> Posted by Jeffrey Riecke and Sarah Samuels, Communications Associate and Operations Specialist, CFI
Did you know that there are over 100 local currencies in the United States alone? We didn’t either until we came across the Guardian article “Could community currencies produce a more sustainable financial system?,” which identifies how local currencies could help boost SME growth and lead to more economically and environmentally sustainable communities.
Local currencies are fun. They help convey a sense of community. Trying to support sustainable local economies is great, of course, but how impactful are these systems actually?
First, some background on these currencies, using a close-to-home example. Both of us are staunch proponents of supporting local businesses and community development, so we were quite surprised to learn that our very own city of Washington, D.C. has a local currency called Potomacs. Our local currency began in 2009 through the efforts of a community development organization called Ecolocity. The notes depict historical natives of DC, Maryland, and Virginia. The one-note has a picture of singer/songwriter Marvin Gaye, one of DC’s best-known artists. Bestowing local flair to community currencies by incorporating history and culture is common.
If we were so inclined, we could take our dollars to the Greater Washington Exchange and convert them to Potomacs at their designated rate, which is 95 cents on the dollar. One might ask why on earth would any sane individual trade a one dollar bill for 95 cents only to be left with limited options on where to actually spend the money. The short answer is that businesses who accept the Potomac offer a 5 percent discount to customers who purchase goods using the local money. So technically, by opting in, you wouldn’t be losing anything, except convenience.
The concept is that as a customer, you spend your money at local businesses or businesses that are willing to spend their money locally. And as a business, you spend your money at other businesses that are either local or spending locally. Together, local businesses are supported, which is good for communities, and supply chains are shortened, which is good for the environment. Not too complicated.
As for actual impact? First off, that depends on uptake. In the case of the Potomacs, there hasn’t been much. So little so that it’s tough to find any information on them. As of a few years ago there were reportedly only ten businesses that accepted them and about 1,400 notes in circulation.
However, there is substantial evidence that community currency with enough scale can generate enthusiasm for community development. With the Brixton Pound in the U.K., for example, there are over 250 businesses that accept the currency and about B£ 100,000 in circulation. The local mayor’s salary is paid in Brixton Pounds. Research from the New Economics Foundation indicates that money spent with independent businesses circulates within the local economy three times longer than when spent at a chain store. In theory, local currency can also help protect communities from national fiscal fluctuations and offer small businesses a marketing advantage over the Walmarts of the world.
Along with physical notes that reflect their unique cultures, local currencies are also exploring digital finance platforms. One can send Brixton Pounds using mobile text messaging, which operates like SMS mobile money services and has been adopted by about 1,300 people.
How could all this apply to the work we do at the Center for Financial inclusion? Could community currency play a part in getting us closer to a financially inclusive world, or is it just another developed world trend being used to block multinational corporations and promote local coffee shops and boutiques? This remains to be seen.
Since this topic is new to us we decided to ask Beth Rhyne, the Managing Director of CFI how she thought local currency could advance financial inclusion. She too was interested in the topic and not completely aware of the intricacies, but supported this idea in saying, “Local currency is basically a gimmick, but it’s a fun gimmick that reminds people to value their communities more actively. In that sense, it’s a good example of behavioral economics at work.”
Image credit: Charlie Waterhouse
Have you read?
Cryptocurrencies and Financial Inclusion – Why I Am a Skeptic… For Now at Least
Behavioral Approaches to Product Innovation at the Base of the Pyramid
Kate McKee: On the Behavioral Economics of Poverty and Implications for Financial Inclusion
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May 28, 2014 at 5:14 am
John Gitau
While I find the currency gimmick an exciting perspective, I am wondering how it can be used as a bait to expand the financial inclusion bracket. That is what Sarah and Jeff seem to be battling with. Perhaps the first question to ask is whether those involved in the currency fun gimmick are already included or not. And that would introduce the question of the role of currency in financial inclusion.
I am ever confused by the distinction between a currency service and a financial service. My confusion is deepened by my understanding that financial institutions’ main product is money and that playing around with it results to financial products. For example, when money is lent out at certain terms, it is called a loan, which is not just money but a financial service. It gets complex because if the borrower(now included) passes some of that loan cash to his 70 year old grandma, who has no bank account, the grandma isn’t included. So, when is money, money, and when is it a financial service? If you buy a piece of meat from an Islamic butchery, chances are that it would be Halal ( clean). But halalness is a mental label otherwise the meat may not taste any different from normal meat. Now compare loan money to halal meat and raw money to non halal meat and tell me where the boundary is. Semantics aside, these questions arise from the currency consideration that Beth refers to gimmick money ( halal meat might as well be gimmick meat, right?)
That reminds me of the village and ghetto boys playing soccer with a ball made from polythene papers. Safe for soccer pitch dimensions, for all practical purposes, the boys would be playing soccer using soccer rules as they knew them (the goal posts may lack nets). Are these boys included as soccer players? What is the role of the quality of soccer ball in determining the soccer inclusiveness? This may not be a good analogy but that is what I can think of at the moment as a soccer gimmick or mimic. Wait a minute, I have remembered a better one. As a young boy, my mum would allocate me a cock. To my young mind, the cock was mine. That was until my dad would come home and order it slaughtered without even seeking my consent. As I grew up, I realized I was a victim of chicken ownership gimmick. All along, I was livestock ownership excluded while gimmickally included. That may have been our mother’s style of teaching me responsibility and care because, believe me, I used to share my food with my cock.
May 28, 2014 at 10:33 am
Jeff Dicken
I’m not sure what any of that last comment has to do with local currency. Here in Baltimore, we have the Baltimore BNote – real, local money that can be exchanged with dollars at $10 for every BN11. In trade, BNotes are spent exactly like dollars at any of the 215+ small merchants who accept them across the city, so residents’ $10 turns into the equivalent of $11. Beyond that small initial benefit, the BNote and other local currencies have much larger effects, encouraging business owners to find local sources of supply, and thus solidifying and expanding local supply chains. This leads to greater resilience for the area, as well as decreased dependence on large corporations and items transported over long distances.
Residents are inspired to think about who they are supporting when they go to buy something, and more often choose to shop locally. This keeps more of their money circulating in their communities – small merchants spend three times as much money with other small businesses as do large corporations (and they donate more to local non-profits as well), and using local currency only amplifies this effect.
May 28, 2014 at 12:22 pm
John Gitau
I guess the post is not about currencies in isolation but their role in enhancing financial inclusion. That is what the first comment is about, specifically in relation to “conclave” currencies being seen as gimmick-which they are, actually. A currencies discussion would be frivolous in a financial inclusion blog unless put in context.
May 28, 2014 at 4:21 pm
Jeff Dicken
As far as financial inclusion, the most important dynamic in my view is the money (value) flow. In other words, given that there is a certain finite amount of value we all create in doing things for others – our jobs or vocations – how can we best direct the greatest amount of that value back into our own cities/towns/communities, so that it can do the most good for people and not for corporations or banks?
I believe that the first task is to increase awareness that purchases from local merchants go much farther toward increasing the common good than purchases from big-box stores or national franchises, most of which leaves the area, never to return.
Along with that, these purchasing decisions are further solidified with the introduction of local currency.
Small business owners seeking local sources for their products and local services then illuminate gaps in the local supply chain, some of which may be filled by entrepreneurs.
Inclusion rests in great measure on “underserved” communities tapping into the power of localization – for example, starting corner stores providing fresh produce sourced from nearby urban farms, which themselves are patronizing small family-run hardware stores and composters.
These are the types of changes that lead to truly sustainable and inclusive prosperity.
May 29, 2014 at 2:59 am
John Gitau
Now you have put currencies in a financial inclusion context quite well, Jeff. I like your value plough back to community “to do more for people” idea as a basic step in the empowerment ladder. But I am wary of it being embraced delusionally as a self contentment panacea. It remains just a necessary and important basic step. As an advocate of informal financial inclusion, I believe every positive intervention within local communities should be encouraged and allowed to grow organically into full blown formal financial inclusion size. Therefore, any tool, currency or mechanism that supports and enhances existing informal financial practices is welcome. By the end of the day, it is all about improving every element of financial inclusion whose characteristics are better earnings, secure savings, cheap and accessible credit, investment, insurance and access to convenient and reliable financial services within an equitable environment. A local currency then becomes a useful tool or resource equivalent to grease that lubricates a community’s economic wheel for the good of the entire community. However, though the wheel is important, it shouldn’t elicit fascination to the extent of forgetting that the vehicle that moves on the wheels must take goods to the bigger markets and come back with more and better goodies.
Why are local communities’ currencies a gimmick all the same? Because there is a community’s feel good when they use their home grown currency as a means of recycling their finite locational resources. They create in-community convenience, morale and moral responsibility but its ability to expedite capital formation is slower than in national currencies( its circulatory frequency is limited). National currencies seen in the backdrop of local communities is not just about wealth flight but also capital inflow. So, a community’s feel good shouldn’t grow into a delusion of self sufficiency. Whatever they produce must be sold outside their communities as the sure way of expanding their local economies. In short the “our own” currency infatuation shouldn’t metamorphose into a bigoted full blown love affair.