May 3, 2008
The Undercover Economist: Can the Brixton currency ever pay its way?
I was recently invited to appear on radio to give an economist’s perspective on the costs and benefits of local exchange trading schemes (LETS), which are alternative currencies that circulate around a small community. This made me scratch my head a bit. I could not think of any real benefits, but then I couldn’t really think of any serious costs, either.
Advocates of community currencies argue that they have social, economic and environmental advantages. BerkShares, which organises a local currency in Massachusetts, claims that the currency helps businesses to connect with their customers, and strengthens the regional economy by favouring locals. In the UK, “transition towns”, which are seeking to use less oil, are exploring the environmental benefits of local currencies.
The common-sense economic case for these currencies was summed up for me by John Walker, acting treasurer of Brixton LETS in London: “They’re more appropriate for local communities, because the money doesn’t drain out of the local community.”
The remainder of this column can be read here. Please post comments below.
Last time or last time but one that local currencies were breifly fashionable, I had to analyse them for my then political masters.
These schemes have generally, in the past, created a modicum of extra credit in the local economy. This is often useful in boosting local economic activity when needed, but carries with it a near certainty that some of the credit will be extended to those who cannot or will not pay back. So the local currency then collapses. Whether it has done anything useful then depends;
a) - upon whether activity in the locality continues at a higher level than it would have done if the local currency had not been created; an unaswerable question I guess, though in principle a gain is possible.
b) - Whether the trasient welfare gains exceeded the cost of the additional book keeping (Very unlikly I suspect in the cases of the local currencies which survive in areas where credit is already plentiful) plus the welfare loss in the process of collapse. In needy areas this process probably implies a transfer from the less needy to the more needy, so a very marginal welfare gain is likely.
I left my masters to see for themselves that a scheme that is likely to collapse is politcally toxic.
As an old Hackney resident, I would never have accepted Hackney dollars (not even 3 dollar bills), but was always in favour of an extra street market.
Posted by: David Heigham (ex-UK Govrnment economic service) | May 4th, 2008 at 8:42 pm | Report this comment