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Do local currencies do any good?
You know, like BerkShares, the local "currency" in Massachusetts. Tim Harford is skeptical:
True, community currencies may very gently encourage trade with locals rather than strangers. But the gains from more trade with locals are more than offset by the losses from less trade with strangers.
See the full post for much more. I am more positively inclined than is Tim. First, local currencies blossom when the nominal money supply is too low and wages and prices are sticky downwards. A boost in the real money supply is needed and the private sector will do it -- albeit at high transactions costs -- even if the government will not. That's why so many of these local currencies blossomed in the 1930s but then disappeared. They did good but then they were stamped out or ceased to be necessary.
Second, private currencies can serve as a form of price discrimination. By accepting private currency from your local customers, and indeed only your local customers, you can charge them a lower net price and without being very public about it. That's useful if the local economy is in the dumps. Note that as the local community recovers, this motive for the local currency goes away as well. It also implies that local currencies will be most popular with merchants who hold excess inventory and have some market power.
Posted by Tyler Cowen on May 4, 2008 at 06:18 AM in Economics | Permalink
Comments
The only local currency I'eve ever encountered was the "Ithaca Hour" which definitely did not come about as a response to low nominal money supply, but out of some kind of anti-corporate, community first sentiment.
Posted by: josh at May 4, 2008 7:35:31 AM
As the 'Berkeley of the East,' I suspect that the Ithaca money uses free-range and organic paper and inks. ;-)
Posted by: Speedmaster at May 4, 2008 9:29:28 AM
how do these differ from frequent flier miles, gift cards, and Disney dollars? Those all seem to be driven by excess inventory and market power as well; do they imply a money supply shortage ?
Posted by: dk at May 4, 2008 11:16:21 AM
A money supply shortage causes deflation. Given one, people must reduce prices or accept excess inventory and lost sales. What they would like to do is price discriminate (possible due to their market power) to keep high price revenue streams while taking in new low price revenue streams. They can use local currencies to do this.
Posted by: michael vassar at May 4, 2008 11:59:36 AM
To add to your point about price discrimination: This works particularly well with the Berkshires because of all of the wealthy tourists who come by. Martha's Vineyard should consider the same thing.
Posted by: Macneil at May 4, 2008 12:11:37 PM
Dunno how well the url will work, but this Feb 25 2007 NYT piece is useful
http://query.nytimes.com/gst/fullpage.html?res=9C00E7DC113EF936A15751C0A9619C8B63&sec=&spon=&pagewanted=print
So from a merchant's point of view, this thing could be like printing a coupon in the local newspaper, though harder to control -- you can see from the NYT piece that Berkshares almost sank the local co-op. (You can see why coupons have expiration dates and limits on what you can do with them.)
The question the NYT piece leaves open is whether this is all it is -- an elaborate 10% off for locals scheme with cashflow-minded businesses quickly turning them back into dollars -- or whether these things really do circulate more widely.
There's a more sinister side in the Baba Louie's story in the NYT piece -- this could be a way for local consumers to use a kind of monopsony power to *demand* ten percent discounts from local vendors.
Posted by: Colin Danby at May 4, 2008 12:51:50 PM
"First, local currencies blossom when the nominal money supply is too low ... That's why so many of these local currencies blossomed in the 1930s but then disappeared. "
The money supply was too low in the 1930s? It was expanding at a rate of 8-20% per year all through the 30s. They were printing money to pay for the New Deal.
Might it not have been the opposite? People didn't trust the national currency, since they just kept printing the stuff whenever they wanted, had removed the gold clause and gold backing, and for the first time nobody really knew what a dollar would be worth in a year?
Posted by: liberty at May 4, 2008 4:55:12 PM
I don't see that there are any advantages to having local currency. I think that it would ultimately just be a needless complication and make it harder for people to see if they are paying too much or too little for what they buy.
-Ted
Posted by: political forum at May 9, 2008 2:19:53 PM
