Making a "Bad" Local Community Currency
Note: This article may not be complete, but I'm posting now so I can work on the next article -- AW
It has been observed that "bad money" drives out "good money". This observation is referred to as Gresham's Law. If our goal is to create a strong, effective local currency, how can we use this characteristic of money to help increase the use of our local currency? How can we make a local currency "bad"?
First, it is necessary for the local currency to be "good"; without this, the currency would not be accepted along with the national currency; so, initiatlly, the local currency must look very good, very appealing, and specifically be accepted and used by as many participants as possible.
Take the BerkShares for instance. Currently, the BerkShares are well accepted by many participants. They see the local money as "good", in that it appears to encourage more sales.
So how then do we take advantage of "Gresham's Law"? How do we make the local currency, ex. the BerkShares, appear "bad" so that they naturally are used preferably in most spending?
One way which is already inherent in local currencies is that they can not be invested. Whereas national currency can be deposited in a bank and earn interest, the local currency can not. This makes the preference to put the "good" national currency in the bank, and use the "bad" local currency in local shopping.
A second way is that the local currency can only be used in the small region. This "bad" feature makes the participant wish to offload the local currency whenever the choice is presented. Why open ones wallet and pay good U.S. dollars when local currency will get the job done just as well?
Another feature which could be exploited would be making the local currency somehow less desireable to carry. For example, a local currency that was a different size from the national currency may encourage some to try to get rid of the non-standard sizes. The notes could be designed in such a way to make the national currency more desireable to hold, such as by having odd values, like $2.50 bills, or 1/4 hours, or etc.
The use of demurrage, or designed loss of value, would be another way in which to make the local currency "bad". As long as those accepting the currency continued to do so, it might make sense to make the local currency "as bad as possible", in order to increase the amount of spending done with that currency.
Hyperinflation
A challenge may arise once the national currency goes into a high or hyper inflation. In this case, the national currency becomes "bad", because everyone knows that it will be worth less very quickly. The desire of those holding national currency would be to spend it rapidly, and this indeed is what happens, in a self reinforcing way, which is only limited by the speed at which people can actually move the money. (Note: With the advent of electronic money, the top speed may be much greater that during 1920's Germany.)
A local currency which had a fixed exchange rate, and was easily exchangeable for the national currency, would still be "worse" than the national currency, and would still be spent rapidly. *** Explore ***
Thus, this local currency would be destroyed in a hyperinflation of the national currency, but what is the alternative? If the local currency were allowed to "float" against the national currency, and were to gain value, then it would be seen as "good" and would fail to circulate, as people held it as a surprising store of value. Then, as the national currency spun itself down to blivion, there would be a great lack of money within the community.
To avoid this, it would be necessary for participants to only accept the local currency, so that they did not have to make the choice between themselves spending either "good" or "bad" money. By designing in some sort of demurrage in the local currency, at least some spending would have to occur. Participants that only accepted the local currency might run into the legal issues that national currency is "legal tender for all debts, public and private". Luckily (perhaps) the government in the USA recognizes that not all spending is related to debts.
Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. -- U.S. Treasury
Additional Reading
http://www.friesian.com/notes.htm#us
http://en.wikipedia.org/wiki/History_of_the_United_States_dollar
It has been observed that "bad money" drives out "good money". This observation is referred to as Gresham's Law. If our goal is to create a strong, effective local currency, how can we use this characteristic of money to help increase the use of our local currency? How can we make a local currency "bad"?
First, it is necessary for the local currency to be "good"; without this, the currency would not be accepted along with the national currency; so, initiatlly, the local currency must look very good, very appealing, and specifically be accepted and used by as many participants as possible.
Take the BerkShares for instance. Currently, the BerkShares are well accepted by many participants. They see the local money as "good", in that it appears to encourage more sales.
So how then do we take advantage of "Gresham's Law"? How do we make the local currency, ex. the BerkShares, appear "bad" so that they naturally are used preferably in most spending?
One way which is already inherent in local currencies is that they can not be invested. Whereas national currency can be deposited in a bank and earn interest, the local currency can not. This makes the preference to put the "good" national currency in the bank, and use the "bad" local currency in local shopping.
A second way is that the local currency can only be used in the small region. This "bad" feature makes the participant wish to offload the local currency whenever the choice is presented. Why open ones wallet and pay good U.S. dollars when local currency will get the job done just as well?
Another feature which could be exploited would be making the local currency somehow less desireable to carry. For example, a local currency that was a different size from the national currency may encourage some to try to get rid of the non-standard sizes. The notes could be designed in such a way to make the national currency more desireable to hold, such as by having odd values, like $2.50 bills, or 1/4 hours, or etc.
The use of demurrage, or designed loss of value, would be another way in which to make the local currency "bad". As long as those accepting the currency continued to do so, it might make sense to make the local currency "as bad as possible", in order to increase the amount of spending done with that currency.
Hyperinflation
A challenge may arise once the national currency goes into a high or hyper inflation. In this case, the national currency becomes "bad", because everyone knows that it will be worth less very quickly. The desire of those holding national currency would be to spend it rapidly, and this indeed is what happens, in a self reinforcing way, which is only limited by the speed at which people can actually move the money. (Note: With the advent of electronic money, the top speed may be much greater that during 1920's Germany.)
A local currency which had a fixed exchange rate, and was easily exchangeable for the national currency, would still be "worse" than the national currency, and would still be spent rapidly. *** Explore ***
Thus, this local currency would be destroyed in a hyperinflation of the national currency, but what is the alternative? If the local currency were allowed to "float" against the national currency, and were to gain value, then it would be seen as "good" and would fail to circulate, as people held it as a surprising store of value. Then, as the national currency spun itself down to blivion, there would be a great lack of money within the community.
To avoid this, it would be necessary for participants to only accept the local currency, so that they did not have to make the choice between themselves spending either "good" or "bad" money. By designing in some sort of demurrage in the local currency, at least some spending would have to occur. Participants that only accepted the local currency might run into the legal issues that national currency is "legal tender for all debts, public and private". Luckily (perhaps) the government in the USA recognizes that not all spending is related to debts.
Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. -- U.S. Treasury
Additional Reading
http://www.friesian.com/notes.htm#us
http://en.wikipedia.org/wiki/History_of_the_United_States_dollar