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142 comments on Locabucks: Are local currencies a way to escape the liquidity trap ?
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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
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.
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.
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.
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.
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.
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.
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!
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!
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.)
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:
and
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?