The Economic Case for Local Currency

In Small Town Decline: 1920s & the Rise of Chain Stores, I wrote about how locally owned shops keep on average 3.7 times more money in the local economy than their chain store counterparts, an important benefit to be encouraged and supported. But as compelling as this number is, our family finds that on a practical level backing up our localist principles with our wallets is not always easy. Why? Well, as with most families, the Golbabais operate within a fairly strict budget. From groceries, to clothes, to books and entertainment – the very reason chains, and now the Internet, have been so successful is that they are able to, in reality or simply in perception, offer cheaper prices than the local competition. Yet patronizing these chains in lieu of local stores in the long term leads to poorer, clone towns.

In economic terms, this conflict is a perfect example of the tragedy of the commons – a situation in which pursuing individual short-term interests undermines everyone’s common interest in the long-term. The classic example of this phenomenon is that of multiple shepherds who share a single field for grazing their sheep. Each has an individual incentive to feed his sheep as much as possible (bigger sheep, more money from the market) but if they all did this the field would become overgrazed and all the shepherds would lose their livelihood entirely. Another great example of the tragedy of the commons is the environment. It may be cheaper today for factories to produce without expensive constraints on emissions but long-term if those emissions contribute to the deterioration of the ozone and the melting of the ice caps, we’re going to have a much bigger problem on our hands.

Our economy has a really hard time addressing problems of this nature. The usual result is first an appeal to the conscience and values of the people eventually followed by a bitter political battle over whether or not the government should step in to regulate this sphere.  But for local communities trying to balance the protection of local businesses with openness to imported goods and services that improve the quality of life, is there a better way?  It’s a tall order, but one of the best ways may be a forgotten ancient economic tool once the norm:  local currency.

Money Multiplier Looking once again at a crude napkin sketch representation of the local economy can help explain the role of a local currency. First, local currency provides an important protective shell for the local business community. If the dollars I have in my wallet can only be used at local places, chances are I’ll look to shop at those places first. Similarly, if a community is circulating a local currency, there’s less incentive for major chains to move in since those chains aren’t interested in extracting local currency to their corporate offices. Now before you tell me that protectionism has long been proven ineffective, let me tell you that while most local towns and cities aren’t employing this technique, major companies already have been for years. Airline miles are a local currency redeemable only at certain places. Coupons are a local currency, only good for specific products. Gift cards are exchanging regular money for a local currency only good at certain stores. Carnivals and video arcades operate with tickets and tokens. For health insurance, “in-network” is nothing more than a way of incentivizing “staying local.” The corporate world has indeed embraced the power of “local currency” because it keeps money circulating in-house.

On an even grander scale, in Cities and the Wealth of Nations, Jane Jacobs cites currency as the economy’s chief thermostat, able to measure the economic climate and provide an appropriate response. A hot economy drives up the exchange rate of the currency, which makes foreign imports cheaper and local exports more expensive, keeping stability in the overall price of goods and services. Similarly a struggling economy will have relatively inexpensive currency compared to the outside world, which lowers the price of its own goods and makes foreign imports more expensive, incentivizing locals and outsiders to support the local economy.

Problems arise when a single national currency is tasked with regulating multiple local economies with disparate economic needs.  How can one monetary policy possibly respond to both the needs of Silicon Valley for affordability and the needs of struggling Detroit for investment?  The flaw in the system is that it is tasked with the impossible. A single national currency only has the ability to receive and respond to an aggregated economic temperature of the country as a whole rather than the individual local economies that make it up. Jane Jacob illustrates this problem beautifully with her example of breathing:

 “National currencies, then, are potent feedback but impotent at triggering appropriate corrections. To picture how such a thing can be, imagine a group of people who are all properly equipped with diaphragms and lungs but who share only one single brain-stem breathing center. In this goofy arrangement, the breathing center would receive consolidated feedback on the carbon-dioxide level of the whole group without discriminating among the individuals producing it. Everyone’s diaphragm would thus be triggered to contract at the same time. But suppose some of those people were sleeping, while others were playing tennis. Suppose some were reading about feedback controls, while others chopping wood. Some would have to halt what they were doing and subside into a lower common denominator of activity. Worse yet, suppose some were swimming and diving, and for some reason, such as breaking of the surf, had no control over the timing of their submersions. Imagine what would happen to them. In such an arrangement, feedback control would be working perfectly on its own terms but the result would be devastating because of a flaw designed right into the system.”

Citing the economic benefits Singapore and Hong Kong have experienced operating their own currency, Jacobs makes the case that currency should be tied to the discrete economic unit of city regions rather than the arbitrary boundaries of a nation.  In some cases the tension between disparate city regions sharing a currency can be so great it can drive a nation apart. In the United States, this was one of the major issues of conflict between the North and South leading up to the Civil War.

 “In the South, where cities did not become productive, the tariffs simply drove up the cost of living without producing the economic benefits they did in the North. The South’s rural producers were being robbed of the cheap imports they had actually earned; in effect, they were victimized to subsidize city production. So bitterly was this resented in the South that tariffs were on of the causes of the South’s attempted secession from the Union in 1861 and the four-year slaughter that followed.”

Right now, policymakers around the world and especially in Europe have decided that the road to economic growth is currency consolidation. Such a policy removes a major barrier for producers looking to export their goods to new markets, but as a result, does not protect local businesses and does little to keep money in local economies. In fact, I would contend that this policy is wreaking havoc across Europe just as it did in the United States before the Civil War. Rather than a policy of consolidation and centralization to achieve economic success, perhaps we need to take a page from Jane Jacobs and go smaller and decentralized, giving our local economies the flexibility to self-regulate and thrive. Perhaps, in these up and down economic times, we need to give local currencies a shot.

3 thoughts on “The Economic Case for Local Currency

  1. Pingback: Why Are Local Governments Not Localists? (Part I): Distinguishing Economics and Finance | The New Localization

  2. Pingback: Local Currency In Practice | The New Localization

  3. Pingback: How the Supreme Court Used the Commerce Clause to Ban Economic Protectionism | The New Localization

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