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The second (of two) currency alternatives available right now

by Paula | 29 October 2008 | permalink | comments
Tags: credit, currency

• On background: Money as Debt: how the monetary system works

The past few days I’ve been talking about currency alternatives, something I believe is extremely important given the problems with national currencies and extreme difficulties coming down the pike.

In addition to digital gold and digital silver, another non-local option exists that is potentially even more useful given its flexibility. It’s called Ripplepay, and it is quite ingenious.

Ripplepay is not a currency per se. It is a payment system in which users extend each other credit and square up later in whatever form they choose, whether in a national currency, in gold or silver, or through bartering items and services. From the Ripplepay site:

Ripple is a monetary system that makes simple obligations between friends as useful for making payments as regular money.

Normally, if your friend Alice owed you $10, she would have to pay you back before you could make any use of that debt. If you were creative, however, you might be able to pass the debt on to someone else who knew and trusted Alice, in exchange for something you wanted. For example, you might be able to get a book you want from Bob, who also knows Alice, in exchange for letting Alice know that she now owes Bob $10. Instead of money, you used Alice’s IOU to pay Bob. Alice acts as an intermediary between you and Bob.

Ripple does the same thing, only it takes the idea one step further. What happens if you want to get a haircut from Carol, who doesn’t know Alice at all? Your $10 IOU from Alice isn’t useful because Carol being owed money by Alice doesn’t mean anything to Carol. But suppose you had a way to find out that Bob, who knows Alice, also knows Carol. You could talk to Bob and arrange for him to take Alice’s IOU in exchange for giving his own IOU for $10 to Carol. Since Alice owes him exactly what he owes Carol, Bob is even on the deal. Both Alice and Bob act as intermediaries between you and Carol.

And that’s how Ripple works. You create a profile on the system and indicate who you know and how much you trust them by connecting to people by email address and giving them credit limits. Then whenever you want to make a payment to another Ripple user using only friendly obligations, the system finds a chain of intermediaries connecting you to the person you want to pay, and records the payment in each intermediary’s account all the way down the chain. You end up owing one of your “neighbours” on the system, and the payment recipient ends up being owed by one of her neighbours.

In the current economic environment, Ripplepay could potentially overcome commercial credit problems by providing a parallel system in which users grant each other credit, rather than having the whole credit system mediated by banks. My clients, whom the banks are currently forcing through knotholes over just a few thousand dollars, could secure credit to pay me from their friends on the system — people who know their businesses and trust them to repay. I can then use the Ripplepay credits with which my clients have paid me either to purchase goods and services from others in my Ripplepay trust network, or to square up in barter or conversion to national currency.

Ripplepay is a working prototype of the larger Ripple Project, currently under development. There is also a Ripple Users Group set up on Google.

I’ve had an account set up at Ripplepay for a while now, but have never used it. If you’re interested in connecting with me via Ripplepay, email me and we’ll see if we can’t get connected.

One (of two) currency alternatives available right now

by Paula | 28 October 2008 | permalink | comments
Tags: currency, recession

Yesterday I wrote about some of the problems I see with local currency models currently popular here in the States and elsewhere. However, I neglected to list the most obvious issue: if you don’t live someplace that has instituted an alternative currency, you can’t use any of them.

Fortunately there are alternative currencies available that any small business can start utilizing immediately to shore up customers’ purchasing power and even to help mitigate credit problems. These are two with which I am familiar; I’m sure there are lots of others.

Preserving purchasing power: digital gold and digital silver

I should note right off the bat that I have no experience with any digital gold currency (DGC) or digital silver currency (DSC) other than GoldMoney, so that’s what I’ll be talking about here. I just adore GoldMoney and its founder, James Turk.

DGCs and DSCs can preserve customers’ purchasing power by protecting the value of the money they have to spend with you, particularly during times of inflation. If your customers can transact with you in gold or silver, it means that instead of curtailing their spending as prices rise, they are able to continue buying the same amount of stuff because the values of gold and silver increase right along with whatever you’re selling. If you’re a grocer, for example, a customer who transacts with you in gold will discover that his weekly grocery bill costs fewer goldgrams instead of more dollars. That helps you offset the smaller grocery orders of your dollar customers and keep up with rising expenses of your own.

DGCs and DSCs work just how people mistakenly think Fort Knox works: there is a big ol’ pile of actual, physical metal, with currency notes circulating around that each represents some small portion of the pile. The primary differences are that 1) DGCs and DSCs actually do have all the metal in their vaults to back the circulating currency notes (GoldMoney does, at any rate); and 2) the currency notes are digital rather than paper.

GoldMoney’s digital gold currency note is called a “goldgram” and, just as the name implies, it represents one gram of gold. Goldgrams break down into smaller digital increments, with the smallest usable increment being one “mil,” or .001 grams of gold. Digital silver is measured in ounces.

The big drawbacks with GoldMoney and other DGCs are that in order to use them, your customer has to be a signed up for a DGC account somewhere, preferably with the same DGC you use. Also, all your transactions have to take place on the internet, which doesn’t necessarily translate well into a brick-and-mortar situation. But these are problems that can be overcome with a little ingenuity. The purchase of goldgrams may have to take place online; however, there’s nothing to stop anyone from reselling those digital goldgrams in meatspace and issuing paper receipts for the purchase.

Back to the example of the grocer: he could use digital gold to offer his customers “grocery bonds” denominated in goldgrams. A (smart) customer purchases a $100 “grocery bond,” and the grocer issues her a bond worth $100 equivalent in goldgrams — I’ll say 4 goldgrams for illustration purposes. The grocer then purchases $100 worth of gold — 4 goldgrams — through his GoldMoney holding to cover the value of the grocery bond.

Three months later, the price of gold has gone up to $30 per goldgram and the original 4-gram bond is now worth $120. The customer returns to redeem her bond, at which point the grocer sells the original 4 goldgrams through his GoldMoney holding and hands the customer a $120 prepaid store debit card. She can now purchase the same amount of stuff she did before prices went up, and the grocer has been spared the effects of inflation on her purchasing power — this, with almost no up-front investment beyond his time and the cost of having the paperwork printed.

It’s worth pointing out that in the event of a total currency collapse — a real possibility in the foreseeable future — the “grocery bond” scheme could potentially end up being the only means people have of buying anything. The bonds could quickly become the only usable currency in town… and the grocer is the originator of them all.

I see no reason why this model couldn’t be duplicated in any sort of brick-and-mortar retail environment. Moreover, I see no reason why multiple businesses couldn’t join together to honor each other’s bonds, or even issue a single bond redeemable among all participating businesses. For that matter, an enterprising entrepreneur could set up the gold retail bond scheme as a bona-fide business, sparing retailers the hassle of managing a digital gold holding.

I’d hoped to get to the second currency alternative today but this post has gotten much longer than I anticipated. Tomorrow I’ll cover the second, which is potentially useful in addressing credit problems.

Liquidity, ’flations, purchasing power, and local currencies

by Paula | 27 October 2008 | permalink | comments
Tags: currency, recession

Local currencies come up frequently in discussions of relocalization and how to make it happen. Currently there are a number of successful local currencies to which advocates often defer, including Ithaca Hours, the Totnes Pound, and Berkshares, among others. The goal of these currencies is to keep wealth and liquidity circulating in a particular geographic region, with the anticipation that doing so will bolster local wealth and create a buffer against problems — even very serious problems — in the global economy.

As a small business owner I can state with confidence that the current crop of local currency models are either not helpful, or decidedly harmful, to small businesses in general and I would not be able to participate in any of them.

As we head into uncharted economic territory, my primary concern is that my clientele is losing its ability to purchase my services on two counts. First, most of my clients use some form of credit to pay me, whether through credit cards, withdrawals against revolving credit lines, or what-have-you. It would be very difficult, if not impossible, for them to secure enough local currency denominated credit to cover the cost of a website design & development project. Moreover, since local currency by definition cannot circulate outside the local economy, even if they could secure enough alternative currency notes to pay me, I cannot use these for the vast majority of my business expenses. Literally nothing my everyday operations require can be manufactured locally or even regionally, and many things cannot even be purchased locally. Accepting these local currencies in anything but nominal amounts would be, for me, a fast track to bankruptcy.

Running a close second is my concern that inflation, deflation, and/or stagflation is eroding my clients’ purchasing power. In just the past year prices for various things have both risen and fallen dramatically, with the net effect being that whatever cash is circulating out there can no longer buy what it recently could. A local currency pegged to the value of the national fiat currency, when that currency is unstable, also makes the local currency unstable and does not support my clients’ purchasing power. For example, one Ithaca Hour is valued at US$10, because when Hours were initially conceived in 1991, US$10 per hour was the average wage in Ithaca. Adjusted for inflation, one Ithaca Hour was worth US$6.56 in 2007. That doesn’t help me or my clients.

The Berkshares example is even worse. Berkshares were set to exchange at 10:9 against the dollar — that is, 10 Berkshares cost US$9 to purchase. It seems crazy to me that any business owner would have participated in the Berkshares scheme: not only do Berkshares lose value at the ‘flation rate of the national currency, they force business owners to take an additional 10% hit on any Berkshares transactions. Berkshares were essentially 10%-off coupons, infinitely reusable until their expiration. In June, 2007, Reuters reported that there were “…about 844,000 BerkShares in circulation, worth $759,600 at the fixed exchange rate of 1 BerkShare to 90 U.S. cents.” In other words, from October 2006 to June 2007, Berkshares deleted US$84,400 from the Berkshires economy, entirely at the expense of small business. Ouch.

I certainly hope that in the future designers of alternative currencies take the needs of small business into account. In the meantime, here are some properties an alternative currency needs to have in order to help my business stay afloat:

1. It needs to be measured in some value of its own, separate from the national currency, in order to preserve my clients’ purchasing power
2. It needs to be readily convertible to the national currency in order to allow me to continue paying my non-local business expenses, and for tax and accounting purposes
3. It cannot have any sort of built-in penalty for its use or conversion over and above relative value and reasonable processing fees, such as national fiat currencies’ inflation rate or Berkshares’ 10% discount, in order to preserve my own purchasing power
4. It needs to be available as credit without an onerous interest burden
5. It needs to be a for-profit product issued by a for-profit organization so I can understand and trust its goals, and maneuver my business appropriately within them

I have some ideas regarding how this can be achieved, and how small businesses can implement currency-like solutions on their own without waiting for some external organization to plan & execute. I’ll post these tomorrow.