Monthly Archives: February 2016

Why local currencies are important to all of us

Local currencies are a courageous attempt to seize back control of one of the fundamental means of economic prosperity – the money supply. A local currency, often backed one-to-one by Sterling, encourages money to be retained locally rather than leak away as profit to international shareholders and lodged in offshore tax havens.

Local currencies can offer cheap credit on a different qualitative basis to the banks’ credit algorithms, back local initiatives, create opportunities and unlock value that would be ignored by the return-on-capital and security approach of the main street banks.

Many of us argue that, until we have local, non-profit control of our money supply – until money can’t be made out of money – then many other Transition Town initiatives, like energy neutrality and food self-sufficiency, will be fundamentally skewed.

Most of us willingly subscribe to a commonsensical view of money as a neutral means of exchange and store of value without realising quite how much it puts us in servitude to its issuers, the commercial banks.

In the UK (and most other economies), most of the money supply is created by banks as loans or mortgages and is debt-based. The issue of credit and growth of the money supply also effectively has no control since mandatory bank liquidity ratios, enforced by the Bank of England, were abandoned more than 30 years ago.

97% of the Pound Sterling is created as debt, limited only by the control of interest rates. This was a practically a conspiracy theory until 2014 when the Bank of England, in its Quarterly Bulletin, admitted that:

“The reality of how money is created today differs from the description found in some economics textbooks…rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”

On the international front, the period from the late 1960s until the present day has seen the gradual deregulation of banking and credit. Much of the theoretical support for such deregulation was based on an analysis that thought of banks as mere financial intermediaries and which neglected their crucial function as creators of the money supply. These decisions were also based on a neoclassical economic ideology whose mantra is that the market is always right.

Is this system well-managed and does it create stable conditions for the many small businesses in the UK to flourish, the real wealth-creators? Nine years on since the financial crisis of 2007-08, there is little evidence of the global economy returning to pre-crisis levels of growth. The system is flawed, creates inequality and actually causes periodic financial crises as well as a new danger, deflation.

Money is not neutral: it is mostly created as a debt and the cost of money is a significant part of the price of everything we pay for. It doesn’t have to be like this. We can decide, as a society, what money should be but we have let political control of the money supply slip away until even the setting of interest rates by the Bank of England’s Monetary Committee is out of our control.

Only when we understand that money can be something other than commercial credit can we see ways out of the dilemma, the most obvious of which is for government to issue ‘sovereign’ money as fiat (government decree), rather than constantly indebting ourselves to banks through commercial borrowing.

This solution is what most monetary reformers, led by campaign groups Positive Money and the New Economic Foundation in the UK, and the American Monetary Institute, propose.

Meanwhile, local currencies are a laudable attempt to wrest back some control over money supply in the local economy. In Transition in Kings, we have tried to formulate plans locally for a Grand Union Pound, encompassing five local authorities from Dacorum to St Albans and involving a local credit union to officially ‘bank’ our cash.

Predictably, the response from local councillors has ranged from ice cold to lukewarm. We need their support because one of the planks of a local currency is to be able to use it to pay local business and domestic taxes, at a discount to the Pound.

One of the difficulties is presenting a viable case for local economic development when cash-strapped councils are shrinking services. Our area is also not a naturally-contained metropolis like Bristol or Liverpool.

The first local currencies – backed by their Transition Towns organisations – in Totnes, Brixton, Stroud, Lewes, Exeter and Bristol are wonderful initiatives and have been formed as non-profit enterprises. They have had mixed success.

Some monetary reformers argue that they lacked proper theoretical foundations and have achieved limited circulation.

Even in 2015, on its fourth issue, the Totnes pound is extremely sluggish. Even with discounts, pound-backed (proxy-pound) models in which national money is captured for the local economy, local currencies lack powerful enough incentives for those local pounds to circulate widely and fast-enough.

These projects no longer promise significant economic development but, instead, acknowledge that local notes act as a ‘nudge’ in people’s wallets to encourage them to spend locally, where they otherwise might not have. However, the vision of economic impact through better models still burns brightly in the hearts of the projects’ founders.

In Bristol, you can get discounts for paying, in Bristol Pounds, for Housing Tax, using buses, for Members’ products and services and choose to have some of your salary paid in the local currency.

From the outset, the Bristol Pound’s breadth of preparation and building relationships with local traders set them ahead of the pack. Bristol Pound is a growing charity, employing ten staff and amplifying its impact through the newly-formed Guild of Independent Currencies (see references), whose initial meeting we attended.

The Grand Union Pound is a founder member of the Guild and Members share information and facilities on subjects like, funding, software, communication, community engagement and legal issues.

Sharing software is particularly important. Software can be difficult and expensive, but is essential to manage digital money as a complement to paper cash and to have trusted banking facilities.

Bristol has put a lot of resources into maintaining and developing its software in partnership with Qoin (see references) and the EU-funded CCIA partnership (see references), and any project with a similar model is invited and advised to share that experience. One aim is that all the Town Pounds can be interoperable through the software to support supply chains across the country.

Local currencies are certainly not yet monetary reform but they are building awareness of the importance of localising supply chains, which is a prerequisite for circulating new local money. Mutual credit initiatives are just not catching on but proxy pounds could be the start of driving a slow wedge between scarce expensive legal tender and free sufficient local credit/money.

In fact, the leaders of Bristol and Brixton both wanted from the start to build mutual credit systems but both opted for backed-money first, because local businesses wanted to retain the option of cashing out in Sterling. Bristol is about to launch a new model, in parallel with its existing pound, called Prospects, which will be an interesting variation on mutual credit in which loans can be optionally repaid with Sterling.

There are lots of good energy and innovative ideas in this arena but progress is agonisingly slow. Chilean economist Manfred Max-Neef offers a vision of a financial system controlled from the bottom up:

“The financial institutions that may be concerned with local financing of human scale development must state goals and forms of operation going far beyond conventional principles. In the first place, these institutions must promote local creativity and support community initiatives that are organized through solidarity, horizontal and equitable relationships.

Second, they must encourage the greatest possible circulation of money at the local level. This means attracting locally generated surpluses and making them circulate as many times as possible within the local space, thus increasing the multiplier effect of a given level of deposits and savings.

Third, these institutions must adjust themselves so that the savers, or the generators of surpluses, may decide on the use of their resources, thus allowing for a greater transparency in the relationship between saver and investor that may, in turn, promote greater participation in activities devoted to making development alternatives in the local space more viable.

Fourth, these financial institutions must be managed in a cooperative way by people in the community itself, which means that the management should also be local in origin. Finally, if the local financial institution is to gain credibility, it must be protected against any potential liquidity crisis.”