Local currencies:
catalysts for sustainable
regional economies
by Robert Swann
and Susan Witt
At present, the ownership of land, natural resources, and industry
and the determination of conditions for receiving credit have become
increasingly centralized at the national level. Now all but a few large
urban areas find that their economic resources are controlled from outside
the area.
The banking system is one of the most centralized institutions of
our economy and one of the major obstacles to strengthening regional
economies and the communities within them. Yet centralized banking is
only a recent development in the United States. The customs of borrowing
and lending and money-printing grew up over generations in towns and
rural communities to form what we now call our banking systems. These
systems were small-scale, regional, and decentralized. Paper money was
made standard, or national, in 1863 in order to raise funds for the
fight against the Confederate States, but it was not until 1913 that
a central system became formalized with the Federal Reserve Act. Centralized
banking and control of money called for large banks and wealthy investors
who could assemble huge, unprecedented sums of money. These banks in
the money centers, with their industrial customers, could pay a higher
interest rate to depositors than could the smaller banks, and these
smaller, often rural banks began sending their deposits to the large
cities. The national currency made money more fluid and allowed rural
dollars to support urban industrial growth. Rural creditors were pleased
with this arrangement until the first time a New York bank closed and
carried off the savings of a small town or until a local farmer couldn't
secure a loan because a Chicago bank was borrowing from his bank at
a high rate of interest .
A national currency facilitated the industrialization of the United
States, which in turn created many jobs; however, the centralization
of the monetary system has served to centralize the benefits of the
system as well.
The effect on small farmers and rural economies has been devastating.
The on-going "farm crisis" is a dramatic manifestation of
what is really a monetary crisis that began in the deep depression of
the 1870s and 1880s and was later codified in the Federal Reserve Act.
Credit for small-scale farming and the small rural businesses that are
a part of the farm community had dried up long before the Depression
of the 1930s, and the United States government had to create the Farmers
Home Administration in order to help replace—with tax money—some
of the rural capital that had been lost to the large cities.
The "housing crisis" is also in part a monetary crisis.
Investors place money in land as a
"hedge against inflation," which drives land and housing prices
up. The high cost of land is a major factor in the present shortage
of affordable housing, and it takes home ownership out of reach for
the majority of Americans.
The local and decentralized banking systems of a hundred and fifty
years ago had the advantage of diversity. The failure of a local bank—even
a New York bank—was still a local failure, and its costs were internalized.
But today we are facing the failure of an entire system. Consider the
billions of tax dollars spent by the national deposit insurance system
to bail out the Savings and Loan industry. And recall that billions
were added to the national debt in order to bail out large banks when
developing countries defaulted on their loans. These systemic failures
are bound to occur if local economic control of banking customs and
money supply is compromised by centralization and sacrificed to serve
the heedless demands of growth.
This predicament calls for a reorganization of economic institutions
so that they will be responsive to local and regional needs and conditions.
These new institutions would decentralize the control of land, natural
resources, industry, and financing to serve the people living in an
area in an equitable way. We need to create an infrastructure that encourages
local production for local needs. Community land trusts, worker-owned
and worker-managed businesses, non-profit local banks, and regional
currencies are some of the tools for building strong regional economies.
Because we have all learned to assume that national currencies are
the norm, a regional currency is perhaps the least understood of these
tools. Jane Jacobs, in her book
Cities and the Wealth of Nations, views the economy of
a region as a living entity in the process of expanding and contracting
and a regional currency as the appropriate regulator of this ebbing
and flowing life. Just like a nation, a region which does not produce
enough of the goods it consumes comes to rely heavily on imports and
finds that its currency is devalued. Import costs increase, the exchange
of goods is reduced, and the region has to "borrow," which
means that it exports its capital—dollars, not goods—and
ends up importing nearly everything it needs. But if the region is
supplying its own needs, then its currency "hardens" and
holds its value relative to other currencies. Imports are cheaper,
and trade is more equitable—or even skewed in favor of the self-reliant
or "import-replacing" region.
Jacobs describes currencies as "powerful carriers of feedback
information . . . and potent triggers of adjustments, but on their own
terms. A national currency registers, above all, consolidated information
of a nation's international trade." This feedback informs economic
policymakers. But should the industrial Great Lakes region or the farm-belt
states adjust their economies in the same manner as the Sunbelt states
or the Silicon Valley of the West Coast? A very significant part of
any region's economy is governed by a monetary and banking system over
which members of a community have little or no control. The dependency
on national currencies actually deprives regions of a very useful self-regulating
tool and allows stagnant economic pockets to go unaided in a seemingly
prosperous nation. What we propose instead is the establishment of a
system with community accountability.
Regional currencies are not a recent invention—the practice is
centuries old. The so-called free banking era of U.S. history, when
many currencies circulated, contributed substantially to bringing about
Thomas Jefferson's dream of a nation of small, independent, self-reliant
farmers who found ready credit with community banks to produce and sell
their goods. Even in the early years of this century local banks issued
their own currency, which John Kenneth Galbraith says was important
for the rapid development of the American economy.
How were these banks different from banks today? Because they were
located in small towns, the bankers knew the people they were dealing
with in a personal way and could make loans on the basis of "character,"
not strictly on the basis of how much collateral an individual had to
secure the loan. A more striking difference is that each bank could
issue a local scrip. Unlike a national currency, which easily leaves
the region in which its value is created, the local currency could circulate
only in a limited regional area; local currencies and local capital
could not travel to the money centers to finance the operations of multinational
corporations or interest payments on debt. Credit decisions were made
by local bankers with particular personal knowledge not only of the
borrowers but also of the needs of the region as a whole.
One of the major objections to "free banking" in the nineteenth
and early twentieth centuries has been that some of these local banks
failed and some printed money to speculate in land and to make unproductive
loans. The argument is that such abuses can be controlled if money
is issued centrally. But it was unity—a shared belief in communal
responsibility and vigilance—rather than uniformity that was
needed. Community development banks like Chicago's
South Shore Bank and the Grameen
Bank of Bangladesh make up an intellectual diaspora—they
are decentralized and unified. The Savings and Loan industry is uniform.
Decentralization and diversity have the benefit of preventing large-scale
failure. This is as true in banking as it is in the natural world. Think
of seeds. If many different strains of corn are planted by different
farmers and a disease hits the crop, some strains will resist and the
corn will be harvested. But if all the farmers have shifted to a new
hybrid seed and a blight hits the corn, the result can be widespread
crop failure and disaster. How do we ensure diversity in banking? As
the economist Frederick Hayek has pointed out, to keep banking honest
it would be better to return to a banking system that utilizes competing
currencies rather than to rely on a central system.
In the 1930s a worldwide deflation encouraged many new forms of exchange
that competed with the national currencies. The town of Woergel in Austria
created a scrip system that drew international attention. The people
in this little town were able to trade in labor and materials, which
they did have, rather than in Austrian shillings, which they didn't
have, and they managed to pull themselves out of the Depression in a
matter of months. Local scrip also sprang up around the United States.
A former editor of The Springfield Union in Massachusetts told
us the story of a scrip issued by his newspaper. He was just a copyboy
at the paper during the bank failures of the 1930s; he remembers that
the publisher, Samuel Bowles, paid his newspaper employees in scrip.
It could be spent in the stores which advertised in the paper, and the
stores would then pay for ads with the scrip, thus closing the circle.
The scrip was so popular that customers began to ask for change in scrip—they
would see Bowles around town and had more confidence in his local money
than in the federal dollars. Newspaper money helped to keep the Springfield
economy flowing during a period of bank closures, facilitating commercial
transactions that went well beyond the original intent of the issue.
Forty years later in the town of Exeter, New Hampshire, the economist
Ralph Borsodi and Robert Swann issued a currency that was based on a
standard of value using thirty different commodities in an index similar
to the Dow Jones Average. It was called the Constant because, unlike
the national currency, it would hold its value over time. The Constant
circulated in Exeter for more than a year, proving, as Borsodi had hoped,
that people would use currency which was not the familiar greenback.
At the time, it received national publicity in Time, Forbes,
and other magazines. When asked by a reporter if his currency was legal,
Borsodi suggested that the reporter check with the Treasury Department,
which the reporter did. He was told, "We don't care if he issues
pine cones, as long as it is exchangeable for dollars so that transactions
can be recorded for tax purposes."
This is all that the government requires of a local currency, and
all that a local currency requires of a community is trust. A currency
is only as strong as the confidence that people have in one another
to produce something of value. Trust is at the heart of the successes
in Springfield and Woergel and Exeter.
Borsodi discontinued his experiment after a year, but he had accomplished
his purpose: to demonstrate local acceptance and verify the legality
of locally issued, non-governmental currencies.
The Southern Berkshire town of Great Barrington, home of the E.
F. Schumacher Society, has made strides toward issuing a Berkshire
currency. Our story will make plain the particulars of how local currency
works and how it encourages economic self-reliance. In 1982 a discussion
group on regional economies led to the incorporation of a non-profit
organization called SHARE
(Self-Help Association for a Regional Economy), with open membership
and a board elected from its members. The intent was to establish
an organizational base for a local currency.
SHARE's first objective was to make productive loans to people who
were unable to secure normal bank financing but who had the kind of
small, locally-owned enterprises that produced quality goods and services
for local consumption. Some of these businesses could get bank loans
but at rates of 15 or 18 per cent, and SHARE determined to make low-cost
loans available. SHARE members open savings accounts at the First National
Bank of the Berkshires, and these accounts are used by SHARE to collateralize
loans. This kind of lending requires that the community separate the
functions of banking. The bank makes the loans and handles the accounting,
but the lending decisions, based on a unique set of social, ecological,
and financial criteria established by SHARE, are made by the community
of depositors.
Sue Sellew of Rawson Brook Farm makes a soft chèvre cheese
from the milk of her dairy goats and the herbs she grows on her organic
farm. She borrowed $5,000 from SHARE to bring her milking parlor and
cheese room up to state standards. This has enabled her to sell the
cheese to stores and restaurants.
Jim Golden trained his two draft horses, Spike and Rosie, to haul
timber and firewood from forests. Jim can assure his customers that
their woods will be treated in an ecologically responsible manner and
won't suffer the undue stress caused by heavy equipment. A SHARE loan
was made to complete a barn for the team.
Bonnie Nordoff had a poor credit record, but she also had a knitting
machine which took bulk-weight yarn, and she had a talent for designing
clothes. She knits sweaters, tights, leg-warmers, and scarves in whimsical,
colorful designs. Her small SHARE loan bought a bulk supply of wool
yarn, which lowered her overall costs and established credit with suppliers.
She borrowed again for a second knitting machine when the first loan
was repaid. Her business kept on growing, and she applied a third time
to buy a machine for an employee. The first two loans had established
bank credit for her business, so SHARE sent Bonnie directly to the bank's
loan officer, who readily approved a loan.
The payback record on SHARE-collateralized loans has been 100 per
cent, both because of their scale and because of community support for
the loan recipients. SHARE members help maintain this perfect record
by recommending these small businesses to their friends.
Most loans have been for start-up businesses requiring no more than
$3,000. They are made for equipment or inventory but not for salary
or advertising—productive loans, not consumer loans. A piano teacher
purchased a piano with loan funds in order to provide lessons in her
home, but an application to purchase a piano for private use was sent
to the bank's consumer-loan officer.
The SHARE loan-collateralization program is simple to operate and
easily copied. Similar programs have started around the United States,
using the model created in the Berkshires. It is the "grandmother
principal" which has made SHARE a success: When people without
credit histories decide to go into business, they frequently turn to
a family member, such as a grandmother, for help. Instead of lending
directly the grandmother might offer a savings account as collateral
for a bank loan. The SHARE program simply extends "the circle of
grandmothers," creating a family of place.
SHARE puts a human scale and a human touch back into local economic
transactions. A newsletter tells SHARE depositors "what your money
is doing tonight"—it is working locally to make cheese or
sweaters or to house two very big horses. On weekends SHARE members
visit Sue Sellew's farm, where the baby goats nibble at the keys in
their pockets. They come by the next weekend with their grandchildren
and on the next weekend serve Monterey chèvre at their dinner
party. Monterey chèvre is not just any cheese; it is a cheese
with a story, and SHARE members are a part of that story.
They ask for the cheese at local stores. They think of Bonnie's wool
sweaters when contemplating a special gift. They root for Spike and
Rosie at the draft-horse pulling contest. These local economic relationships
encourage social patterns that in turn shape a uniquely local culture.
Frank Tortoriello is the owner of a popular deli on Main Street in
Great Barrington. He turned to SHARE when the bank refused him a loan
to move his restaurant to a new location. But Frank didn't need SHARE's
circle of grandmothers; he already had a circle of his own in his customers.
SHARE suggested that Frank issue Deli Dollars as a self-financing technique.
The notes would be purchased during a month of sale and redeemed after
the Deli had moved to its new location. A local artist, Martha Shaw,
designed the note, which showed a host of people carrying Frank and
his staff—all busy cooking—to their new location. The notes
were marked "redeemable for meals up to a value of ten dollars."
The Deli would not be able to redeem all the notes at once after the
move, so SHARE advised Frank to stagger repayment over a year by placing
a "valid after" date on each note. To discourage counterfeiting
Frank signed every note individually like a check.
We recommended that the notes be sold for ten dollars each, but Frank
thought that would be too good a deal for the Deli. With his customers
in mind he sold ten-dollar notes for eight dollars and raised $5,000
in thirty days: contractors bought sets of Deli Dollars as Christmas
presents for their construction crews; parents of students at nearby
Simon's Rock College knew Deli Dollars would make a good gift for their
kids; the bankers who turned down the original loan request supported
Frank by buying Deli Dollars. The notes even showed up in the collection
plate of the First Congregational Church because church-goers knew the
minister ate breakfast at the Deli. Regular customers were pleased to
help support what they saw was a sure thing—they knew firsthand
how hard Frank worked and believed in his ability to make good on redemption.
Frank repaid the loan, not in hard-to-come-by federal notes but in cheese-on-rye
sandwiches.
Jennifer Tawczynski worked at the Main Street Deli and carried the
idea home to her parents Dan and Martha Tawczynski, who own Taft Farm,
one of two farm markets in the area. The Tawczynskis came to SHARE with
the idea of issuing "greensbacks" to help them meet the high
cost of heating their greenhouses through the winter. Customers would
buy the notes in the late fall for redemption in plants and vegetables
come spring and summer.
At around the same time the other farm market in town, the Corn Crib,
was damaged by fire. Customers of the Corn Crib came to SHARE with the
idea of issuing notes to help owners Don and Ruth Zeigler recover from
the ravages of the fire. SHARE suggested that the two farms together
issue a Berkshire Farm Preserve Note. Martha Shaw designed the note
with a head of cabbage in the middle surrounded by a variety of other
vegetables. The notes read "In Farms We Trust" and were sold
for nine dollars each. The Massachusetts Commissioner of Agriculture
traveled from Boston to purchase the first Berkshire Farm Preserve Note,
and five national networks showed our farmers using Yankee ingenuity
to survive a difficult winter. The Berkshire Women with Infants and
Children (WIC) program purchased Berkshire Farm Preserve Notes in order
to give them to families, part of a local initiative to supplement the
federal food program. The notes do not carry the food-stamp stigma,
and the Berkshire agency knows it is supporting local farmers at the
same time it is supporting local families.
The notes could be purchased at either farm and were redeemable at
either farm. At the end of the redemption period SHARE acted as the
clearinghouse for the notes. The farmers received the income (ranging
from $3,000 to $5,000 per farm
per year) from the sale of the notes, and they found a committed base
of customers who would travel out of their way to buy from their local
farms rather than purchase the jet-lagged vegetables from supermarket
chains.
Deli Dollars started a consumer movement in the Berkshires. The Berkshire
Farm Preserve Notes, Monterey General Store Notes, and Kintaro Notes
that followed gave Berkshire residents a way to vote for the kind of
small independent businesses that help to make a local economy more
self-reliant.
The popularity of the scrip inspired the Southern Berkshire Chamber
of Commerce to work with the Schumacher Society staff to issue Berk-Shares
as a summer promotion. Customers were given one Berk-Share for every
ten dollars spent in a participating business over the six-week summer
period. During a three-day redemption period customers could spend their
Berk-Shares just like dollars in any of the seventy participating stores.
The success of the Berk-Share program depended on the energy and cooperation
of a small group of merchants and in large part on the sense of community
among consumers. Of the seventy-five thousand Berk-Shares handed out
(representing three-quarters of a million dollars in Berk-Share trade)
twenty-eight thousand were spent during the three-day redemption period!
Some families pooled their Berk-Shares for a gift for one member of
the family. People who were going away over the redemption weekend were
sure to give their Berk-Shares to a neighbor who would use them. A spirit
of festivity and excitement filled Main Street that weekend as people
chatted about how they planned to use their Berk-Shares.
Although the Berk-Shares and Deli Dollars and Farm Preserve Notes
represented a major shift in local attitudes toward an alternative exchange
and captured the imagination of both consumers and producers, they were
not yet the year-round local currency the organizers had envisioned.
A suggestion from several area banks pushed the effort forward to its
next stage. The Berk-Share organizing committee proposed that the five
local banks participate in a Berk-Shares zero percent loan program during
the winter holidays. Spending that would normally flow to catalogue
stores and malls would instead go to the locally owned stores that accepted
Berk-Shares, helping to secure local jobs and keeping local dollars
local. The committee presented the idea at a meeting with the bankers,
who in turn proposed that the committee create a year-round Berk-Share
which would be a 10 percent discount note. Customers would come to the
banks and purchase one hundred Berk-Shares for ninety dollars and redeem
them at local stores for one hundred dollars worth of goods and services.
The merchants would then deposit their Berk-Shares at local banks at
ninety cents per share.
But how to clear the Berk-Share accounts among the five banks? The
Federal Reserve system moves dollars (checks) between the receiving
bank and the issuing bank. This clearing system is automated and keeps
the national currency moving. A local currency needs a local system.
The bankers at the meeting came up with the solution. They said, "Well,
we can just walk down the street to one another's banks and make the
exchange, the way we used to with checks." It gave these individual
bankers, who are caught up in a highly centralized and fast-paced system,
great pleasure to imagine recapturing in a small way the early days
of banking when transactions had a warmer, more community-spirited tone.
The Schumacher Society and the Main Street Action Association of the
Southern Berkshire Chamber of Commerce are cooperatively seeking funds
to staff the first year of issue. When the program is in place and local
businesses and their customers are familiar with the Berk-Share as a
year-round scrip, Main Street Action and the Schumacher Society will
work with local businesses to develop a commodity backing for the Berk-Share.
Eventually, loans can be made in Berk-Shares at an interest rate as
low as 3 percent—the cost of servicing the loan. Unlike the current
SHARE program, which relies on borrowed dollars, a loan in Berk-Shares
would carry no profit costs. A 3 percent loan could encourage new business
ventures like local food processing that otherwise couldn't compete
because investment capital is too expensive. A local scrip can empower
Berkshire residents to shape their own economic futures unfettered by
high interest rates and credit decisions made in far-away money centers.
Each town can be a money center, and local economic problems will have
local solutions.
In the summer of 1991 Paul Glover heard a radio interview with Schumacher
Society staff about the Deli Dollars and Berkshire Farm Preserve Notes.
The story inspired him to issue Ithaca Hours in his hometown of Ithaca,
New York, as a way to create more local jobs and more security for Ithacans
who are underemployed. Ithaca Hours has grown from its small grass-roots
beginning to include over a thousand individuals and stores. The scrip
can buy food items, construction work, professional services, health
care, and handicrafts. Each Ithaca Hour is worth ten dollars—the
average hourly wage in Tompkins County—so the five thousand Ithaca
Hours (or $50,000) in circulation have increased local economic transactions
by several hundred thousand
dollars annually.
Individuals and stores agreeing to accept Ithaca Hours notes are issued
two free Hours to begin trading and are listed in the free monthly paper,
Ithaca Money. This newspaper features articles about the local
economy and tells the stories of small home-businesses that have prospered
by accepting payment in scrip. Only Ithaca Hour vendors can advertise
in Ithaca Money, and although the ad will run for two months,
it costs only half an Hour (five dollars).
Consumers are led to shop locally because Ithaca Hours can be used
only in Ithaca. One market farmer who had difficulty paying bills during
the winter was able to secure a loan in Ithaca Hours from a customer
who had accumulated more than she could use. She preferred to recirculate
them rather than let them lie idle. The farmer's family paid for child
care, movie tickets, and other goods and services in Ithaca Hours and
then repaid the loan in produce in the summer. The Alternative Credit
Union in Ithaca accepts partial repayment of mortgage loans in Hours
because its employees have agreed to accept part of their salaries in
scrip.
Paul Glover has opened a downtown Hours Bank in order to regulate
circulation of the currency, provide visibility, and supply a diverse
array of goods for purchase with Ithaca Hours. The organizers work with
local businesses by tracking the goods that these businesses buy from
outside the region and then connecting them with local producers of
the same goods. This is the substance of an import-replacement program
that will create sustainable jobs.
A local currency may be dollar-denominated or measured in chickens
(as Wendell Berry once suggested for his part of Kentucky) or hours
or cordwood, as long as people know they can spend that chicken cash,
that cordwood note. Confidence in a currency requires that it be redeemable
for some locally available commodity or service. The Schumacher Society
recommends the following policies to maintain confidence over the long
haul:
- The issuing organization should be incorporated
as a nonprofit so the public understands that providing access to
credit is a service not linked to private gain. The organization
should be democratic, with membership open to all area residents
and with a board elected by the members.
- Its policy should be to create new short-term
credit for productive purposes. Such credit is normally provided
for up to three months for goods or services that have already been
produced and are on their way to market—credit for things which
pay for themselves in a very short time.
- The regional bank or currency organization
should be free of governmental control—other than inspection—so
that investment decisions are independent and are made by the community.
- Social and ecological criteria should be
introduced into loan-making. (Community investment funds also use
a positive set of social criteria particular to their own region.
These funds could join with hard-pressed local banks to initiate
regional currencies.)
- Loan programs and local currencies should
support local production for local needs.
Local currencies can play a vital role in the development of stable,
diversified regional economies, giving definition and identity to regions,
encouraging face-to-face transactions between neighbors, and helping
to revitalize local cultures. A local currency is not simply an economic
tool; it is also a cultural tool.
Community groups in Kansas City, Eugene, Boulder, and in little Philmont,
New York, are issuing their own currencies, and each is uniquely tailored
to the people, culture, and products of the region. Each community has
its own tale of how and why people first organized and what they hope
to achieve by their efforts. A Schumacher Society member who was visiting
Ithaca looked in Ithaca Money for a way to spend his scrip
before leaving
town. He decided on a craft item that a woman made and sold in her home.
The daughter who answered the door understood that the visitor was not
from Ithaca and asked, "What does your hometown currency look like?"
A handbook
of legal documents for starting a SHARE program may be ordered
from the E. F. Schumacher Society, 140 Jug End Road, Great Barrington,
MA 01230, (413) 528-1737, email: EFSSociety@aol.com.
An Ithaca Hours Starter Kit may be ordered from Paul Glover, Ithaca
Money, Box 6578, Ithaca, NY 14851. Prof. Lewis D. Solomon's book,
Rethinking
Our Centralized Monetary System: The Case for a System of Local Currencies,
with a Foreword by Robert Swann (Westport, Ct.: Praeger Publishers,
1996) discusses the legal aspects of local currencies.
This article is based on a piece originally written in 1995.