Reproduced by permission of the artist.
Ithaca HOURs and its imitators never were intended to be run under a currency board framework. Purchasing a membership in Ukiah's HOURs program costs $5, for which one is promised four Ukiah HOURs, listings in the local HOUR Town quarterly newsletter, directory, and website, and copies of the newsletter and directory. At a fixed value of $10 an HOUR, this initial exchange would bankrupt any currency board, since anyone realising the value of the currency they received might be tempted to make a quick $35 profit by exchanging back their HOURs for dollars. In fact, the membership fee only covers the cost of printing and distributing the newsletter and directory. Because these currencies do not have the same level of trust as federal currency, they cannot command their full face value, but must be initially offered to the community at a greatly reduced price to reflect this lesser trust.
A local currency under the Ithaca HOURs model also does not deal as well with capital goods. For consumer goods, its usage can be seen and measured, but if it earns no interest, there is therefore a loss of value with respect to the dollar of holding it until a sizeable quantity can be amassed for a major purchase, which would be expected to discourage capital investment, as most capital purchases are not small enough to be paid off with a week's or month's earnings. Or is this part of the model too, that men and women using local currency would craft at the sweat of their brow with hand tools rather than saving up to integrate machinery into their production lines? Since HOURs depreciate at the rate of the dollar but without the opportunity to earn compensatory interest, and are not likely to be accepted for capital investments produced in whole or in part from outside the region of their circulation, HOURs may be all fun and games until someone tries to buy something. Until the lumber mill, the sheep farm and the wool dyer are local; until man's needs for food, water, and shelter can all be met by local devices alone, a local currency may not have the right to be called a "currency" in full, being solely a scrip acceptable for redemption at very limited locations.
Convertability
Community currencies which are not, or not easily, convertible to federal currency rely upon a deception to succeed. That deception is that their money, unlike federal currency, aids the community. In fact, for any transaction between two members of the community, there is absolutely zero advantage to using local currency over a federal currency. There is an exchange of goods or services facilitated by a value-attributed intermediary. A community currency contains no moral fibre to impart to each person coming in contact with it. It merely disallows certain activities and permits others, with no work on its own part to ensure that such activities take place. Were persons in a region convinced that they ought to exchange primarily with their fellow locals, no further work would be necessary.
But in view of the lack of fortitude with which they possess these views, a currency which denies them the freedom to trade elsewhere may prove helpful as a reminder of the value of local exchange, much as one company has marketed a device shaped like a pig which sits in refrigerators and oinks when the door is opened, in the hopes that this audible tone will cause would-be overeaters to rethink their harmful binges. Like that pig, community currency will only work if the community buys into it and takes it seriously. But like the pig, the task could be accomplished without it.
Education
In nearly every community that attempts a local currency, education proves a stumbling block at some point, either to a successful initial implementation, or to growing it beyond the first few excited activists. Why is immense education necessary for local monies to succeed? Man's demand for anything and everything is based on his marginal utility for it, which the opportunity cost of holding it. He has been educated as to the value to he as the individual of holding federal currency - it is accepted anywhere across the nation, which for someone in a small community not necessarily planning international travel for regular transactions is more than sufficient. In an emergency, he can get a tow truck with it. He can do every transaction he needs with it. So he must be shown the advantages to him of local currency before he will choose it over federal currency. If he is altruistic toward others in his community, he may need to see its advantages to the community, and if he thinks even larger than that, he may need to believe that the restriction of trade does not hurt others nearly as much as it helps his community.
His marginal utility for federal currency over local currency will diminish over time as he assesses that he has enough of the former to attend to his potential needs, obligations, and emergencies. As that utility for nation-wide convertibility falls, federal currency may be less necessary and important to him, so he will more readily consider local currencies. Knowing that all his needs can be met by his store of federal currency and having currency left over, he is more likely to spend it on items typically considered luxuries. This then is a possible hypothesis for the recurring massage jokes in local currency communities: persons ensure that they are capable of earning through standard labour enough federal currency to meet those expected expenses for which federal currency will be best received. Once their needs are met, they can freely accept other items in exchange and seek non-essential goods and services, such as the oft-mentioned massages. This may be the easiest market for a local money to spring up. Ultimately, this suggests much less trust placed in local monies to meet needs, and a much greater likelihood in communities that are not in dire straits of never successfully running a local currency program. Local currency is a response to crisis; men atop mountains do not stockpile sandbags.
Discounting
In long-run equilibrium, one would expect that all the costs and benefits of local currency for transactions as opposed to federal currency would be incorporated into the valuation of local currency. If local currency under the Ithaca HOURS model is not permitted to float against the U.S. dollar, one might expect certain other incentives to be designed to encourage use of one or the other, recognising the difference in value that is perceived by their users, even if not officially acknowledged.
A corresponding example can be found in the credit card industry. Credit card companies eliminate the risk of non-payment for services that the acceptance of personal checks would pose to a company, transferring the liability to themselves and screening credit cards against their centralised databases.1 But this benefit they do not provide for free. Recognising the value to companies of permitting potential shoppers a non-cash method of payment for which the companies need assume no risk of loss to fraud, they charge a small merchant tax on each transaction, usually on the order of one to three percent of the total bill. Companies that sign with one or more of these credit card services have decided that the additional profits from accepting credit cards will more than make up for the decrease in profit margin per purchase.
Facing two different income levels depending on the method of payment, some companies have devised methods to help equalise the two from their perspective and make their profits less dependent on the means of payment chosen by the consumer. Many department stores and gas stations, for example, offer their own credit cards, thus paying the merchant tax to themselves, though adding the expense of maintaining a credit department and dealing with fraud. Other stores pass on the costs of credit cards to the consumer. This allows the retailer to advertise lower and more competitive prices while maintaining a fixed profit margin. Numerous gas stations have had posted pricing policies reading "three cents less for cash [per gallon]" as a way of passing on at least some of the savings to consumers and encouraging their patronage. Similarly, some computer resellers in Silicon Valley offer a two percent discount for cash. Advertising prices that reflect the cash discount helps them attract the consumer who believes that the added cost of procuring the cash, such as a stop at the bank en route to the store plus the lost opportunity to invest that money until a credit card bill comes due, is less than the savings from the cash discount.
In a similar fashion, if sellers see financial benefits from customers using local currency, such as the Return on Spending function which is detailed later, they may work to design incentives to encourage consumers to use local currency, including discounts on purchases made with local currency. I have not come across any sellers that use this strategy, which might seem to question the validity of this theory. However, in most communities there exists a large fringe element that does not fully trust local currency’s redeemability. These would assert that the incentive for customers is to get rid of a less liquid currency, and that due to the limited acceptance of the currency in geographic range if nothing else, local currency may be less desirable as a store of value than U.S. dollars. Many persons in the core of currency movements are motivated by altruistic components as well and consider the use of local currency a public service or charitable, decent act, rendering non-existent the need for any pricing incentives to encourage local currency use.
Additionally, a key value of local currency-sustaining communities is to focus on making a decent living instead of solely profit maximization. These pricing schemes are perhaps not as useful in smaller, more isolated communities wherein consumers’ purchasing options are more limited and businesses are not as likely to compete on price but rather are trying to distinguish themselves on commitment to community and service.
Return on Spending
A regional currency, as an alternative to federal currency, possesses as a potential selling point a function not traditionally attributed to money. This function is present in every currency of reasonably fixed stock, but is not an emphasised feature in national currencies due to its complete lack of visibility. I call it the Return on Spending function.
There is always an inherent trade-off between the consumer and the producer in economic exchanges. The desire of each side in a transaction to seek his own good leading to a mutual agreement is far older than Adam Smith’s invisible hand; it shows up in the sayings of Israel’s King Solomon. "‘Bad, bad!’ says the buyer, But when he goes his way, then he boasts."2 It is well recognised that utility-maximisers seek to pay the lowest price and receive the highest price in exchange. The Return on Spending function of money may make local currency the preferred exchange medium in small communities by simultaneously increasing the value to the seller and decreasing the cost to the buyer as compared to using federal currency.3
The value of any unit of a medium of exchange is what it can provide its possessor. To my knowledge, all prior analyses of what this includes have been incomplete; this analysis attempts to fill in one known gap. Money is more than a mechanism for completing exchanges today; it is an infrastructure that can direct future transactions as well. Therefore, money has value in two periods: now and later, and in two locations: one's own pockets and the pockets of others.
The Return on Spending function declares the value to one person of a single piece of currency to be the value of the goods and services it can purchase now plus the value of goods and services purchased later with that same bill by the same individual, this future value being based on an estimation of the probability of that bill being used later to compensate him for goods or services he provides in the future.4 For a group of individuals engaged in intra-community trade, the likelihood of a dollar spent by one person returning to him is inversely proportional to the size of the community: the larger the trading community, the less likely it is that a dollar spent by that individual will return to him. In mathematical terms, the formula is VPi/VPc where VPi and VPc are the value of purchases of the individual and the community, respectively, for a designated time period. The nominal value to one person of each unit of currency used as he expects it to enhance his future buying power is
ti*pi/tc*pc
where pi and pc are the average price of a purchase of the individual and the community, respectively, ti and tc are likewise the number of transactions by the individual and the community, and n is the number of individuals in the community.5 Since ppcc = (Spi)/n and tc = Sti, the average individual will have pi = pc and ti = tc/n, making the nominal future value of using a unit of currency equal to 1/n. This makes the value from present and future value equal to 1 + 1/n. Only if the trading community is extremely small, say under 100 individuals, does this have any actual financial effect; the psychological effect of knowing that one's money remains local and the hope that might return are no doubt several-fold more powerful as motivators than the actual mathematical calculations. Yet now we see not only why money can have value in both the present and the future, but also why it has value to you while in another's pockets: it has a calculable probability of moving into your hands. For federal currency circulating in a bustling region of hundreds of thousands of individuals, the Return on Spending function is neither statistically nor economically significant.
The possibility that money spent by one individual will return to him even with a local currency is small, even if it is many-fold larger than with federal currency. However, communities may work to design incentives for individuals to use local currency, since the Return on Spending variable is larger for a group than one individual, and therefore the group may initiate programs to transfer some of that added value to the individual to ensure his participation, as it is the participation of individuals which allows any benefit to accumulate to groups.6 The Argentine province of Salta issued provincial bonds denominated in the national currency, and for the first two formative years, ran a system where the individual in possession of the bond with the serial number randomly selected won a small monetary prize. This worked both to encourage persons already in the system to trade increasingly in local currency and to provide incentive to non-participants to join the system as the expected value of the currency compared to other money alternatives rose to potential users.7
Return on Spending is in this manner no different than Return on Investment. As the value of one form of money rises, the odds are that individuals will turn to that money more. This function recognises that one’s consumption activities can encourage or discourage certain activities, just as investment could. The difficulty in measuring must be acknowledged, for even if there is a direct return to the individual, the majority of the benefits accrue to the community, and thus free riders are likely.
A Downside to Regionally-Limited Monies
Local currency could also have lower value than federal currency, for when we consider the possibility of money providing value beyond the exchange it is currently facilitating, there become two sides to examine. As a giver of currency, the buyer may desire to use the form of payment with the highest probability of returning to him. What he receives from the transaction right now is a good or service whose quality will presumably not change based upon his means of payment; if he can affect his possibility of receiving income and thus the opportunity to purchase in the future by his choice of payment mechanism now, he may be inclined to choose the one with the higher Return on Spending, ceteris paribus. As a consumer, an individual will want his money to be permitted to circulate in a very tiny region only to increase its likelihood of returning to him. But as a recipient of currency, the seller desires to use the form of payment with the highest probability of being accepted at face value by to another seller in exchange for goods and services he desires.8 Not knowing as to how he may desire to use his newly-gotten income, the producer will prefer the money which can be most universally accepted so as to least complicate his future consumption decisions.
If the seller’s calculation of the probability of acceptance at whatever location he should desire to us his money is anything less than one, he may require assurance of being able to receive value in another format, imposing a cost upon the system, which may decrease the value of that monetary system enough to make a different one be preferred to it. The possibility of a check bouncing is why merchants write down driver’s license information; the very real probability of credit card fraud causes credit card companies to assess a percentage charge on each transaction to stock a fund against unrecoverable losses. The possibility of bank failure is compensated for by offering to pay interest upon savings. The possibility of local currency not being accepted where the seller wishes to make a purchase may be compensated for by this increased Return on Spending, but is likely helped by other factors instead.
Persons take checks and credit cards because they believe these acceptances drive business. The cost of losses to fraud is considered equalled or outweighed by the gains in increased business at each of these firms.9 Likewise, posted acceptance of local currency may drive business.
The largest reason that advantages to trade with other communities exist is that different communities may have different regional strengths which lead to gains from trade, just as different individuals may possess different skills and thus differing abilities to transform the hours of their labour into goods and services. In an era of franchises and chain stores, those needing inter-community trade are generally businesses. Though catalogue sales and Internet vendors allow one to purchase across state and national boundaries, individuals could obtain from their local Sears & Roebuck, Barnes & Noble, J.C. Penney’s, CompUSA, Safeway and Starbucks all the necessities of life. Dependence on the location of natural resources in determining the make-up of a community has decreased as communities focus more on the production of services and information. This in turn has permitted an increased homogeneity in community appearance, since the high mobility and value of human capital relative to land capital has designed a competitive equilibrium in which productive resources are increasingly equally distributed. Though regional costs related to land capital still influence pricing, that influence is falling. The price of a Big Mac is able to be set the same nation-wide in advertising campaigns because costs are approximately equal at each McDonalds location.10 Therefore, as compared to a currency viable in one hundred homogenous communities with approximately equal costs of production,11 a currency viable in only one of these may be more valuable to a consumer because the expected future return on spending of the local currency is one hundred-fold that of the broadly-accepted currency. This does presume, of course, that the possession of purchasing power in other communities is of little or no concern to the consumer, which hardly seems likely except perhaps for places like Ithaca where the nearest large city is a two-hour drive.
The limitations on trade that are necessary implications to an economic community of having a high coefficient of Return on Spending and the magnitude of the benefits from the Return on Spending variable in comparison to those limitations are such that this cannot be seen as a strong motivator for individuals to prefer a local currency. However, it is not necessarily proven that the psychological effects of believing oneself to be helping one's local community are similarly negligible. The usefulness of this variable then will be most likely found when examined as a propaganda device and not under a mathematical framework. As it seeks to encourage altruistic behaviour, the knowledge that a possible benefit to self exists may be most inspiring when the magnitude of that potential benefit remains merely estimated and imagined by potential users. Susan Hofberg, one of the co-ordinators of SEED, a local currency in Mendocino, California, put it best when she said:
Intuitively, I know it's good but just because I feel that way, I don't have hard evidence to show someone else what a benefit it is. Unless they can agree with me that that's a good thing, it's hard to convince them with concrete evidence because we don't have it.12
The lack of evidence available to Hofberg and her colleagues and the information I have been able to gather about SEED will be the focus of the next chapter.
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Endnotes:
1 There are certain provisions under which vendors and not the credit card company will bear the brunt of the fraud, but these contract details are beyond the scope of this example.
3 Technically, it
increases the value to both buyer and seller. If something increases the value
to the buyer without an increase in price, it serves to decrease the net cost.
4 Though it is not
necessary that the same exact bill return to the individual, the effect of the
individual's participation in one specific financial transaction on the expected
level of future income must be carefully and rigorously approached before results
can be extrapolated to larger groups and multiple transactions. Too often groups
marketing new ideas speak of wonderful returns with little or no proof for their
claims; this analysis attempts to prevent that.
5 Although transactions usually include purchases and sales, if the average individual has approximately equal quantities of money flowing in and out, long-term savings goals aside, this double-counting will be balanced out by the double-counting of transactions in the community.
6 The future benefit to the average group will be m/n, where m is the number of members in the group. However, it should be noted that as m approaches n this measurement becomes less meaningful as m becomes potentially its own self-serving community within n. Further, the calculated value to any group that arises is likely to be higher for the simple truth that persons who take the effort to join are likely to be more interested in the project than those who abstain.
7 Thomas H. Greco,
Jr., New Money for Healthy Communities (Tucson, Ariz.: Thomas H. Greco,
Jr., 1994), 80-83.
8 Speculative values
concerning potential currency appreciation or similar elements are presumed
non-existent.
9 When it becomes expected that a certain type of business accept a certain payment medium, the value of accepting that payment medium is no longer to increase business but to prevent a decrease.
10 Excluding airports and amusement parks.
11 Such that the cost of transportation between regions at least equals and thus negates the savings that would be realised from purchasing elsewhere.
12 Susan Hofberg, interview by author, 15 July 2000, Boonville, Calif. (Tape recording).