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.

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.

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 ?

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.

"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?

Local currencies are beneficial I believe in direct proportion to the number of businesses that use them and to the degree each of the businesses use them.

Beyond that, the real revolution needs to be the regaining of monetary control away from the central banking system and the transition from the cash based system we have to a cashless system with checks and balances to keep it from going too far in the wrong direction. Brighter mathematical and financial minds than mine would have to work out the details but I believe I have a pretty good high level design for such a system that would not only encourage greater innovation and harder work but also reduce the most negative forms of greed and the propensity of cash to end up in the wrong hands for the wrong reasons.

I'm sorry, just to be perfectly clear, my question is predicated on the dollar's not being convertible in specie. Given that and the pegged nature of the exchange rate, aren't BerkShares just a slightly-different denomination of dollars?

congratulation very interesting blog about Do local currencies do any good? thanks for sharing!!!

local currencies doing great job in our life.

This is the first time i actually heard about it. I never thought local currency existed but they still accept dollars, don't they?

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