Tuesday, November 8, 2011

Local Currency

A story in The Oregonian last Sunday discussed the efforts of a group of people to bring local currency to Portland. The idea is pretty straightforward: with local-only currency (i.e. accepted nowhere else) it can never leave the community, so through the use of such currency you ensure that money you spend remains in the community. This, in turn, helps the local community through increased investment, fostering local connections, enhancing local businesses, etc. The system works on an advanced form of barter where a group of individuals and businesses agree to accept the local currency for goods and services provided. However, you can only use the currency within that group - so only if the group has a good or service you need will an exchange be made.

I want to like the idea, I really do, in fact I lived in Ithaca, New York for five years while in graduate school where perhaps the most successful example of local currency exists: Ithaca Hours. But the economist in me just won't let me get excited about the idea. I certainly don't think there is anything wrong with having a local currency, but I think that claims about the benefits are just not very credible - I don't think it really makes a difference.

The first idea, that this keeps money circulating locally seems to me to be countered by the much lower velocity in the circulation of this money. Even though dollars may quickly leave the Portland market, chances are they will have changed hands locally many times first (on average). The problem with local currency is that it does not solve the barter problem very well unless there are a huge number of participants. If the velocity is quite low, then it may even cause a drag on the economy - slowing down the rate of transactions.

I also don't think that local is the way to think about economic vitality. Most Portland artisans, I imagine, are very happy to fill orders from across the US and the world and would be much worse off if they tried to satisfy only local demand. On the other hand if I take a dollar I earn from my job and spend it at the Corvallis farmers market, I hope that that dollar is spent by the farmer in a way that yields the most benefit to him or her. Maybe it is buying seeds from a wholesaler in another county, or perhaps in a new piece of equipment from Japan, or a cool iPod for the kid that cannot be bought with local currency. I am not clear on how a purchase with the local currency (and apparently there is one in Corvallis but I had never heard of it prior to its mention in the article) helps the local economy if it prevents these purchases by the local farmer.

Finally, the hypothetical extreme is a completely closed off economy. What would I expect from such a place? Lower variety, less efficiency (including higher energy usage) and poorer quality. So why should we want such a world, even in part? I like the idea of lots of goods a services both flowing out of Portland and flowing in - I don't see it as a leakage but as a virtuous cycle of exchange.

As a coda: two of my classmates in graduate school actually wrote and published an economics paper which argued that local currencies could serve as a signal of demand for local goods and thus spur investment in local productive activities. With all due respect to my esteemed colleagues, I think in reality local currencies are so minor a part of the economy (even in a hugely successful system in a tiny upstate NY town), that though theoretically correct, the real effect is negligible.


petrichor said...

i wouldn't say i'm super excited about a local currency, but your analysis is based on a very pessimistic scenario.

early on you say: you can only use the currency within that group

but the group is not of fixed size; it will expand or contract as more people use it, accept it, or don't.

thane you say: that this keeps money circulating locally seems to me to be countered by the much lower velocity in the circulation of this money.

but your assumption of low velocity is only sound if the network is indeed small and limited. if the network expands steadily then the velocity could be as high if not higher.

you end with the hypothetical extreme is a completely closed off economy.

really? i didn't see that in the article. hypothetical extremes aren't very useful, the natuhral extreme would be widespread local use, and a fluctuating (or perhaps pegged) conversion rate with the dollar for people who need to cash out.

for an economist, it is puzzling that you did not even tackle the key economic component of this ideaL incentives. a local currency not subject to the whims of the current inflationist at the fed might in fact be more stable than the dollar. but even if there is no increased purchasing power, the strongest incentive would be that holders of the local currency are often going to look for the availability of local goods and services to purchase with their "Hours", rather than automatically looking for the cheapest price, wherever it can be found. that incentive alone create conditions for a much higher velocity: currency that leaves the local economy has a very low local velocity.

Patrick Emerson said...

I think lower velocity is almost guaranteed unless the group is virtually all Portland individuals and businesses. But I agree the larger the group and the easier the transaction (using e-money) the better the outcome.

If you peg the conversion rate with the dollar than whatever inflation happends with the dollar will also happen with local currency.

You bring up one point which is possible, that people will be willing to pay more if it is in local currency bacuse they feel it is a type of investment on top of an exgchange. If this is true then it is very much like the paper I linked to: increased investment might actually happen as a result because it essentially means there will be a higher demand for local goods and services with a local currency.

I have no problem with local currency, and I hope it gets started because it would be a very interesting experiment, but I just can't see that it will have much of an effect.

Anonymous said...

I am intrigued by this discussion. I was not interviewed in the Oregonian article you reference, but I am a former member of that group. I and a few partners decided to shift our focus and create the Community Exchange Network of Portland (http://www.cenpdx.net). Of late, we have had much success gaining the partnership of the City of Portland, Portland Saturday Market, Bright Neighbor and others. I encourage you to visit our website and contact me (c.macfergus@cenpdx.net) if you have any questions. Perhaps you would like to revisit this topic and interview me for your next blog post.


Collin S. Ferguson

James said...

Current economic issues in the US point to a need to reevaluate our ignorance of the challenges of local credit unions and community banks, which local currency ignores, in my opinion. Also, in my opinion, buy local NEEDS healthy community merchants and businesses, all of which borrow money from local Financial Institutions. National FI don't, historically or statistically, loan money to local businesses.

Anonymous said...


It's going strong now. The notes were printed last week.