[Edit] The comment above about Lazy Larry and Hardwork Harry also reminds me that social-engineering schemes of this sort are often little more than ways to provide undeserved subsidy hammocks for the Lazy Larries of the world to lounge in at other people's expense. A major reason many local business have gone under over the last few decades is that they provided poor value for money and could not withstand the slightest whiff of competition. Good riddance. (And don't tell me trade over distance is going to cease tomorrow morning. For one thing, relying exclusively on local food, which is subject to the vagaries of the weather, would be a sure recipe for death; and for another, even the ancient Greeks shipped grain, which has always had a fairly poor value-to-bulk ratio, many many hundreds of miles.)

On a related note, as bad as the financial crisis is, if you look at the world in terms of real capital (e.g. natural capital), the recent financial losses are dwarfed by 'monetary' losses in nature

A timely topic for me; this afternoon I was reading Chapter 9: Energy and Economics of Odum's "Environment, Power and Society". It addresses many of the issues in this thread. One of my marginal notes - nature never gets paid. The annual cost of forest loss - $2 to $5T. The annual cost of species extinction is probably many orders of magnitude greater than that (separating out a forest of Loofla trees from the LAST Loofla tree). The destruction of a species - say Atlantic Salmon here in Maine - is enormous compared to the few dams on the river that are causing that destruction. Gigazillions of watts of sunlight evolved that salmon over a next to forever time period and the State of Maine decided to exterminate the species for the benefit of a few dollars for FPL. Gaia's emergy investment in the salmon species - its genome, ecological niches, etc... - we don't recognize outside of the price for a few pounds of fish flesh. And we say we can substitute that with farm raised tilapia.

I love stuff like this in the text - and I don't yet understand how Odum gets to this point:

the influence of economic values is expected to decrease as the global shortage of nonrenewable resources reduces annual empower.

and

Adding some money [or credit] in order to cause money to circulate faster increases the energy and emergy flows if unused resources are available.

I read that to mean "the more money we add to the mix, the more activity". The Worgl effort shows that too. But the horizons were different. Worgl scrip stayed in Worgl and environmental destruction would have been seen; so they planted forests. Dollars chew up forests out of sight. That's a qualitative difference.

Odum suggests not a currency based on joules or btus, but on "emergy". The first (or last) copy of a book will cost far more than the equivalent weight of paper. Though if there are very many in circulation, it might be very close. He refers to the "wealth buying power of money" as an "emergy certificate", not an "energy certificate". [The Last Salmon vs pounds of generic fish]

Another thing about this money discussion. People need to be able to live with both feet in the local scrip paradigm. Cherry picking doesn't work.

cfm in Gray, ME

Odum suggests not a currency based on joules or btus, but on "emergy".

And part of the eMemrgy plan is a value to the 'mental work' going into the production of, say, a solar cell or a fission power plant.

Does anyone know of a good de-construction of this part of Odum's work?

Gav - also, given our penchant to need a 'smoking gun' before changing conventional wisdom, perhaps Australian communities will have more luck initiating local currency movements, because the 'example' of losing purchasing power is fresh in their mind. Aussie dollar has lost 1/3 of its value in last few months (at least againt US$ -more against Yen, less against Euro).



If people suddenly have to pay more to get goods on international market, and are uncertain about future of their national currency, awareness that their localbucks can be exchanged for food and barter items with people they live near and come in contact with everyday might become more attractive - or at least less wild sounding.

The fall has been staggering, but hasn't shown up in prices yet (at least as far as I'm aware) as it has happened so fast.

The area we would normally notice first - petrol prices at the pump - has been very muted as the oil price has been slumping as fast as the Aussie dollar (and many other commodities - the CRB is the main influence of the exchange rate along with interest rate differentials).

I've never heard of any local currencies down here, with the possible exception of Bartercard, which I've never really understood.

On the other hand Oz may be a different animal wrt to local currencies compared to other countries. Isn't 60%+ of your population in 5 cities? Im not sure whether this concentration would help or hinder the development of local currencies. Brisbanebucks anyone?

Its probably more like 70% in 5 cities.

I'd struggle to imagine this sort of scheme working in Sydney - much more likely in some of the mid-sized regional cities.

I suspect ByronBayBucks would be the best place to start :-)

there are actually quite a few Local Exchange Trading Schemes (LETS) in Oz. a google search finds plenty and i've seen mention of them in some melbourne areas.

Gav, there are a number of LETS in Australia, see here.

Most of them are not very widespread with many participants. Typically stores won't accept LETS, so that the exchanges are between individual members of the LETS group. In a group of 100 participants, perhaps only 10 have goods and services they're willing to offer, the other 90 are evenly divided between those who neither buy nor sell anything, and those who only want to buy.

As you observed, this may be because the national currency is strong and well-thought of. So the 90 have no incentive to be productive and acquire more LETS for themselves, they can be lazy. They buy goods and services up to their maximum spending, and then drop out of the system. The 10 productive members acquire a lot of LETS cash and largely spend it among themselves.

Scarcity drives productivity in an economic system.

Great article, and an issue close to my heart.

I wrote a rough paper about possible decentralised local exchange trading schemes (LETS) last year. It's long-winded in order to try to make it simple to follow for your average public... I'm not sure that really works though ;)

Anyway, it's based on the premise that each person in the scheme offers credit to other people they know and trust within the scheme. What makes it interesting is that we can utilise paths of credit within the system so that people who don't know each other can trade using the intermediate credit of connected parties.

Here's the paper.

Any thoughts or feedback would be great!

How about requiring something of value as a deposit or an entrance fee into the trading network?

In addition to the emulation of eBay, how about the emulation of a paper check? If you buy something from a store or individual, you digitally sign a "check" which the merchant deposits as with traditional bank accounts.

I don't really feel that a deposit is necessary or desirable since the system requires full trust between individuals anyway.

Do you mean a printed cheque with a code that they will enter into the system at their end? That seems on the face of it like a great idea! Maybe there's some problem with it, but I can't think of anything.

That principle could perhaps even facilitate the use of some form of cash within the system, which is something I prviously thought would be too difficult.

A credit-barter system such as LETS requires there be a credit limit on the amount to which an account is allowed to go negative. It would be possible to put in a mechanism whereby one could deposit national currency into an account such as a credit union which could act as security for an increase in ones credit limit. LETS transactions, as I understand it, tend to be limited in size in practice and this would offer a way out of that limitation.

With the decentralised scheme I propose, the participants set credit limits for each of thier friends, no general credit limit is required.

Any unused credit existing in the credit path(s) between the buyer and seller could potentially be used to contribute towards the purchase. This would also increase the transaction size limit of LETS.

The problem with taking security is that - unless it was taken by various parties - it would represent a further centralisation of trust in the system, and there is the question of how assets are valued for this purpose. If national currency were to be used as a deposit, it would constrain the extent to which such a scheme could help in the face of a national liquidity trap.

Because people can set different credit limits for different people under a decentralised local exchange trading scheme, we can trust such a system more than a conventional LETS system. It deosn't REQUIRE people to trust a community, though obviously we will ultimately benefit from doing so.

What I was thinking was based partially on an idea we were batting around at an ISP ca 1998 (dot com boom days). Some prospective buyers wanted to go public with us (not sure why, we had more liabilities than assets) and wanted to make public statements that had anonymous this and privacy that sprinkled generously in the verbiage. The idea was anonymous money to purchase online goods and services that were potentially embarrassing to the consumer if discovered by peers. Instead of paying with a credit card you would download a form that had some of the basic information in a cheque, but no name, and we would be a bank of sorts. The buyer would fill out the form, sign it with a PGP key associated with their anonymous money account, and maybe additionally encrypt it with the PGP key of the seller and send it to the seller. The seller would sign it with their PGP key, send it to us and we would honor it as if it were a real cheque and remit funds from the account. It never did get past the thought experiment stage due to obvious problems in making anonymous deposits and there would probably be lots of legal issues also. We never did approach any vendors with the idea.

Revisiting the idea with LETS and looking at it from a code monkey vantage point a simple text file with a few fields in a predetermined format could be used as a cheque that could be signed with PGP keys of each the buyer and seller. Being a code monkey I don't know how the idea could be applied with printed cheques without requiring more human intervention. Suppose you have some arbitrary currency like maybe a fregg, maybe pegged on something fungible like an egg. So if you are paid a digital cheque you could visit something like an online banking interface for managing your account, cut and paste the contents of a PGP signed cheque into a deposit window, and deposit the egg pegged freggs. Supposedly you could download freggs from your account onto some type of ubitiqous removable media and pre-sign some checks of various values (1,5,10,20, etc), effectively giving you cash in pocket for LETS trade. If you want to extend credit to someone you trust, send them a digital cheque which they can deposit.

Disclaimer: I know little about economics or money and never heard of LETS until this thought provoking topic about local currency was posted by Big Gav.

The legal issues you mention may indeed have been a problem for anonymous purchases (anti money laundering legislation). Although some sites now allow people to pay by calling a premium rate number (with a pay-as-you-go mobile phone allows anonymity). I appreciate this wasn't the case back in 1998 though, and your system potentially offers more comeback if there was a problem with the goods.

Yeah, that kind of cash would work, and the idea of printing a cheque would also require some kind of encrypted key to be added to it, perhaps in the form of a barcode that could be read by vendors (with a barcode scanner). The barcode would translate to an entry in the LETS database and be marked as 'payment complete', so it could not be used again. Or, if the cheque number could just have its ownership number transferred to the vendor, perhaps it could be used repeatedly in cash (provided it was scanned between each use).

During my mis-spent youth and early adulthood (ie. late 80s and early 90s), I used to waste a lot of time hanging around the cypherpunks forum (which probably explains why I write things like this occasionally).

Anonymous ecash was their holy grail (or as Wired put it later on "the ultimate Crypto Anarchy tool would be anonymous digital money").

As noted above though, no government will willingly tolerate it (even less so than local currencies) and it would almost certainly fall foul of anti-money laundering or anti-terrorism financing laws (surprise, surprise).

From Eric Hughes' Cypherpunk's Manifesto:

Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn't want the whole world to know, but a secret matter is something one doesn't want anybody to know. Privacy is the power to selectively reveal oneself to the world.

If two parties have some sort of dealings, then each has a memory of their interaction. Each party can speak about their own memory of this; how could anyone prevent it? One could pass laws against it, but the freedom of speech, even more than privacy, is fundamental to an open society; we seek not to restrict any speech at all. If many parties speak together in the same forum, each can speak to all the others and aggregate together knowledge about individuals and other parties. The power of electronic communications has enabled such group speech, and it will not go away merely because we might want it to.

Since we desire privacy, we must ensure that each party to a transaction have knowledge only of that which is directly necessary for that transaction. Since any information can be spoken of, we must ensure that we reveal as little as possible. In most cases personal identity is not salient. When I purchase a magazine at a store and hand cash to the clerk, there is no need to know who I am. When I ask my electronic mail provider to send and receive messages, my provider need not know to whom I am speaking or what I am saying or what others are saying to me; my provider only need know how to get the message there and how much I owe them in fees. When my identity is revealed by the underlying mechanism of the transaction, I have no privacy. I cannot here selectively reveal myself; I must always reveal myself.

Therefore, privacy in an open society requires anonymous transaction systems. Until now, cash has been the primary such system. An anonymous transaction system is not a secret transaction system. An anonymous system empowers individuals to reveal their identity when desired and only when desired; this is the essence of privacy.

On a tangential subject, the Richmond Fed once floated the idea of a hoarding tax on actual US currency as a way of dealing with deflationary periods.

http://www.wired.com/politics/law/news/1999/10/32121
http://www.richmondfed.org/publications/economic_research/working_papers...

Ron Paul introduced a bill to ban this idea, claiming the need to "protect our privacy and maintain confidence in the currency" (without explaining why it would violate either).

http://financialservices.house.gov/banking/32800pau.htm

Isn't the traditional inflation of the money supply by the creation of debt (some of which then becomes spendable money), just such a tax already? Ron Paul would say it is, and I'm inclined to agree. The proposal looked like an extension of their powers of confiscation.

This process has reduced the purchasing power of currencies over the ages.

I actually think the current accelerated debasement of the dollar will prove sufficient to encourage people to spend them, and I think inflation will be a bigger problem than deflation soon enough. I'm not sure about the currency situation elsewhere, but I can't really see what constrains governments from printing money to defend against liquidity traps... I appreciate that the side-effect may be high or even hyper-inflation, but it looks as though they are choosing this route in preference to keeping stable currencies.

Deflation for (most of) the people who hang out on TOD, inflation for those of us who use up our money on food, fuel and housing. West Texas has asserted something that amounts to this from time to time.

Yes - you could be right there. I'm probably at the lower end of the socio-economic spectrum for this sites audience, although I'm not sure how you'd tell.

Well - it would be a further tax of sorts, but only paid while you were holding actual cash - which for most of us amounts to a pretty small amount of money day to day (the proposed amount would be tiny compared to the amount of GST paid on the things you purchase with the cash here in Oz, for example).

I would have thought the average Ron Paul libertarian would prefer to have their stored "money" in the form of silver or gold anyway.

I suppose the federal reserve would like to eliminate the use of cash altogether so they can increase the amount of debt from about 97% of the money supply to nearer 100% (as credit cards attempt to do), so they increase their cash reserves on which they can lend. It may even be related to this strange issue in some way. I don't think it's out of concern for a liquidity crisis, although I do see your point.

I know you linked to the FEASTA website...
But the book to read, which is similar to the article is
The Ecology of Money.

Thanks - I haven't read much of the content on the FEASTA web site yet (what started as an off-the-cuff post turned out to have a lot more depth than I imagined).

The section on the use of local currencies after the Argentinian collapse was interesting - a lot closer to home than the events in the 1930's.

http://www.feasta.org/documents/moneyecology/argentina.htm

As with decentralized power sources(those aluminium smelters closing
yet?), why do you need the federal government anymore?

And why, if successful, do you think the fed gov't will
ignore you?

I think history shows that federal governments and central banks don't ignore these schemes if they become successful - they act very quickly to stamp them out.

In the article I did note they probably only have a limited lifetime anyway - when a liquidity trap (which makes them viable in the first place) disappears, they probably will too.

I think the Worgl example showed that killing them too quickly is a bad idea, even from the centraliser's point of view. In the recent example, the Argentinians waited until the economy had stabilised before suppressing the local currencies and mandating the central one once again.

If you're a collapse minded doomer, of course, the central govt never gets to re-assert control. In that scenario they may become quite successful for long periods of time.

they act very quickly to stamp them out.

As the price of silver went up the Liberty Dollar effort became more 'interesting' - more articles questioning the idea/letters from fed-gov.

Once they went political with the low cost copper coin - the smack-down hammer got applied.

The Liberty Dollar still exists, but only the collectors seem to be spending $38 for a $50 1 oz silver coin when silver is at $10-12.

A problem with the limited life time model is that the life-ending phase tends to be cruel and give a bad name to alternative/local currency ideas that are aimed at something more permanent. In fact, if run well enough, a community currency could make use of Gresham's Law (as it is commonly misunderstood): bad money drives out good. The community currency is very much "bad" money and will drive out the "good" national currency. Up to a point. Some very interesting possible dynamics. It's possible that well-run local currencies would drive a national currency into a benign mode. Now the national currency enjoys something of a monopoly status which means it can be poorly run since you have no where else to go.

Zinc smelter Nyrstar is threatening to relocate to China if carbon pricing comes in
http://www.abc.net.au/news/stories/2008/10/09/2386692.htm

Guess they hadn't heard that China is now a net coal importer. My parting words to that company; see ya.

I like how Richard Douthwaite of FEASTA describes the various functions of money. One of the functions is "store of value." During a deflationary liquidity crisis, this function tends to dominate, shutting down money's function as a "medium of exchange."

Local currencies with demurrage disentangle these two functions.

I interviewed Richard about this some time ago, and he talks about Argentina too.

http://globalpublicmedia.com/richard_douthwaite_on_the_reality_report

The case of Argentina's 2001-2002 collapse is interesting. While people with savings were eager to flee the peso in favor of the dollar (a harder currency than the peso), people (or businesses) in need were eager to accept not only pesos, but also any provincial scrip which would allow them to pay for essential goods and services (or sell their goods and services).

The article does not mention that the first phenomenon forced the Central Bank to restrain printing of pesos to avoid further devaluation, which would have led to an unbearable rise in the cost of food for the poor since most staples (wheat, etc.) are internationally traded in dollars and can be readily exported. That's why they in turn restrained the withdrawal of bank deposits.

Today in the US (and Europe, etc.) the harder currencies are gold and silver. But in contrast to Argentina 2002, fleeing fiat currencies in favor of precious metals would not be inflationary, since nothing is internationally traded in gold. Actually, if speculative funds now flow to precious metals instead of to agricultural and other commodities like they did in 2H2007-1H2008, it would probably avoid another painful rise in food prices.

Thanks for that. The books looks very interesting. What do people think of The Money Masters documentary and the Money as Debt minifilm?

They both seem to me like pretty good explanations for people who have trouble getting through books on the subject.

I have seen Money as Debt and it is good. Goes over a lot of information quickly but can be viewed repeatedly or paused on the DVD as needed.

Hi Jason,

When I first watched the Money Masters documentary a couple of years ago, I thought it was quite far fetched, but now - following much reading on the subject - I think it's a pretty accurate and educational documentary too.

By the way, the interviews that you post to Global Public Media are really appreciated. Particularly good one with Chris Martenson - here.

I'm always looking for material that I can use to introduce family and friends to these things (and learn from myself), and your stuff is very accessible.

Thanks
Andy

In 1936, the Alberta provincial government, under the control of the Social Credit party, introduced the Prosperity Certificate. The Certificate had space for 104 tiny one-cent stamps on the back and each week a stamp had to be added. After all 104 stamps were added, the government would redeem it for $1. The Certificate failed because the Socreds would not accept it as payment for taxes or government fees, and thus lost the confidence of Albertans. By 1938 they were out of circulation.

For a couple of decades now, Calgary has had LETS currency, although it is not widely accepted. Few businesses will accept them for payment in full, and the ones that will take some LETS as partial payment are mostly non-essential boutique businesses. It is a good idea though.

One word: Kondratieff.

I think once we get that IDIOT Bush out of the White house, things will change. Dictator Bush is the biggest Weapon of Mass Destruction of EVER hit this country. Since surely no one with any common sense would be considering McBush to replace him, Obama should be a shoe in for Office.

Jiff
www.privacy-center.ru.tc

I think it is fair to say that both parties are responsible for this mess and neither is going to do anything real about it. The lack of regulation for CDS instruments was signed into law by Clinton. The extraordinary buildup of debt through war by Bush.

A great primmer on Credit Default Swaps: http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365

This election season, neither Obama nor McCain are telling people they will have to suffer for a long time to get out of the hole we've dug, and that once we have, we will all have less luxury than our parents.

It seems that, in order to work (work well at least), the Worgl had to be exchangeable for the 'global' fiat the schilling. This would imply that the central fiat still has an important purpose as a standard for the larger region. In a sense, the Worgl was 'pegged' to the schilling in much the same way some countries' currencies are pegged to the dollar, the dollar being the 'global' currency. Might the scheme work on a global scale by some means that might include doing away with interest, or at least reducing interest to a very small amount.

Pegging it to the national currency is one option - however you could peg it to another currency if you don't trust your national one (eg. a locabuck in Zimbabwe might be euro-backed instead of linked to the national currency).

Alternatively you could link it to a commodity (or basket of commodities) - such as gold, silver or some form of energy like oil.

You do need to peg it to something of worth for anyone to accept the currency in the first place.

The peg (ratio of exchange) shouldn't be absolute - the idea is the local currency constantly depreciates, in order to keep the velocity of exchange high

"You do need to peg it to something of worth for anyone to accept the currency in the first place."

No, you don't. It's enough that the members of the community accept it as payment for their goods and services.

You can see it by realizing that any national currency is essentially the same thing as a local currency, only over a bigger territory and population. And today no national currency is pegged to a commodity, nor are many national currencies pegged to another currency.

National currencies are monopolies - you have to use them and you need to pay your taxes (in particular) in them.

Their backing (nowadays) is the ability of the central government to collect taxes. As you say, in the past many national currencies were backed by gold.

A key difference with local currencies is that they aren't backed by the ability of the issuer to simply take money from the participants (or to create it out of thin air via fractional reserve banking or printing paper money).

" A key difference with local currencies is that they aren't backed by the ability of the issuer to simply take money from the participants "
A totally unnecessary limitation adopted by local currencies. For instance, using a modification of a LETS, have the negative balances be legal obligations in the national currency, collectible in small claims court (USA). Of course this coercive attitude is utterly foreign to the spirit of LETS, so one more LETS falls into disuse. It goes on and on. Problems with LETS are pointed up. The critics provide no solutions, the proponents deny there's a problem, the whole idea gets a bad name. I'm not really picking on LETS in particular, it's just the system I now best. As far as I can tell the same troubles effect the various other systems.
Legal action should only be used as a last resort and would mainly serve to create confidence in the timid. A first recourse would be to try to help someone earn their credits.

National currencies are monopolies - you have to use them and you need to pay your taxes (in particular) in them.

Funny Thing that. See, one day the IRS sent me a letter saying I owed $300. So I went to the main office. Showed the letter. Asked if I could pay it there. Was told yes. And when I handed 'em $300 I was told 'no they only accept checks'.

Thus - the national money could not be used to pay the IRS. Fine for the state however.

So you wrote them a check payable in something others than dollars? Only reason you didn't land in jail was that you were too small a fish to fry.

Hi,

Interesting topic! Couple of quick comments.

1. "Their backing (nowadays) is the ability of the central government to collect taxes. As you say, in the past many national currencies were backed by gold."

.. is a comment I would support. It is not however a new development. The concept that "taxes drive money" was first articulated by the Chartalists and still progressed by some Post Keynesian economicsts. e.g. L. Randall Wray who argues that the 'government does not "need" the public's money in order to spend; rather the public needs the government's money in order to pay taxes.' (from Understanding Modern Money- Wray, 1998 pp. 18).

2. "A key difference with local currencies is that they aren't backed by the ability of the issuer to simply take money from the participants (or to create it out of thin air via fractional reserve banking or printing paper money)."

One of the advantages of local currencies is actually the ability to create money 'out of thin air'. i.e. to provide a medium of exchange whose availability is determined by a communities demand for transactions, not by the rate at which gold is dug from the ground (or the money supply determined by the overnight interest rate). This is something which the Wörgl example demonstrates- what people lacked was not the means of production or demand for goods and services, rather it was the lack of medium of exchange that was responsive to transaction needs.

One example that combines LETS with a chartalist approach to achieve a community bonus is oulined at http://cas.umkc.edu/econ/economics/faculty/wray/papers/ELR.IRRA.01.htm

3. An online project loking at creating a diffuse community currency network is http://openmoney.info/index.html ... unsure of where the project is upto, but had some interesting ideas a few years ago when I was doing more research on the topic.

IMHO doing away with interest is fatal. It means providing a service that isn't paid for. There are those around, unfortunately, that will take advantage of such a situation. In a local currency, interest rates (on both negative and positive balances) should be set at a level that supports the system. The problems with interest come up when it provides a return on ownership rather than a return for service rendered. Also, interest is useful in making up the losses that occur when a party can't meet their obligations. Unless money is lent with a certain degree of risk, the system will be so conservative that many good ideas will not be pursued.

in order to work (work well at least), the Worgl had to be exchangeable for the 'global' fiat the schilling.

Seems to me the key was its acceptance for taxes. If the city of FooFoo issues a currency and takes it for taxes that more or less does peg it to the coin-of-the-realm at some level.

Acceptance for taxes puts one in competition with the government. They don't like that very much. While profile is kept low enough, okay. But if the local currency really starts to make a difference, the government crunches it. Sorry I'm not into proving my points, more into satisfying my own curiosity, so I can't give you references. Maybe some one else can dig up references. Australia and Austria during First Great Depression.

Here in Berlin there are a number of more or less successful local currencies. A friend of mine participates in very simple token swapping (of so-called 'pearls'), where each unit represents one hour of work. This is successful amongst a smallish group of members (50-100). I have also heard of the 'Bärengeld' (bear money) in Berlin but never seen it.

world logoBerliner

The 'Berliner' is the famed local currency though. Introduced in 2004, it has garnered many supporters with a long list of participating shops and businesses (both official and inofficial), primarily located in one part of town, Prenzlauer Berg. The city quarter is located in former East Berlin where apparently more than a few people failed to exchange their DDR cash in time and were left with worthless paper - so there is an understanding of the ephemeral nature of 'value' with any money. The Berliner is a parallel currency to the Euro with a one to one exchange rate. A bookstore owner, for example, might simply collect them until he has a substantial number and then spend them at a local restaurant or store. As such, the currency is primarily intended to support local businesses. There is a fee for exchanging Berliners back to Euros which goes to local community projects. The currency is backed by Euro reserves held by the founder of the Berliner. In order to ensure circulation of the currency the notes 'age'. This idea seems to have come from the 'Chiemgauer' system mentioned above established by Rudolf Steiner. There are less than 100,000 Berliners in circulation.

Some of the alternative currencies in Germany seem to have been motivated by a perceived (or actual)
devaluation of money caused by the introduction of the euro in 1999. It is forbidden to print alternative currencies in Germany, but by establishing an association and attributing the notes to it, this restriction is bypassed. Note the Berliners above are labelled 'Wertgutschein' (voucher). A parliamentarian, Wolfgang Thierse, uses Berliners so they are clearly not seen as any threat to the euro.

My big question is ¿why would anyone accept these scrips,? or for that matter, any currency with a higher inflation rate (the scrips, being linked to the main currency, will always be the inflation rate of the linked currency + the planned inflation).

Note: I'm using inflation to mean both a loss of purchasing power from an increase in prices and a loss of purchasing power because of the currency 'decaying.'

I believe the answer is that in situations when the main currency is in short supply having some money is better than none.

Furthermore, because they can only be used locally, they tend to foster the creation of local economic relationships. People hold out this local currency and say "I need X." And a local person might say, "Okay, I will provide it." Beforehand, the non-local market may have been the only place X could be had. So local currencies create the conditions for greater diversification of local economies, tending to make them more resilient to fluctuations in the rest of the world.

Thanks for this piece Gav!

I'm still finding the "furthermore" unintelligible. Absent a near-apocalyptic problem as in Wörgl, why would anyone accept a local currency, with its extra deadweight costs of exchange and possibly demurrage? If I have money burning a hole in my pocket, so that as an impulsive aesthetic lifestyle choice, I wish to go to an inefficient local supplier and say "I need X", why can't I just as well do so with 'normal' currency, and avoid the useless extra costs? It seems to work just fine with all sorts of boutique suppliers, arts groups, etc. etc.

It seems to work even better with the efficient ones, since the added turnover from their non-local business allows them to supply me in a more versatile manner. And maybe that's the rub? Perhaps the real agenda, as with so many otherworldly academic and governmental schemes for telling people how they must spend their money, is to provide comfy resting places for the Lazy Larries of the world, i.e. those inefficient suppliers who don't deserve to be in business in the first place?

Oh, and for most things, why should I believe the "resiliency" tale for even a second? Unless "X" is some utterly crude item anybody can do up in the backyard starting with only the soil there, or a service involving nothing save for sheer labor, my allegedly local supplier will actually be procuring supplies from the not-so-local "rest of the world", as his or her forebears have done since long before classical Greece. After all, my favorite local bicycle shop doesn't mine their iron, chrome, and aluminum ores from the backyard, nor do they smelt them into metal, nor do they refine the metal, nor do they roll it into sheets and tubing.

I would think that in the case of the Berliner, it's mostly a lifestyle choice to support local business. People are, in fact, assigning a value to local commerce. If, say, you had to pay 2 cents over every dollar on all products, but as a benefit you had a livable Main Street, would you pay that? Some people do, it's their lifestyle choice, but it's not very big.

I'm from Brazil and out here we have some local currencies as well. I know one that works in a former shantytown in my city. It's a poor neighborhood (like I said, it was a shantytown and it's still extremely poor by "first world" standards) and there's a lack of formal jobs in the area. The local currency, while fully convertible with the Real, our national currency, ends up being way more effective then real money. There are people who can't get formal employment and instead work on ad-hoc jobs and are paid in the local currency, which of course means they spend it in the local shops, thus the local shops can hire more people and so it goes. They also have a bank that lends at very low interest rates to trusted people of the community (in a "Do I know this guy?" basis) and it has been working like an investment bank of sorts, too. Two young guys who hadn't any collateral and couldn't get a loan in any bank took a loan from the community bank and started a very small business making and selling cleaning supplies to local markets, and it's been working. Since the currency tends to stay localized, it fosters localized business. Of course the currency can be speculated on, so if it grows too much, this is a risk, but it has to be fully convertible to the national currency in order to gain the trust of the population.

Oh, btw, I have no background on local currencies. I can't say I know exactly why they work, just saying what I have seen. I did like very much this Silvio guy. Would need to study more in depth his ideas, but I liked it on a superficial look. Thanks for the post, Big Gav.

DeltaGreen, I'm an expat Brazilian living in Florida, I was completely unaware of any local currencies in Brazil, though it makes perfect sense. where in Brazil are you?

Legal encontrar um outro brasileiro por aqui :)

I'm from Fortaleza, btw. How long have you been in the US? Thinking of coming back with this crisis?

EDIT: Oh, btw, forgot to talk about the currencies. Like I said, I'm no expert in this matter. I visited this community where they were using a local currency and I talked to the "bank manager" from the community, and that was it. I do know there is a forum of other communities that do the same and they were trying to expand it. I think I heard him mention that in Rio de Janeiro some of the favelas used it as well.

Fortaleza! Valeu. Eu sou de Sao Paulo, capital.

I'm from Fortaleza, btw. How long have you been in the US? Thinking of coming back with this crisis?

I first came to the US at the age of 2, I went back to Brazil when I was 8 and grew up in both the US and Brazil with close ties to Europe.

Long and complicated story ;-)

However, my family is very international as you can tell from my last name which means, Hungarian. My family owns a little land about 50km outside of Sao Paulo and I probably would be able to survive there in case of a global collapse. I most definitely will not discount that possibility.

Fortunately I know how to sail...

Hehehe, sounds complicated, yeah. I just figure Brazil is one of the places most likely to escape any really bad crisis without a massive die-off of some sort. There's way too much land to the number of people we have here, combined with a lot of renewables producing energy (hydroelectric and biofuels), we should be more or less on the safe side. The big unknown factor is violence and political disintegration, that could be very bad, but one can do little to avoid that anywhere in the world. Having land in the countryside, specially in a fertile area in São Paulo, that's a good lifeboat.

Google "Carlos Gesell"
He was Silvio's son and started his own city on the beach in Argentina. Villa Gesell. It was ran in unusual ways, but it was one of the very best places to live in Argentina.

How geeks get chicks

Crash! Bang! Boom!

Looks like the $700,000,000,000 wasn't enough to alleviate world markets. As money goes "Poof", it is high time we look at the way the Internet innovation is presently acting as its own currency and market. If you will remember in March 2008 when I wrote the Trends-to-watch article regarding peak oil, I predicted that we would see the Internet moving in and encroaching on the government's territory.

The geeks of the world are becoming the new masters of the Universe, and the leaders of the world are miffed. They do NOT want to lose control of the masses - and we citizens can only ponder what military solutions they have in store for us as the value of American paper dollars become more and more meaningless.

The US Government is ready to deploy the US Army to fight back our own citizens, who are rightfully pissed off that their 401Ks have taken such a massive hit. But, there is risk in any investment, and it's not like people haven't been warned time and time again this crash was coming.

But let's face it - we must like George Orwell's 1984. Since its late arrival, we have grown accustomed to our "telescreens", and we know the government has us bugged. But as long as there is food, electricity, the Internet, sex, drugs, and rock and roll, we apparently aren't ready to fight for the Constitution.

So as the economy contracts and we start to experience fuel and electricity shortages, all sorts of funny human behaviors will start emerging. Who knows what our failed government has in store to control enraged the citizens of the US - only the biggest, most shadowy figures have the playbook.

What we do know, however, is that even as markets fail, Internet startups will continue to create and innovate. There are coffee shops loaded to the hilt with programmers and entrepreneurs teaming up in collaborations to unite local communities through social innovations.

The focus of the startups that matter are around real-world needs, including food, communications, community-building, hyper-localization and revenue sharing. Revenue doesn't necessarily mean paper money, either. Collaborations are forming based on shared value(s), meaning whatever the participants decide is worth something is becoming its own currency. That means barter and trade - just like the old days.

As America collapses Enron style, we will probably begin to experience hyper-inflation. That means "consumers" will continue to experience a serious wake-up call into what we truly need versus what we think we need to be happy. But hey - Ramen Noodles have got a lot of people through tough times before.

In case you are a government employee reading this and need to do something to help your local municipality or emergency responders deal with this crash, here are some of the nifty things that Bright Neighbor offers communities:

- Fast and easy searching for all things local
- Discover and meet people around you based on location and interests
- Safe & Secure - only your real community members allowed
- Food Growing / Garden system automation
- Swap & Share allows the community to lend, barter, trade and sell
- Add and discover community events, hyper-local news, views, and reviews
- Transportation & Ride Sharing tools

Bright Neighbor offers a strong solution to help communities deal with the new depression. It's going strong in Portland, and there are multiple new Bright Neighbor communities launching across the US.

As things get worse in the currency markets, we will be counting on the geeks to help the new farmers of the world. Here is an objective review of Bright Neighbor:

http://peakoilhausfrau.blogspot.com/2008/10/bright-neighbor.html

This might be the place to ask this..

Aside from the actual availability of Computers themselves (and durability, and stability of Operating Systems, etc).. the organizing made possible with PC's also hangs currently on copper and optical wires and a plethora of contracts and subscriptions that provide 'service'.

Who knows about packet radio and the various forms of networking that would allow people to leapfrog directly from WLAN node to node across a community in order to get that email or listserv across town? It wouldn't work immediately today, because noone has this installed except for a thin smattering of Ham Radio fans and such.. but there are fairly simple ways to make direct links, radio, phone and other local networks using shareware and old Terminal Programs that used to come with the Operating Systems, buried deep in old utility folders.

To keep it from getting completely astray from Local Currencies, it would seem that computer-sustained programs like "TimeDollars", as we have up here in Portland Maine are directly influenced by the availability of this technology. Even at a 56k Baud Modem level or far slower, the ability to network Text and other Computer communications and coordinating schemes can be invaluable in keeping such systems organized and moving..

This would be an interesting subject to discuss at length (or even do a post on) - but some brief pointers:

1. Look into peer to peer networks (actual networks, not file sharing software), especially radio / wireless based ones.

2. Look into electronic cash (see the Tim Boucher link at the foot of the main post for some pointers).

ther local networks using shareware and old Terminal Programs that used to come with the Operating Systems, buried deep in old utility folders.

FreeBSD still has the UUCP networking stack as maintained by the base OS group.

UUCP will transmit email, news and files whenever you can make a network connection. Thus, if 'we' move to a 'catch as catch can' network model, data can still be transfered.

Local currencies again! They keep cropping up (for various reasons) and keep failing after a while for the same old reasons. It is such a pity because the reasons for failures have relatively simple answers. One of the major reasons for failure is that enthusiasm for them is often brewed up as a way to eliminate the charging of interest. However, providing a currency is providing a service and if an economic service is provided free of charge ..... guess what? Come on you economic sophisticates out there, provide the answer.

Another range of difficulties with local currencies is tied up with the use of a printed medium. A significant advance over that was provided by Local Exchange Trading Systems (LETS) .http://en.wikipedia.org/wiki/LETS

Since LETS is a relatively simple system with some significantly strong features it can serve as a basis for seeing how a local currency system could be made sound. If you are strongly interested in this subject, I suggest reading the article. Some comments I make below depend on an understanding of LETS. Also I would be interested in an extended discussion of the issues involved including evaluation of various systems on a rational basis. I can be contacted at rudio (at) skyhighway (dot) com.

The article in wikipedia does not face up to the reasons for the continual failure of LETS. A clue for one reason can be seen in this quote from the article:
“LETS organisers often complain of being overworked, and may suffer burnout. Many schemes have ceased operation as a result.”
Since the service is not paid for (by charging interest) it depends on donated time, money and labor. Various attempts have been made to get around this. But unless charges reflect the amount of credit extended both with respect to quantity and time the system is flawed. By the way, and no small point, the service provided is a service to parties on both sides of the transaction. Thus interest needs to be paid on both negative and positive balances. The reasons for the animus against interest have strong historical and religious components that serve to confuse the issue.
The list of reasons for the failure of local currencies is quite long but all, as I said, have relatively simple remedies. If you approach the matter like a computer program, spotting where it breaks down and fixing the problem one can come up with a very robust system.
Some of the fixes needed:
A way to pay for the service
A backing for the currency
A means of exchanging the local currency with the national currency
A legal means to insure obligations are met.

There's a reason for failure that comes up quite regularly. Proponents of local currencies often want to use it to pay taxes or tie it in with governmental obligations in some way. This is a fatal mistake. So-called fiat currencies that are said to have no backing are really backed by the fact that you have to pay your taxes in them. Trying to do it with a local currency is challenge to TPTB which will not go unanswered. Witness fate of depression era systems in Austria and Australia.

Correction to address given above: rudio (at) skyhighway (dot) com

However, providing a currency is providing a service and if an economic service is provided free of charge ..... guess what? Come on you economic sophisticates out there, provide the answer.

IANA economic sophisticate, but I'll take a stab at an answer in general Darwinian terms. Continually providing morsels free of charge attracts parasitic elements from the environment that impede the ability of the host to thrive. The relationship should be symbiotic.

I don't completely understand the utility of your concept of interest on both positive and negative balances but I gather they provide stabilizing selective pressures.

Interesting analogy. Free goods and services tend very strongly to be over-used. Extending credit costs a system resources. The question then becomes who should pay the costs. Since both sides of the transaction are benefited it is reasonable for both sides to pay. This happens, in effect, during normal commerce when a seller sells on credit and charges less than market rate of interest.
Since the barter-credit system in question is designed to be a medium-of-exchange currency it is desirable to minimize its store of value function. Having a positive balance that costs you to hold it encourages you to spend it although that spending may be to convert it to a store-of-value currency such as Treasury paper. My thought is that a charge on positive balances should not be so high as to put one in the fame of mind, oh I better spend this quick, I'm losing out by holding onto it.

I think locavolts are a great idea the problem is cost. If every sun facing roof was covered in thin film PV and each building contained an online two day uninterruptible power supply it would provide distributed generation and microstorage. Indicative figures for a standalone house could be 5 kw output and 20 kwh storage. Current costs might be $40k per house plus weatherising. Note the UPS would double as the inverter. That cost needs to come down to perhaps $4k. Either that or the world has fewer but wealthier people. Since neither is likely I believe the need for 'centravolts' can't be eliminated.

Somewhat related ideas. Well, involves {relatively) decentralized energy. And relates to establishing a sound (but national as opposed to local) currency system. Go with geothermal. Nationalize all geothermal energy. Instead of paying taxes, pay government for electrical energy from the grid. Lots of people seem to be suggesting an energy based currency but to my mind backing consists of what you can reliably get for your money. Just somehow saying you're going to base it on BTUs doesn't seem to mean very much. This would be a way of having a definite concrete use for your money.
Problems with wind and solar: not so good for baseload and location as compared to geothermal. But mostly the combined opposition of FF interests and nuclear advocates has been and will be enough to stop them.

I believe the need for 'centravolts' can't be eliminated.

Thats true - I think we'll always have people / regions that are net energy consumers, and its hard to see distributed generation entirely replacing centralised generation facilities.

But areas with good local energy sources should be able to go a long way towards eliminating centralised energy entirely over time (especially if sufficient effort is put towards eliminating waste and inefficiency).

You may already be implying this, but not to forget that like local Currencies, Power has the middleground potentiality of 'Neighborhood Grids' and the like, Communities investing together in power supplies.. so it's a little bit centralized, a little bit local.

See www.nativewind.org

“Wind energy is the fastest growing energy source in the world, and Native communities have an excellent potential to be a part of that trend,” said Winona LaDuke, Executive Director of Honor the Earth, a nonprofit group that supports environmental activism and sustainability in Native communities. “We see the KILI wind turbine as a flagship project, a springboard for a broad, tribal renewable energy initiative.”

I like the idea of kwh being the "store of value" backing up a local currency.

It makes the currency a lot more useful in some ways - money representing energy.

This would seem to be a suitable local currency for regions with their own local grid - and perhaps you could apply it globally too, if there were a global electricity grid.

I don't think you want to back up a local "medium of exchange" currency directly with a "store of value" currency. This gets into the kind of complexity you have in the relationship between Treasury paper and Fed Reserve paper. Conversion facilities, yes. Backing, no.

On the case of the Austrian town of Wörgl in 1932:

"Because nobody wanted to pay what was effectively a hoarding fee [technically known as 'demurrage' and often referred to as "negative interest"], everyone receiving the notes would spend them as fast as possible."

That's not what you want to happen on the downward side of Hubbert's Peak, since the thus encouraged demand (which is obviously discretionary, since people do not need negative interest to be motivated to buy the daily bread) implies in most cases an increased consumption of exhaustible resources. An expanded analysis of this point using the case of Keynes' "patriotic housewives" can be found here.

On the case of today's European local currencies:

"The Bundesbank is keeping an eye on them however, publishing a report titled "Regional Currencies in Germany, Local Competition for the Euro?"."

This "control" approach (actually the lack thereof) is a critical feature in determining the probability that a complex social system will be able to avoid catastrophical collapse after Hubbert's Peak. This comes right from the main point of Joseph Tainter's 1990 book "The Collapse of Complex Societies": as a society becomes more complex to confront new challenges, the marginal returns on the increases in complexity diminish, until the point when those returns become negative and the society collapses.

We are well aware that modern society has been able to increase its complexity to the present degree thanks to the huge energy subsidy from fossil fuels. Once the world goes past Hubbert's Peak and that subsidy starts to shrink, social systems that are not able to streamline themselves to the core functions needed for their survival will collapse. Therefore a social system's attempt to keep unnecessary degrees of "control" over its members just increases the likelihood of its collapse. A 1984 scenario is just not feasible. Governments will not be able to care whether citizens read The Bible, Der Kapital or The Secret. Or whether they use gold, the national fiat currency, or a local currency. If they feel good about it, leave them alone!

BTW, I'm talking about dropping "unnecessary" degrees of control, not all controls. E.g., I'm not advocating legalizing hard drugs (hard = all except marihuana).

On ecological concerns favoring local currencies:

"Thus under neutral money, when interest goes to zero, this additional burden on resources will cease" [Suhr, 1988, page 112].
When it pays more to cut a tree, sell the wood and let the proceeds earn interest than simply let the tree grow, it is predictable that "economic pressures" will be felt to cut more trees than is optimal from an ecological viewpoint. Stamp Scrip would reverse that process."

In this comment I show that:

1. The existence of a widely available, RISK-FREE interest bearing investment requires a "soft" monetary system, meaning one where the monetary stock grows at a rate at least equal to the nominal risk-free interest rate (in contrast, the annual rate of growth of above-ground gold stocks was 0.11 % from 1200 BC to 600 BC and again from 300 BC to 500 AD, which shows the basis for the biblical prohibition of interest). Therefore any currency (like precious metals) with more or less constant total stock can do, not just a local currency.

2. For that investment to also yield a REAL positive interest rate, real economic output must grow at that rate or higher. After Hubbert's Peak, real GDP growth rates will be negative for a (hopefully not very long) time until eventually becoming zero (Daly's steady-state economy), and so will REAL "risk-free" interest rates, and therefore there will be no financial incentive for clearcutting the forest, irrespective of the currency and financial systems in use.

Tell me if I got this wrong, but it seems to me that if your money is quickly depreciating, you would use it to get not only essentials, but in a more long-term frame of mind, to use these earnings to invest in Real long-term assets. Durable Products, things that would retain their value. This should have the effect of minimizing the resource usage we see today, where we buy the cheapest stuff, and as it dies quickly, are constantly replacing our belongings, using up resources at this deadly pace.

Bob

Thats it.

See the section on "Local currencies and the environment" for more details on how this model can lead to long term sustainable investments (such as the tree planting example) instead of short term consumption.

If a currency is quickly depreciating, people just try to get rid of it as fast as possible.

They may buy a harder currency, discretionary items, durable products, whatever. The second and third options tend to increase resource usage, not decrease it.

"The second and third options tend to increase resource usage, not decrease it."

The whole point of durable, well-built goods is that you don't have to replace or repair them as much as when you worked in a disposable regime. That does not increase resource usage, except in the very short term.

James Robertson and Joseph Huber have written a very interesting monograph on monetary reform: Creating New Money: A Monetary Reform for the Information Age (pdf warning: 378 KB).

From the Foreword:

For all the prominence and sophistication of share dealing and financial services in the new economy, it is rare that we ask questions of our money system itself. The way that we issue and use money seems so ingrained that it’s hard to question. It is, in the words of George Orwell “the air we breathe”. Like air, it’s everywhere, we are dependent on it, and perhaps most important, until it is really dirty, it cannot be seen. We see the money system as something natural. But it’s not.

The rules of the money system have shifted. The majority of money that now changes hands does so electronically. As a result, far more than ever
before, new money is not issued by the state but by banks. Ninety seven pounds in every one hundred circulating in the economy will now have been issued by banks (in the form of sight deposits, printed into
customers’ accounts as interest-bearing debts). Only three pounds are cash, issued by the state (in the form of banknotes and coins, issued at no interest). The cost to the state of issuing new money is only the cost of producing banknotes and coins. The cost to the banks of issuing new money is virtually zero. The state receives public revenues from issuing cash, but banks make private profits. The benefits of the money system
are therefore being captured by the financial services industry rather than shared democratically.

since reading Bernard Lietaer's 'The Future of Money' i have been convinced that the current credit/growth monetary system could not survive peak oil and that alternative currencies would be needed.

the drive that our current society has for short-term growth is in large degree driven by the nature of the currency system (fractional reserve lending).

with alternative currencies, the best interests of individuals and companies are served by investing in the long-term rather than seeking short-term returns.

today's currencies necessitate economic growth and they cannot survive a physical limit to growth (peak oil) - i think this goes a long way to explaining the cause of the current financial crisis.

hypothetically, it might have been possible for the 'economy' to keep growing beyond peak oil if preparation and building of alternative infrastructure had started early enough (10-20 years ago), but we would eventually have hit other physical limits to growth.

i think we will have to go through this cycle of demand destruction and recovery before oil supply limits become apparent and peak oil is accepted as reality. we probably will not fundamentally change our economies and currency systems till after that.

I hate to rain on the Locabank parade but...

The US Banking system between the failure of the Second Bank of the US in the Panic of 1837(followed by the Depression of 1837-1843) and the National Banking Act of 1863 was conducted by banks chartered by the States.

These banks, which issued paper money backed with gold or silver coinage (kept at the banks) were highly unstabled though the price of gold and silver remained constant.

These banks failed on average every 5 years.

http://en.wikipedia.org/wiki/History_of_central_banking_in_the_United_St...

Are locabanks really appropriate to a post-Peak economy?

What you say is true because of backing with gold or silver. For one thing, I doubt you will find any local currencies backed in that way. Unfortunately, the usual alternative is to not back them at all which is hardly better. Why local currency enthusiasts insist on including fatal defects in their systems is a source of constant wonder.

The price of gold and silver remained constant for 37 years ? I find that hard to believe...

Why were local currencies - clearly successful in places like Worgl and and post-collapse Argentina shut down by central governments ? Why bother ?

In any case - I noted in the article that they are a tool for escaping liquidity traps. Such a thing existed during the depression of 1837-1843 that you mentioned, and was influential in the rise of these local currencies.

There are some interesting notes in this blog post on the subject - http://questioningwar-organizingresistance.blogspot.com/2008/10/october-...

Over a hundred years ago, the populist movement in the United States rose up in the wake of the collapse of agricultural prices that threatened farmers and enriched bankers. The farmers pushed for monetary reform, including the demand that dollars be backed by silver rather than gold. The populists also argued that money should be created by the government for the benefit of the people, rather than by banks for the benefit of the bankers.

As for the outlawing of local currencies during the Civil War, there are all sorts of conspiracy theories floating around about that.

"These banks, which issued paper money backed with gold or silver coinage (kept at the banks) were highly unstabled though the price of gold and silver remained constant."

The key was that those banks issued more paper money than the gold/silver they had in their vaults (fractional reserve banking).

The combination of a precious metals-based currency and a fractional reserve banking system is inherently unstable. Because since a gold/silver standard prevents the existence of a lender of last resort, there's no way to stem a credit bust and its most acute form, a bank run.

In contrast, the combination of a precious metals-based currency and a 100% reserve banking system is perfectly stable (though Simons (1934) and Fisher (1935) originally proposed the 100% reserve banking system to be used with fiat money).

Not exactly a local currency but in the US there is a national asset based barter currency in circulation. The Liberty Dollar.
Check it out here http://www.scribd.com/doc/4565634/Liberty-Dollar-Inflation-proof-currency

I was going to mention the Liberty Dollar (its not really a local currency but its certainly an alternative currency) but forgot about it when I was wrapping up the post.

I thought they'd been driven out of business based on this post at Cryptogon :

http://cryptogon.com/?p=1731

But it seems they are still going :

http://libertydollar.org/

Still going, yes. Under new leadership. They are complaining that no one is spending $38 for 1 oz of silver ATM.

mention of what the liberty dollar founder is up to.
http://www.ecommerce-journal.com/articles/hyip_weekly_report_the_retirem...

and a link to his new put-a-finger-in-the-eye-of-the-feds effort.
http://www.freemarijuanachurch.org/content/press_release.html

The article asks: "Are local currencies a way to escape the liquidity trap?"
My answer is I think not except in special circumstances limited as to duration and locale.
I count this as one more instance of trying to use local currencies for purposes for which they are not well suited. The strength of local currencies is to give vitality to a local economy. If the local currency is used to escape the liquidity trap then the design must include means to prod circulation. Now if one were to modify a LETS by imposing an interest charge on positive balances that would be such a prod. However, making that interest charge high enough to be effective for that purpose would (I am guessing) have side effects some of which have been pointed out in other posts. I've mentioned LETS as an example but I think the same would hold for other systems. Using interest charges for something other that supporting the system is a slippery slope.

Great Post Big Gav,

I think that there is a fundamental problem with all money systems that has not been addressed very well, by any of them, ever. Regardless of how the money system functions, they all share one problem: What is the appropriate mechanism for creating money?

How do we create money responsibly? Who is the first to receive newly minted money? Who gets to be in charge of the process?

Money that is lent into existence by a central bank will tend towards scarcity and competition. Money that is earned into existence by people in a specific place has very different properties, and works on a model of abundance.

I agree that different money systems have different properties, and I think that those characteristics play an important role in how a society develops its economy, but I don't think that is the heart of the issue.

The basic idea of money is that it contains or represents actual value, of a generic type, that can be exchanged or converted into goods with specific values. Money's value to civilization lies in its ability to act as an intermediary between specific goods. Food isn't directly convertible into infrastructure, energy isn't directly convertible into education, but money is directly convertible into anything.

The fungibility of money is the sole reason that we, as a civilization, prefer it over barter. It reduces complicated situations down to a single common denominator. This reduction strips away all the specific details and the ethical values and reduces everything to a unit of account, a simple number. Money isn't good or evil, it's soulless.

That makes the mechanism for the creation of money central. Whoever is in charge of creating new money is also in charge of determining what is most important to society. If money is lent into existence by central banks then the banks get to be in charge. The Wörgl Stamp Scrip example where the local Wörgl government controlled the currency seems like a good idea when it is reducing unemployment and reforesting, but nothing prevents the local Wörgl government from commissioning coal fired power plants or building a bridge to nowhere. Similarly, earning money into existence seems like a good idea unless said money is earned into existence building SUVs or condos on Galveston Island.

Whoever controls the money supply will have substantial control over the economy. Whoever receives the newly minted money is going to enjoy primacy. The question is how do we allocate that primacy? How do we enjoy the fungibility of money and retain control over values in the ethical sense?

A number of questions are asked. I will give some of the answers I have come to in terms of a particular local currency. Let us call the system barter-credits. Those familiar with LETS (see Wikipeida) will have a start on what I will be talking about. However Michael Linton, the developer/inventor of LETS has specifically asked me to not to associate these barter-credits with LETS. The differences constitute a strong criticism of LETS with which he is not particularly happy.
The questions you have asked are not answered simply. Thus if you have not read the article about LETS it will be difficult to follow what I will be saying. Barter credits come into existence when a transaction is performed: One person's account is augmented by the exact amount by which anothers is diminished. The sum over all accounts is at all times zero. It's sort of like electrons popping up and leaving oppositely charged holes in a semiconductor.
Thus in a sense, there is no money supply. The functional equivalent of the money supply is given by credit limits for the participants. Thus determining individuals' credit limits is a critical aspect of the system.
“How do we create money responsibly?” I believe that this is a responsible way of creating money.
“Who is the first to receive newly minted money?” This simply does not apply in this case. You could say there is no first person or equally, it doesn't really matter.
“Who gets to be in charge of the process?” The people who participate in the credit-barter system.
“The basic idea of money is that it contains or represents actual value, of a generic type, that can be exchanged or converted into goods with specific values.” This sounds pretty good but I think on very careful examination it does not hold up. (Meaning, that's very much along the lines of my thinking at one time.) I don't think money can be defined because it is a complex of shifting social institutions that to some degree seem to contradict each other. What we can do is identify certain functions that money performs and see if we can develop arrangements that carry out these functions better than is presently done. Two classical functions are medium of exchange and store of value. I would suggest it is appropriate to have separate currencies each specialized to one of these functions. Most of what you have written seems to emphasize the means of exchange function.
“money is directly convertible into anything” One could maintain that for people at a certain (low) economic level the most important use of money is to obtain consumables. A little higher, use shifts to acquiring means of production. At a higher level, a means of acquiring power. In this last use the convertibility is not at all direct.
“local government controlled the currency seems like a good idea when it is reducing unemployment and reforesting, but nothing prevents the local government from commissioning coal fired power plants or building a bridge to nowhere.
Similarly, earning money into existence seems like a good idea unless said money is earned into existence building SUVs or condos on Galveston Island.”
I do not think it is useful to expect a type of money system to answer these questions. A characteristic pitfall of many money reform ideas is to try to accomplish too many things. In other words don't ask of a money system that it gets people to use money in the right way. Devise other means to do that.
“Whoever controls the money supply will have substantial control over the economy.” In a credit-barter system the control is very decentralized. As mentioned above, it may be a mistake to consider the system has a money supply. The functional equivalent consists of the sum of the credit limits on all the accounts. There are various ways of setting that up. The subject is complex. I doubt many have read this far anyway and if so are actually interested in going into details. If so, I am willing to enter into private correspondence. Rudio at skyhighway dot com.
“How do we enjoy the fungibility of money and retain control over values in the ethical sense?” The main point I would make is that you don't do this by the structure or type of money system.

Thanks to both of you for your thoughtful comments.

Personally I'm not sure what the best approach is when considering the big picture for money - in that sense, a lot of the concerns expressed are completely valid.

This is why I limited this post to just considering the value of local currencies for dealing with liquidity traps - it seems (to me) they have a useful role to play in such situations (situations which are temporary - though they may not feel like it if you are mired in a multi-year depression).

During "normal" times, I think there are still a lot of issues with the current model - but I'm not sure if local currencies (of whatever stripe) are the solution (though I don't rule it out either).

I think concentrating on the "exchange" and "store of value" requirements separately has a lot of merit though.

Can you give us a link for how the barter-credits system works in more detail?

My writings on this are from the pre-Web days and none are posted. Currently I am trying to set up a sustainable homestead/community in the wilds of the upper Puna district on the Big Island of Hawaii and have only a very poor dial-up connection to the Web. I could append to you some older stuff, but it looks like some arrangement may be made to get an updated posting on AusNz TOD. You could lobby for that and wait. Or I could send you some of the old stuff via attachment. rudio (fill in blank) skyhighway (fill in another blank) com. But you can come up with the answers on your own. Read the article on Wikipedia, notice where the system would fail (such as non-convertibility or the unpaid-for-service fault or etc. and apply a fix. Hint: fixes can be found in our standard ways of treating money. That's where I got my fixes. Someone clever might come up with something new. The problems arise in trying to keep it simple.

The Swiss fed does not have a monopoly on money creation. We have an alternative currency, the WIR.

(This is the primary reason why) barter has less than 1% penetration in the
business community worldwide while one in five businesses in Switzerland uses a
barter system to increase commerce and profits.
appropriate economics

They equipped the new medium of exchange with a stimulus to spend it quickly, rather than holding on to it. Thus as a rule, not only was no interest paid on accounts, but on the contrary, a "storage fee", a kind of negative interest, was charged. This was to counteract people's tendency to hang onto their money for fear of the future. mutualist blog

One way that businesses can continue to make profits in periods in which the supply of national currency is inadequate is to allow each other credit. As discussed in Chapter One, the credit-control measures that most firms use to protect themselves whenever trading becomes difficult actually make matters worse. While it would obviously be a mistake for firms to have no credit control at all, what businesses need when national currency becomes scarce is a properly regulated system of mutual credit so that they can use much less normal money when they trade amongst themselves. The Swiss Wirtschaftsring (Economic Circle) co-operative (WIR) is such a system.. blog, the ecology of money

see also.

http://projects.exeter.ac.uk/RDavies/arian/wir.html

http://www.itcsystem.com/ITC_System_and_Model.htm

WIR
Back in the days when I was working on alternative currencies, I amassed quite a bit of reference material. I later threw almost all of it out in disgust. Still have the stuff on WIR. Both in its successes and failures it gives one much to ponder on.

I'm South African, and ever since I heard of the Worgl experiment I wondered if it might be the answer to the poverty in our black townships by keeping money circulating locally. But I have my doubts, even after reading the discussion here.

Firstly, the speed of circulation issue. In Zimbabwe, people queue all night outside the banks to draw their salaries as soon as possible in cash so they can spend it before it depreciates further. This has not resulted in prosperity.

When people ran out of spending ideas, they would pay their taxes early using scrip, resulting in a huge increase in town revenues. Over the 13-month period the project ran, the council not only carried out all the intended works projects, but also built new houses, a reservoir, a ski jump, and a bridge.

Secondly, where does the extra income come from? If everyone pays off their tax arrears at once, that is not extra income. It is a one-off surge in receipts, which then fall in following months to the usual monthly income. The only benefit is that the council can carry out work projects without having to borrow an amount equal to the surge.

The actual source of any extra spending power is draining money out of savings. Of course this leads to more production which leads to more money available to spend, so there is a beneficent cycle going, but the loss of savings must have undesirable side-effects that have not been considered.

Question: Which country received the most amount of Marshall Plan aid after WWII?
Answer: Britain.

Many people are surprised by this, because Britain stagnated while hammered-to-pieces Germany prospered after the war. The economist JK Galbraith noted that the German economy grew rapidly until it reached pre-war levels, and thereafter at normal rates. He speculated that it was psychological -- they knew what level they could achieve, they had the know-how and the templates, so they put in a big effort until normality was restored, and relaxed after that.

I think depression-era Worgl was like that -- a recovery to pre-slump levels of prosperity, so the success of their currency experiment was a special case.

Local currency remains an attractive idea, but I can't see it being used on a wide scale

US Constitution,

Article I, Section 10, Clause 1. No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.

However, the states do not obey this today anyway, because they allow Bills of Credit issued by the Federal Reserve Bank (Federal Reserve Notes) to be used as legal tender. This is at the root of the crisis we face today. When was the last time you paid a debt with a gold or silver coin?

States or political subdivisions thereof (towns, cities, counties, etc.) could not legally emit Bills of Credit (paper money, script) and these could not be used as legal tender in any state, no matter who issued them.

The suggestion that local currencies be issued is a suggestion that fraud be committed.

"The suggestion that local currencies be issued is a suggestion that fraud be committed."
The legal situation is not at all that clear. In practice, governments only seem to get upset if you try to pay taxes in them. Or if some local government body tries to issue them. Local currencies can be made to look so much like well accepted business practices that cracking down on them can be very difficult.

There are two sides of the equation; The monetary system and the banking system. The private banking/monetary system was originated by the Rothchilds in the 17th century because kings could no longer be trusted to run the economy, as war because increasingly unproductive. For three centuries this created an economic updraft that became a hurricane, as it consumed the worlds resources to pay interest to a private banking system.

The fact is that money functions as a public utility, much like a road system. It is no longer backed by private hoards of precious metals, but the tax base of the countries issuing it, as we are finding out. The Federal Reserve system and all modern central banks serve as a cut-out to maintain a private banking system supported by a public monetary system. So that risks are socialized, while profits are privatized.

As of this week, the worlds banks are rapidly being nationalized. This is causing fear of totalitarian regimes running amok. That is an unfounded fear. Originally political power was private. It was called monarchy and those defending it feared mob rule, but over centuries of trial and error, political power has evolved into a working public trust. Now is the time to do the same with economic power. We need broad, nation based currencies to provide the economic connectivity necessary for an integrated economy, but it shouldn't be issued by a semi-private bank that allows a private banking system to siphon off the majority of the profits. Since the responsibility is borne by the taxpayers of a country, the government of that country must assume responsibility for issuing its currency.

The banking system, on the other hand, should be a function of all levels of governmental organization, with small banks serving towns and counties, medium ones for cities and states and a various national banks serving different aspects of the economy. These banks would then feed their profits directly back into the communities which created the wealth in the first place. These communities would use these funds to compete to provide the best environment for it people and businesses. These interests would use their local banking structures because they directly fund the services on which those businesses and people depend, thus reducing other taxes.

Since money would be viewed as a form of community property in the first place, it would place a stigma on hoarding it, as this would detract from the health of ones community. This would not apply to other forms of wealth, so that people would be inclined to increase wealth by improving their environment and community, rather than draining value out to put in a bank. Given that governments are currently having to nationalize the banking system, the question has to be raised whether we want to invest taxpayers funds into fixing them back up and returning them to the private sector, or breaking them down and distributing them to local communities. The remaining healthy banks would not have to be outlawed, as they would have to compete with banks that serve to fund their communities, rather than siphon this profit off for the vested few, or outside interests. Likely they would fade away.

Wealth is a convective cycle of rising asset values and precipitating benefits. A locally grounded system would prevent much of the massive hoarding of resources that create economic hurricanes that pull up enormous economic power in speculative bubbles and send it crashing back down again , like the one which we are currently experiencing.

"As of this week, the world's banks are rapidly being nationalized." I don't see that this is so. It looks to me more like they are temporarily being take over by governments because they are broke with the intention of turning them back to private hands once they are again made profitable. As is being said so often, "socialization of losses, privatization of profits". In US legislatures, Republicans plus conservative Democrats form a permanent majority.

I agree. This is the nationalisation of massive financial losses (more than we currently are aware of). A true nationalisation should wipe out all existing shareholder value, this in fact looks to be adding to it - in the UK anyway!

It looks to me like share holder value is being wiped out or nearly so. The point of the operation as I see it is to bring the banks back into profitability and get them back into the hands of shareholders, not necessarily the same ones at all, just so that they are in private hands. It's not so important that a few years of profits are lost or maybe even some of the profits of some given years stay with the government. The point is to get the ownership of the machinery which generates the profits back into the private hands of a certain class of people. oh oh there i go, class warfare, sorry to bring up one of the unmentionables
So for at least today the markets are saying "WE BELIEVE! The bubble can be patched!" Maybe so for now, we can be pardoned for having our doubts.

I think you're right about the localisation of banking, but unfortunately the guarantees that the governments seem to be giving are to the larger institutions, whilst ignoring the smaller ones. This surely encourages people to transfer their deposits from the smaller regional banks and building societies to the institutions thought 'too big to fail'. This is further centralising banking power with the big banks, taking us in exactly the wrong direction.

I certainly agree that what is happening is those in control are doing everything possible to maintain the system which they control, but this situation has a long way way to go and they are already having to nationalize the banks, ie, accept the public has rights to the profits when they are responsible for the risks. This is a very dangerous step for those who have been taking those profits. The fact is that this credit bubble is far larger than the economies, let alone the governments of the world. To try save it, they are risking the currencies. This is what caused the stagflation of the 70's, as liquidity had been increased to accommodate the Great Society social programs, the Vietnam War and the oil price increases. The assumption was the economy would continue to grow and absorb this additional money supply, but it didn't, so Volcker was given the job of tightening the money supply back down. The problem was that tighter money only caused the economy to go into recession, as it is those borrowing money who provide much of economic growth. How do you cure an oversupply by reducing demand?

The Fed tightens the money supply by selling debt it's holding and retiring the money it receives. When the Treasury, on the other hand, issues fresh debt, it uses this money for public spending, which tends to increase the private sector economy. So it was actually Reagan's deficits which cured inflation the last time.

Surplus money is logically in the hands of lenders, who are more politically influential than borrowers. Government debt is a significant portion of investment capacity. Where would this money be invested otherwise? Real Estate? Derivatives? It has to be recycled back through the public sector and should be taxed, rather then borrowed.

It's doubtful this will work again. For one thing, it's very, very doubtful the economy is going to grow to absorb this money, given the debt overhang. It's also doubtful those who have money to lend will keep loaning it to the government, as opposed to buying hard assets, since the bubble is bursting and they know it.

Just as you eventually lose your house when you use it as an ATM, the same it true for government. It is interesting those who say taxes are bad and the richest should get the most cuts, then borrow from the rich to fund government. Surplus warships anyone?

Safe to say, there is an economic war coming between the financial system and the rest of the economy, so my point isn't about what is happening right now, but after the shit really hits the fan.

I'm getting into this late, but I thought I'd chime in with a few points anyway.

It seems to me that it is often overlooked that the two most commonly cited attributes of money are mutually incompatible. Those attributes being: a medium of exchange, and a store of value. That is, when something is being exchanged it is not stored, and when stored cannot be exchanged. So the more money that is stored, the less is available for exchange (a.k.a. commerce). This is, to me at least, a very important point, and is one reason I prefer demurrage based systems.

I'll try to make my last points brief, and embellish them more if anyone happens to be interested.

If you think of money as an extension of the barter system, then money actually represents the incomplete portion of a trade.

The idea that money would not be lent without positive interest is based on the perception that money is a reasonably good store of value. If money were to devalue on a relatively short time scale, one might find that the borrower would be considered as providing as much of a service as the lender.

Commodity-based currencies artificially inflate the value of the backing commodities. Additionally, dealing with commodity variety and grades is problematic. An energy unit would surely be my choice for any "single" physical backing. However, I think it would better to back a currency with a basket of all the goods and services produced by mankind in proportion to their marketable quantities. In other words, an arbitrary unit such as "dollar" should suffice. ;-)

Gold bugs: gold does not have any significant "intrinsic value". Its value was declared, essentially by fiat, a long time ago... Its value is determined the same way the value of anything is determined; by what someone will give you for it in trade.

As to inflation being equivalent to demurrage; that is only generally correct. I don't think inflation itself is the problem, but rather the unpredictability of the inflation rate. Also, the inflation effect varies for different segments of an economy, distorting price signals, and making the "inflation tax" not very equitable.

Here is my preferred monetary system: demurrage based, money is created at a rate equal to the demurrage losses such that the money supply is constant on a per capita basis. Newly created money is distributed evenly to every person. Alternatively, some (or all) of the newly created money could be diverted to public funding in lieu of income and sales taxes.

"the two most commonly cited attributes of money are mutually incompatible" -- yes, yes. That's a point I made elsewhere in this thread, though I think "incompatible" is a little too strong though I used to express that strongly. That's part of the reason for having two currencies: one for storage of value and another for medium of exchange.
I rather dislike the term demurrage for the interest on the positive balance. We have a credit transaction. There are costs for employing credit. I am proposing that since the benefits go to both sides, those costs should be paid by both sides. Using the same term for designating those costs makes it simpler the see that point, I think. And makes comparison of allocation of the costs more natural. I suspect that "demurrage" was brought in as a term to get away from the extremely negative connotations of "interest" among alternative currency advocates. There are other language changes made the obscure whats going on. For instance, among some, one is not supposed to call a negative balance a debt. 'Cause that sounds so negative!

I think the term demurrage is very descriptive. The original meaning of the word, being a charge levied for holding up the loading and unloading of a ship. The purpose of the charge was to give incentive to load and unload as quickly as possible, so the ships can get back to doing what they are meant to do, transport. I think the analogy between ships and money fits nicely. Currency should be a transport for value. Using currency to store value would be like using a cargo ship as a warehouse.

My opinion is that currency should not act as a store of value, there are innumerable commodities that can serve that purpose. Currency, on the other hand, should be designed to do one thing particularly well: circulate.

In my mind, I think a paradigm shift regarding money is necessary. It should not be seen as an asset, but rather a shared resource. By holding onto it you are depriving others of its use.

Thats an excellent summary - I like the shipping analogy.

Although I only partially agree with some of your points and disagree with others, I find that your general trend of thinking is one that I relate to -- and that is rare.

You say: "Commodity-based currencies artificially inflate the value of the backing commodities." Good, good. Another way of thinking about that is that the backing commodities tend to be produced for their monetary status rather than their more normal utilities. One cannot really get away from that with a basket of commodities. It may take a bit of analysis to see that. Even a very extensive basket of commodities puts an emphasis on commodities over services.

Interest charged to positive balances is quite different from inflation since does not effect prices in general. For one person could arrange their affairs in such a way as to quickly spend down their balance when it went positive and pay very little interest on the positive account while another might find considerable utility in holding onto a positive balance. Cost would be proportional to use which is not at all like inflation.

When you say the unit should be backed by a basket of goods and services, what do you mean? That for a certain quantity of the currency I should be able to demand so much of those items? From whom? Who is to keep a stock of such items? I can see a lot of trouble in this approach.

You suggest a constant money supply per person. But commerce fluctuates. Without allowing the money supply to fluctuate some very difficult problems emerge. Historically speaking in the US the fluctuating needs of farmers in the wheat lands between planting and harvest and between good and poor harvests caused a lot of hardship. Much, much better in my opinion is the striking innovation of LETS in having a money supply of zero!

When you say the unit should be backed by a basket of goods and services, what do you mean? That for a certain quantity of the currency I should be able to demand so much of those items? From whom? Who is to keep a stock of such items? I can see a lot of trouble in this approach.

I do not advocate commodity backed currencies, with a basket, or otherwise. My comment was intended as tongue-in-cheek, the basket being comprised of "all goods and services", clearly an intractable problem.

I would like to discuss the merits of variable versus constant money supply. Feel free to contact me offline if you are interested, I am always open to interesting discussions (email in my profile). I'll try to put some ideas here, but it will be a while. Work to do and all...

Feel free to keep posting thoughts here - if you have anymore to say after the comments close let me know and I'll reopen them...

Here are the problems I see with variable money supplies:

  • Distorts the value of money and the price signals it provides (Inflation/Deflation)
  • Lends itself to mismanagement or abuse
  • Complicates time-based financial instruments

There are several perspectives on what the essence of money really is, but one is that a unit of money is a claim on a certain percentage of the total goods and services available in the market (a share, if you will). Considered in this way, creating new money would suggest that there are more marketable goods available, which clearly isn't the case. On the contrary, the new money created has simply diluted the shares of all the other money holders. It simply creates inflation.

Another common perception is that "time is money", or rather, vice versa. While the relation is not really that simple, there certainly is a time element to money. Considered this way, creation of new money implies that somehow there are more hours in a day...

First, thank you for your kind words. Also know that I have nothing against LETS systems, aside from the fact that they don't address what I think is the fundamental problem with money. Namely, that money is too good of an asset compared to nearly any other commodity.

With regard to the variable money supplies of LETS systems, how much money is in a LETS system? It is not zero. The net system balance is zero. Simply because positive balances must equal negative balances by design. The money supply is actually the maximum amount of negative balance permitted in the system. If there were no limit to negative balances, the money supply would be infinite.

In our current debt-based money system, assets and liabilities are essentially balanced as well. (Fractional reserves are another matter) The real difference is where the credit is created. Our current system is very centralized, LETS systems at least attempt to distribute the credit generation. This is a very good idea, but does it actually work?

Let's consider an example. Bob is a very productive and thrifty man in the community. By all accounts he is an outstanding citizen and responsible example to all. Because Bob is productive he makes a lot of money. Because Bob is thrifty he saves a lot of money; the more time that goes by, the more money Bob has. Few would consider this a bad thing, for he has earned all the money that he has, and it is considered quite prudent to save for the future. There is of course a problem here; given enough time and a limit to the amount of total money in the system, Bob will have all the money. Now how will others pay Bob? Bob has unwittingly killed the Golden Goose, so to speak.

One does not need to be too creative to see where this story goes next. Since Bob has all the money, and money is desired by all, it seems that Bob should start lending his money. This is starting to look like a very familiar state of affairs!

A LETS system would not alter this chain of events whatsoever. Since assuming the LETS system has a reasonable limit on negative balances, the clear outcome of the preceding scenario would simply be that Bob would have a positive balance equal to the number of other participants in the system multiplied by the maximum allowed negative balance. In other words, he would still have all the money!

Now consider how the story would change if money were a poor asset. Bob would no longer be prudent to save his money, but rather to purchase other commodities that would hold their value better than money in hand. So even if Bob bought up all the gold in the land with his money, the money would still be out there allowing everyone else to go on with their business. Bob might have a monopoly on gold, but that is a far cry better than having a monopoly on the entirety of commerce!

Suppose you use Doom and Gloom Dad's idea of charging interest on positive and negative balances?

As is evidenced, currencies are already backed by governments and their taxbase. This makes it a public utility, ie. a system of exchange, very similar to a road system. I think a separate system of money as a store of value not only isn't necessary, but is socially corrosive and environmentally destructive. Money can only be stored by investing it, ie. loaning it out to someone else. There are not enough viable investment opportunities to support everyone having sufficient wealth to be secure. That is the real cause of credit crises, as standards have to be lowered to increase the money supply. Social Security is a good example of social cohesion in the modern era. We invest in our old age by taking care of the previous generation in the assumption the next will do the same. The money taxed for it is spent immediately and doesn't have to be saved. It's like electricity, in that it is used as it's produced and doesn't have to be stored. If we simply viewed currency as what it is, a public utility and drop the tie to particular commodities and therefore specific property, it wouldn't require the same level of regulation required when it is a given that individuals have the right to hoard as much as possible, just as being a road hog isn't socially acceptable. This wouldn't apply to other forms of wealth and property, so rather then everyone trying to squeeze as much abstract value of their environment and community to put in a bank for the profit of those owning that bank, they would be far more inclined to try to increase the value of their environment, tangible assets and communal connections. Not only would this reduce the power of the monetary system and its tendency to blow bubbles, but it would reduce the ability to create large economic and political organizations which are not accountable to their base, but only those at the top. Yes, people would still have bank accounts, but they wouldn't place as much of their net worth in this abstract form of asset. And as I mentioned earlier, these banks would be a function of the community and treat profits as a community asset. Think of it as the difference between gentle rain and hurricanes. A healthy convective cycle redistributes water as evenly as possible and even those areas which haven't been productive, will tend to become more so, as they become integrated into the larger economy. Hurricanes, on the other hand, lift up enormous amounts of water and frequently damage the land when it does come down, just as credit bubbles destroy wealth when they pop.