Fed-Free Monetary Stimulus
Can alternative currencies help DC emerge from the Great Recession?
by Sam Knight
The financial collapse of 2008 and its lingering aftershocks, without a doubt, has many Americans pondering previously unconsidered apocalyptic economic scenarios that they wouldn't necessarily trust the government to address in a satisfactory manner. If the AIG bailout and Quantitative Easing, for example, are any indication of who the government is looking out for, many may feel that they're better off printing their own money.
In fact, many have done just that.
Since the collapse of '08, local currencies – also called parallel and alternative currencies – have been founded all across the country by part-time Alan Greenspans and Ben Bernankes. And if America's recovery from its most epic bout of economic hiccups since the Great Depression doesn't produce the sort of economic development that yields widespread satisfaction, alternative currencies might be increasingly viewed as a useful tool for culturing community-centric growth.
Even right here in DC, an alternative currency was founded in 2009 just a short metro ride from the state organs that beg the Chinese to prop up the US dollar on a daily basis. And it wasn't even the first local tender to be issued in the Nation's Capital in recent times, either (The Anacostia Hour was founded in October 2006.) Larry Chang, the founder of the group behind the most recent currency confirmed that his group's alternative paper, called The Potomac, drew significant inspiration from the 2008 global collapse.
“During the Great Depression, hundreds of local currencies popped up,” he explained. Today, the idea is proving to be more than just a quirky historical relic. Other American locales that have launched alternative currencies since 2008 include Detroit, Brooklyn, Baltimore, Phoenix, Ardmore, PA, North Fork, CA and the Piedmont region of North Carolina.
But how does it work, exactly? Shouldn't such acts of monetary defiance be considered economic sedition by our corporate overlords at the US Treasury, the Federal Reserve and the Chamber of Commerce? Does Sean Hannity know about this? How can it be legal?
Considering the (sometimes absurd) distrust of government ingrained in many Americans, it shouldn't come as too great of a surprise to find out that local/alternative currencies are perfectly legal (despite the negative publicity that they might have received in the wake of the Tuscon shootings/Jared Lee Loughner's incoherent Youtube ravings), and the rules governing them aren't terribly complicated, either. Local governments are forbidden from issuing alternative currencies - they can be issued by NGOs and private individuals - and transactions made with them are still subject to local and federal taxes. But beyond obeisance to tax laws, every local currency in the US, as per their nature, abides by its own set of rules. One experimental currency that is no longer in circulation, called the Exeter Constant (launched in Exeter, NH in 1972), was tied to the value of commodity futures. It demonstrated that it was possible to have an alternative currency in America whose value wasn't entirely dependent of the US dollar. Another now-defunct alternative currency was established by a deli owner in Massachusetts who merely sought to raise capital to expand his store when he was denied credit by banks. In 1989, Frank Tortoriello, the entrepreneur in question, successfully raised $5,000 by issuing “Deli Dollars”, which amounted to certificates that could be exchanged for 120% of their value in the expanded deli he would eventually build. Shunned by the banks, Tortoriello turned to his loyal customers for credit, whom he repaid , quite unconventionally, in toasted goodness and kettle chips.
Thus, as in the case of Deli Dollars, local currencies can be used to finance long term local economic resilience, which is a common trait that they tend to share despite their inherent heterogeneity. In the words of community currency advocate Peter North, money “has an unpleasant habit of vanishing out of the places where we live and ending up in London and New York. Local money is a way of re-imagining money as the tool it should be, rather than the master it often becomes.”
Even beyond ideological factors that might prod consumers towards local currency – regionalism, environmentalism, anti-consumerism etc - there is good old fashioned cut-and-dry economic incentive. Washingtonians might not start trading in Potomacs just because they think of themselves as environmentally conscious consumers or because Marvin Gaye is on the one Potomac note. What makes Potomacs amount to more than just Disney Dollars for hipsters is that each Potomac is sold by The Greater Washington Exchange (their central bank) for 95 cents, even though shops accept them at parity with the dollar. Thus consumers that use Potomacs receive a 5% discount.
So, whats the catch? After all, there is no such thing as a permanent 5% discount on lunch. And if something seems too good to be true than it probably is. Just who pays in the end?
The answer is everyone and no one. The 5% discount could have an inflationary effect if the Potomac becomes wildly popular. But if price levels were to rise as a result of the Potomac's use, it would be indicative of the currency's success rather than its failure, as moderate inflation usually stems from an increase in commercial activity (and employment). So apart from hypothetical inflationary pressures (which they themselves may be offset by a subsequent drop in the demand for dollars), there is no hidden cost to using the Potomac as long as it remains in circulation. Only in selling it back to The Greater Washington Exchange for dollars at the fixed exchange rate do consumers and merchants pay a price for using the currency.
However, just because a local currency like the Potomac has theoretical benefits does not mean it will be accepted to the extent that The Greater Washington Exchange will need to worry about inflationary pressures. To assume that any local currency will be accepted would be to take a giant leap of faith. The Potomac, which has been in circulation for almost two years, has hardly made waves in Washington's local economy.
“It has grown very slowly,” Chang said, adding that Ecolocity and the Greater Washington Exchange have little funding. According to Ecolocity's website, The Potomac is still only accepted by 10 businesses (including City Paper favorite Qualia Coffee) with just over $1,500 worth of the currency in circulation (1584P = $1504.8 on March 23). Chang warned that anyone trying to introduce a local currency can expect it to grow at an “organic” pace.
“Particularly when you are talking about a subject as emotive as money, people are justifiably very cautious when it comes to new ideas,” he said. Not only might people be put off by the geographical limitations of local currencies in the absence of some sort of national local/alternative currency exchange, but there are trust issues. On that note, Chang insisted that the money used to buy Potomacs is as secure as possible. Anytime the Greater Washington Exchange sells Potomacs, it places the dollars used to buy them into an escrow account at City First Bank on U Street. Moreover, transparency is something that Ecolocity and The Greater Washington Exchange are striving for. “Once the project achieves critical mass and viability, it will be hived off as an independent non-profit with its own governance,” Chang wrote on The Potomac's Facebook page.
Chang also stated on the Facebook page that he harbors no hope whatsoever that The Potomac will eventually replace federal currency as the official medium of exchange in Washington DC area. So anyone hoping to replicate the Montana Militia Movement in the nation's capital might be slightly disappointed.
But despite the lack of a Branch Davidian-like insurrectionary zeal behind The Potomac, the glacial speed at which the currency is being accepted by Washington area folk hasn't been due to a lack of outreach on The Greater Washington Exchange's behalf. For example, Chang said that the group asked City First about trading in Potomacs but the bank declined. Jose Ygoa, General Manager for City First declined to comment on the bank's relationship with Ecolocity and the Greater Washington Exchange, citing customer confidentiality.
But for whatever reason City First spurned the proposal, Chang said that the rejection was somewhat of a let down, as the active participation of local financial institutions can be crucial to the success of local currencies. In Ithaca, NY and Berkshire County, MA, where community currencies were introduced since before the financial collapse, local financial institutions agreed to trade the alternative paper. Of the two currencies, the Berkshire model, which The Greater Washington Exchange adopted for the Potomac, is particularly successful. According to the BerkShare's official website, roughly 2.7 million BerkShares are in circulation since its 2006 introduction, and the currency is accepted by about 500 businesses throughout Berkshire County. If local banks were to trade The Potomac and participate in the project, The Potomac would be more likely to replicate the success of the BerkShare.
Moreover, Ecolocity is also interested in using the Potomac as a vehicle for microfinance, but, Chang said, “we need to engage a non-profit, credit union or bank first.”
The involvement of community-minded financial institutions such as City First, however, may not be enough to ensure that The Potomac will have a lasting impact in a city with a significant population of permanent nomads. In that vein, the “organic growth” concept should not be understated. Berkshire County's infatuation with local currency, for example, can trace itself back to the emergence of Frank Tortoriello's Deli Dollars.
Still, the involvement of local institutions could be an immeasurable boon to the Potomac. The Potomac, for example, has no security features. The BerkShare, with its network of local banks, does.
But Chang, who prints The Potomac at his home, denied that local currencies are more vulnerable to counterfeiting than the US dollar. For one, he says, it makes little sense for counterfeiters to bother forging the Potomac, particularly when the US dollar itself isn't very difficult to copy (an assertion backed by cursory internet research). Secondly, Chang says that local currencies offer a safeguard against counterfeiting that Federal Agents can't provide, even if they don't have tangible security features.
“If a suspicious guy walks into a local mom and pop store and took out a wad of Potomac bills, it would raise suspicion,” he said. “In local economies, buyers and sellers know each other.”
Thus, in the era of high frequency trading, hedge fund chicanery, Mortgaged Back Securities, TARP, and the never-ending game of Russian Roulette that is financial capitalism, alternative currencies like Potomacs have a certain allure. Financial crises and crises of confidence go hand in hand, and trust comes more naturally to community based relationships; you are more likely to ask a neighbor to watch your kid while you run to the store than to outsource the job to Bangalore. Local economies and local currencies could therefore become increasingly accepted as engines for economic growth in these shaky times.
And if the Potomac's Facebook admirers are any indication, in the near future a considerable number of Washingtonians may take a shine to the concept.
“You have those on the left, the people you'd expect who are anti-big business,” Chang said. “But you also have people on the right, the type who are running to guns and gold,” he added, somewhat amused. While the number of people who “like” Potomacs on Facebook remains small at the moment, it contains people of all colors of the political rainbow, despite the fact that Chang did not really expect the Potomac to attract the sort of people you wouldn't be shocked to find scrawling poorly written diatribes and typo-laden reactionary manifestos on Tea Party blogs and forums. The Potomac, like other local currencies, is based on Transition Culture, which is an environmentalist movement; not exactly a school of thought that one is want to associate with the Koch Brothers.
And that The Potomac (and other local currencies) can trace its roots to environmentalist and “anti-globalization” circles might limit its appeal, despite recent planetary fakata (global economic kerfuffles, climate change, Japanese nuclear disasters etc). There are those who - rightly or wrongly, with careful deliberation or engaging in demagoguery (depending on your persuasion) - consider environmentalism and “anti-globalization” as backward thinking, inward looking and inherently isolationist. But as Chang describes it, the endgame of the local currency movement isn't to create various inward looking walled off hermit-states. The world, he pointed out, consists of hierarchical social networks; the larger the network is, the bigger and more byzantine its hierarchy becomes. The idea of establishing alternative currencies is to empower smaller, less rigid local hierarchies, and not to create isolated communes (when asked, Chang even said that he would even be delighted if multinationals in the DC area started trading in Potomacs; a scenario, he conceded, that is highly unlikely). Besides, to consider “anti-globalization” and environmentalist to be inward looking and isolationist would be to oversimplify those schools of thought.
Perhaps the mantra behind the local currency movement can best be summed up by the author of Small is Beautiful, the late “Buddhist economist” E.F. Schumacher, who said that a country doesn't have to conquer the world in order to trade with it. In other words, smaller social agglomerations shouldn't feel pressed into submitting the lion's share of their authority to hegemonic forces beyond their borders in order to interact with communities outside of them. Some of the richest economies on the planet, after all, are tiny while many of the larger ones – China, India, Brazil, Russia, California etc – struggle to meet their vast populations' basic needs. Localizing power structures and making economic stimuli more sensitive to smaller communities could spark a revitalization that many in America so desperately need.
Considering the widespread unemployment and growing inequality in the US in spite of record corporate profits and a soaring Dow Jones industrial average, it appears that the overseers of our economic system are barely even pretending to serve the best interest of the people anymore. So why shouldn't Americans dabble in socioeconomic experimentation like alternative currencies? And while the DC area may not be nearly as destitute as other parts of the country, Chang and his compatriots, as it should be abundantly clear by now, still think that alternative currencies are a capital idea when contrasted with the status quo.
“Currently, the Federal Reserve Board prints the country's money supply based on nothing,” he bemoaned. “Obviously we don't want to go in that direction. We want local communities and currencies in control.”
And even if The Potomac doesn't become the medium for dynamic local economic development that its founders aspire for it to be, well, at least we can sell it to tourists.
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