In the wake of the crisis of 2007-8, central banks became understandably more willing to try out new monetary policies. Quantitative easing, combined with the traditional slashing of interest rates, was meant to solve the United States’ liquidity problem. Coupled with fiscal stimulus, the economy made a consistent, yet fragile, recovery over time. While the recovery has persisted for the past few years, there are some areas of the countries left untouched by it that are unable to access these kinds of tools to solve their problems. One potential solution is a novel one: have local communities create their own money.
Originally formulated in the 19th century by a German economist named Silvio Gesell, community currencies that depreciate in value are seen to as a way to counteract financial panics. A monetarist by trade, Gesell was convinced that economic problems could be solved using fixes to the money supply. Gesell theorized that the introduction of a new currency or increasing the money supply could solve the problem of economic panics. The implementation of his ideas has yielded very positive results, and community currencies are now a tool that local governments can use in a number of different ways.
Community currencies counteract recessionary effects by providing easy money to communities strapped of cash. In situations where communities have a high rate of unemployment but only a small amount of funds to carry out public works projects, community currencies are able to provide a kickstart to a local economy. The greatest example of this in action is known as the “Worgl Experiment.” In the middle of the Great Depression in 1932, Worgl, a small town in Austria, experimented with issuing its own currency. The mayor of Worgl had thousands of people unemployed in his town and the surrounding area. Although he had plenty of public works projects that needed to be done, he had nowhere near the amount of money necessary to pay for the necessary supplies and labor. Rather than spending what little he had or going into debt to pay for the projects, the mayor deposited this money in the bank and used it to back his own “community currency.”
This new currency was used to pay for the first public works project. Every month, the holder of this stamp scrip was required to purchase and apply stamps to it that were worth 1% of its value. Holders were thus incentivized to spend their wealth held in community currency because of this depreciation in value. Because the community currency was spent so quickly, employment and trade in the town boomed. Using more of the stamp scrip, the mayor was able to pave the roads, improve the drainage system, relight the streets, build a ski platform, and modernize the parish mill. In addition to all of these, because of the incentive to spend the money quickly, the town was also able to recoup almost all of its tax arrears within a year. This led to a significant easing of the town’s finances and revitalized the surrounding area, in addition to the town itself. This experiment was so successful in Worgl that many other towns in Austria wanted to imitate it. Fearing that it would lose a grip on its monopoly to print money, the Austrian Central Bank intervened and put a stop to the currency. Taking place in a small town with strapped finances, this example has many promising attributes.
Many deindustrializing and rural areas in the United States suffer from poor infrastructure and high rates of unemployment. One of the most tragic examples of such a community is Flint, Michigan. Suffering from financial troubles, Flint decided to change its city water source. This change, coupled with poor infrastructure in the town, caused levels of lead in the water of residents. Because the municipal government was so strapped for cash, however, they were unable to replace the piping, and thus unable to ensure that the water was uncontaminated. This tragedy may even play out across the country in the near future, as most of the water systems in the country are due to be replaced in the next decade. Because most of these water systems are small systems that often lack financial, managerial, and technical capacity, they are likely to face the same problems as in Flint. Community currencies would offer a way to not only increase economic activity in these disadvantaged communities but to also improve the quality of life within them.
Community currencies can also benefit local economies by increasing the velocity of money. Because of a decrease in confidence, the velocity of money has dropped sharply, falling to 60 year lows. Thus far, this has only been counteracted by massive injections of liquidity by the Federal Reserve. The Federal Reserve has been printing money and buying securities off the market in order to increase the amount of money in the financial system. Increasing liquidity through this policy, called quantitative easing, is dangerous and has many potential unforeseen consequences. Raising confidence in the economy is also an incredibly hard feat to pull off in a post-recession atmosphere as most people are very hesitant to spend their money. This inevitably leads people to hoard cash as they fear the worst will happen again. By refusing to spend money, consumers ultimately worsen a recession by further decreasing confidence in the market.
The Worgl Experiment showed one instance in which community currencies jump-started an economy amid a very tepid atmosphere. A modern successful example took place in the Chiemgau region of Germany. This community created a currency that had a 2% depreciation every 3 months. Consumers may trade Euros for Chiemgauer (as the currency is known) at a 1:1 rate. When businesses have a glut of Chiemgauer, they are then able to exchange 100 Chiemgauer for 95 Euros. Consumers are incentivized to spend the money that they exchange quickly because of the regular depreciation in community currency value. For this reason, the Chiemgauer moves through the economy 3x faster than the Euro does. The difference in the “purchase” rate for the consumer and the exchange rate for businesses is then donated to charities that are specified by the currency members with a small portion going to administrative costs. While the economic benefits are clear, this currency begs the question: why would someone sign up for this in the first place? The answer to this is actually one of the strongest arguments in support of community currencies.
Community currencies promote local and regional businesses and increase the personalization of the economy. In a hyper-globalized world, large corporations dominate the economy. These large, unfeeling companies can often be portrayed as being soulless and cold. Killed off by bigger chains, the local small business model is in danger of extinction. No longer are people able to walk into small town shops to know and see the owner. This kind of personal connection with those around us is a significant part of what makes us human. To accompany the increasingly lost sense of community in America is a related sense of isolation and atomization in the economy. By intentionally focusing on the local, community currencies regain this spirit. People in the Chiemgau region of Germany are willing to sign up for their community currency in part because the money is donated to local non-profits dedicated to preserving local culture and promoting local businesses. Outside of an economics department, anyone would say that humans are more than robotic money maximizing machines. A great example of a local currency meant to encourage such community bonding is the Sardex. Created in Sardinia, Italy, a place of high unemployment and a lot of economic slack, the Sardex was meant to foster a sense of common spirit amongst the island’s people. The creators made a slightly different system than the Chiemgauer. Members of the currency are able to buy goods and services on the exchange using the Sardex up to a predetermined limit. In order to continue using the system, they must also sell their goods or services and pay off their debt or gain a surplus in the system. While there have been very rare cases of companies racking up huge debts and not paying them off, most companies in the system participate faithfully. Even though it would be the economically “rational” choice for companies to backstab other companies, they do not. These intangible social benefits are also accompanied with extra transactions worth 51.2 million Euros because of the Sardex.
Community currencies provide numerous economic, social, and cultural benefits. They are a tool that local governments can use to promote a sense of community while also improving the economy. By focusing on the local, community currencies offer a customizable tool for use in many different situations. They can be used to restart an economy in need of a spark or simply to take out some of the slack in a stagnant economy. All of this economic activity must necessarily come from local sources and thus increases trust and community spirit. In standing up for the local, community currencies offer a way to encourage a return to the local and human market.