The financial crisis that started in 2007 will leave a lasting impact on the global economy. Government debt levels throughout the developed world will be higher than they would otherwise have been, as authorities stepped in to shore up failing economies. The overall level of national income will probably be permanently lower in some countries – billions of pounds of income lost forever, never to be recovered. But the crisis could also have an impact in some rather unexpected ways. One of these is the rise in ‘local’ currencies.
At its heart, a currency is just a store of wealth. For it to work it has to be an accepted medium of exchange – so other people have to be willing to receive it when you want to buy goods and services from them. There is no fundamental reason why governments have to be the issuers of currencies; the fact that they typically are mainly reflects the confidence in the currency that is required if it is to be a meaningful and accepted store of wealth. And, throughout parts of Europe, new mediums of exchange have been cropping up.
One of these has arisen in the Greek town of Volos, where citizens have been using an alternative currency called ‘TEM’. Members bank their TEMs by selling goods or services (gaining credit) and can then use them to buy other things that are available in the network. But this is not just happening in Greece. Mr Henley Davis, editor of this site, recently observed the growing popularity of ‘Beacons’ in Brecon, where deals were struck with no exchange of sterling. ‘Beacons’ have been around since 1993 – but may now be gaining more traction.
What are the benefits of these currencies? One might be that, in their simplest form, they often enforce austerity. Because these micro currencies do not have functioning credit markets – it is relatively difficult to borrow money – in order to buy something people first have to earn the money for it. This means that build-ups in debt are avoided. Another benefit is that, because these currencies are only used within a local area (there are several different Local Exchange Trading Systems, or LETS, in Wales), the physical income stays within the local community, rather than leaking outside.
So far, so good. But there are limits to the use of these local currencies. First and foremost, a ‘TEM’ or ‘Beacon’ will not be much use in Athens or London. So, if they are to become truly important, these local schemes and currencies must have some means or being exchanged for national currencies. This is no different from someone in Iceland needing sterling to pay for things when visiting the UK, or euros for France. One ‘TEM’ is worth one euro – and one ‘Beacon’ is supposed to be worth a pound. Someone, somewhere, needs to be able to change the two.
This is where the practical difficulties start. If these local currencies are to have trusted value, then they may well need to maintain fixed exchange rates against national currencies. That means that the local economy system will be tied to national developments – the lack of flexibility in the exchange rate will mean that shocks are transmitted fully.
This could also lead to issues with lending and saving. If I build up a store of ‘TEMs’ or ‘Beacons’, I earn no interest on them. For people with relatively small savings, this may not be much of an issue. But it means that larger investors would probably still keep their savings and investments in national currencies. And, because there are no credit markets in local currencies, money could not flow to where it was needed. As such, if a business in Wales needed a loan to build a new factory then it would still have to get sterling. Furthermore, it could not pay back the loan to the bank in ‘Beacons’: it would need to pay sterling back. But, if the company earns ‘Beacons’ from selling its wares, then the exchange mechanism needs to be able to swap the two. In a fixed exchange rate regime (Â£1 = 1 Beacon), the amount of Beacons in circulation would probably need to be tied to sterling flows in and out of the region. Brecon could not simply increase the money supply at will, as it would need to be able to back it up by swapping any new local currency for sterling. As such, far from providing genuine financial freedom, local currencies could become just one more cost and hindrance with little real economic impact or benefit.
Local currencies can work well for small items within a relatively contained community, reflecting local preferences and a desire to limit borrowing and money in the region. But these restrictions on borrowing and capital flows mean that they are unlikely to ever completely replace national currencies, even within communities. And, even if they did, a shift to local currencies would not erase the debt that has already been built up in advanced economies. Local currencies may well continue to flourish in the years ahead. But they are not a solution to the crisis itself.