home » Liquidity, ’flations, purchasing power, and local currencies

Liquidity, ’flations, purchasing power, and local currencies

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

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