Local Currency Schemes – The Big Tractor

I’ve been thinking about this post for a few days and am about to say things that some people may find hard. And my rhetoric might seem unfair. But I think it needs to be said firmly. I’m unlikely to change the minds of the alternative currency adherents but for the rest of us who are prepared to put the time into understanding the issues, I hope the following is useful.

Unfortunately there are a few people, thankfully mostly on the fringes of the green movement, who don’t have a good grasp of economic issues (it’s been a struggle for me too). With the best of intentions, they believe alternative currencies will save the planet. Such rhetoric gets all greens labelled lunatics. See * below.

Their adherence is religious, by which I mean logic doesn’t enter into the debate. They keep saying I disagree. They keep saying that black is white (for example that petrol vouchers are a currency). If we use the language so loosely, we are not talking the same language.

There’s a logical flaw in local currencies –  the local currency remains a currency. It has essentially the same problems as any other currency: price instability, convertibility, inflation, a reserve system, a banking system (at least to recycle your tatty bits of paper), and liquidity. In addition local currencies have large transactional costs (keeping track, avoiding counterfeits) . There is no way that standard currencies have anywhere near such enormous transaction costs. And when you have a plethora of local currencies the problems multiply. So you are no further ahead. Indeed you are further behind.

Promoters of local currencies or alternative currencies don’t understand that they are substituting one flawed system for another. You’ve still got the problems of a banking system. Oh but our bank will be better because we will promote trust between humans. It reminds me of a similar lack of understanding of “the economy“.

Those who wrongly believe banks are the root of the problem are often against interest payments. They want someone to look after their money and have it on call, but they don’t want to pay for the service.

Kim Hill, in a Radio NZ National interview with a popular adherent, Tom Greco, got to the nub of the issue with her “Big Tractor” question. She showed the lack of logic in Greco, and let’s make no mistake, the same criticism can be made of Bernard Lietaer or those on the edges of the Transition Town movement who are also believers. Utopian dreams are good, but they don’t equate to rational green policy-making.

Kim: (18 mins into the interview for those whose time is limited) “What if the local community wants a big tractor?”

Greco: If you buy it from someone outside your currency system you need “more conventional means of paying for it … you need a national currency as long as local exchanges remain localised. But you can envision the possibility of networking local systems together on a global basis and eventually I expect that’s what’s going to happen.”

Kim: “But then we get the banking system.”

Greco: We can reinvent the banking system and not repeat the mistakes of the past. We can share risks between debtors and lenders.

Kim: Where does this operate best?

Greco: The WIR Economic Circle Cooperative in Switzerland. But then Greco said it was a pity that it had turned into a bank!!!

My conclusion? The same as Kim’s. Greco is a Pollyanna. Promoting local currencies as a solution to the problems of the finance sector is an idealist dream of well-intentioned people.

* From the save the planet link the following question to the adherent on that website is worth close reading:

“If I put £1000 in the bank, then I think I have £1000. But then the bank lends my £1000 to someone else, who also thinks they have £1000. So now £1000 + £1000 = £2000 “exists” (at least on my bank statement, and in the wallet of the borrower). I think that is what you mean when you say banks “create money  …

Or are you basically saying that banks should become stock brokers? E.g., if the investment of my savings results in a loss, would the amount in my savings account decrease?”

“I think the essence of your proposal is (1) full-reserve banking for current accounts, and (2) abolish deposit protection for savings accounts. I think that would be enough [to] stop people thinking that “£1000″ written on a statement for a bank savings account is the same as £1000 of money.”