Rethinking Money: The Rise Of Hayek's Private Competing Currencies
Auditing the Fed, replacing Fed monetary policy discretion with a mandatory price rule governing policy, even the gold standard, Nobel Laureate Friedreich Hayek pushed the envelope beyond all of these. He advocated running the world economy on competing private currencies.
A competitive private market for money, instead of an arbitrary government monopoly amounting to a license to steal for the ruling class? How could that ever work?
Just like any other competitive private market for any other good or service, Hayek would answer, which is a lot better than a government monopoly. But doesn’t the government have to determine the standard for any society’s money, just like it determines the standards for the society’s weights and measures?
Actually, the governing standards for weights and measures historically grew out of the competitive private marketplace of ideas in every culture. The government only validated society’s determination. But in regard to money, governments have abused their monopolies since ancient times.
Kings and Emperors would start out with pure gold or silver coins. But then they would melt down the old and reissue them debauched with increasing portions of less precious metal alloys. Hence the beginning of inflation, with markets devaluing the debauched currency.
Paper currency began as warehouse receipts for specified weights of gold or silver. The bearer could turn them in for the actual specie. But the custom developed of just using the paper receipts as the medium of exchange, with few if any showing up to demand the actual gold. Governments soon began to abuse this, issuing more and more warehouse receipts without enough gold to back them, which enabled the government to buy more goods and services.
That meant inflation as well, and threatened to spark runs on the gold reserves. Governments would respond by “devaluing” the currencies, arbitrarily reducing the amount of gold each unit of currency was worth. But that meant more inflation.
Such inflation amounted to sophisticated stealing, of course, as the value of savings by the industrious would be devalued in the process as well. That value effectively went to the irresponsible and dishonest governments abusing their currencies. Inflation also amounted to the first redistributionist policies, effectively stealing from creditors to favor debtors, who could pay back their debts in depreciated currency.
Inflationary policies consequently developed a constituency among debtors. But that policy was short sighted, as the redistributive theft discourages the savings and investment that are the foundation of economic growth, and rising prosperity for all, as such policies do to this day.
Hayek argued that in competitive private markets, private currency issuers would compete to maintain the value of their currencies. Those who were less reliable or effectively stole from their customers would be driven out of the market.
From the early rise of capitalism, private bankers issued their own currencies, or specie warehouse receipts. But governments drove them out over time, disdaining the competition. The monopoly of the dollar in the United States was achieved by taxing private and state currencies out of existence in the 19th century.
But in their new book, Rethinking Money: How New Currencies Turn Scarcity Into Prosperity, Bernard Lietaer and Jacqui Dunne document the new rise of effectively competing private currencies. Lietaer, MIT PhD in economics, served as an official of the Central Bank of Belgium, and as President of Belgium’s Electronic Payment System. He was an architect of the EU, and Business Week named him “the world’s top currency trader” in 1992. Dunne is an award winning journalist, and a leader in promoting development of environment friendly technologies.
Lietaer and Dunne report more than 4,000 unofficial, private currencies already operational in the world today. They call these complementary orcooperative rather than competing currencies because they are not competing to replace the official currency, but to complement it where it is leaving available resources unused.
The most easily recognized complementary currency is frequent flyer miles, now issued by 92 airlines. These do not involve just bonus or discount tickets in return for repeat flight business. “Increasingly, frequent flyer miles are redeemable for a variety of services besides airline tickets, such as long-distance and mobile phone calls, hotels, cruises, and catalog merchandise,” the authors write. Yet, more than half of frequent flyer miles “are not earned by flying. Instead, credit cards that offer bonus miles with purchases have become the most popular way to earn frequent flyer credits.” Consequently, the authors rightly conclude that the frequent flyer miles have “developed into a corporate scrip – a private currency issued, in this case, by airlines.”
Another private currency model is time-backed currency, which has been spearheaded by liberal lawyer Edgar Cahn, former advisor to Robert Kennedy and Sargent Shriver. Participants provide an hour of service to earn an hour of service in return, involving such services as tutoring students, teaching English or other languages, gardening and lawncare, housecleaning, helping the homeless and teaching them skills, rides for those without transportation (or for seniors who can no longer drive), respite care freeing caregivers for children with special needs, adults with disabilities, and aged seniors to take a break, and other services. Lietaer and Dunne add,
“Mayor Bloomberg has launched TimeBanking for seniors in all five boroughs of New York, as baby boomers turn 65 at the rate of 10,000 per day for the next two decades. Seniors can live longer in their homes independently because they can avail themselves of services offered by people within their time bank community, such as rides to a doctors appointment or help with writing letters to their insurance company.”
Cahn reports there are nearly 300 TimeBanks in the U.S., another 300 in the United Kingdom, with TimeBanking now spread to another 34 countries internationally.
This mutual exchange concept is expanded more broadly in the LETS (Local Exchange Trading System) model of private currencies. Participants trade goods and services to each other in return for agreed LETS credits, which are recorded in a central exchange. Lietaer and Dunne quote Michael Linton explaining how LETS enabled economic recovery in a small town near Vancouver:
“We are a town of 50,000 people, and the major industry was a defense base, plus the town was a dormitory for timber, mining, fishing, and a bit of tourism at that stage. In 1982, everything stopped. The defense base moved, and the Bank of Canada was running at 14 percent prime, and mortgages were approximately 18 to 20 percent. I was a sole proprietor business….When the sand ran out of the economy, my business dried up in a matter of months, as it did for many others.”
But after LETS was created, the currency was used by participating employers to hire the unemployed to produce the many goods and services the community needed. This positive result in reviving depressed local economies has been repeated many times around the world by introducing such cooperative, complementary currencies in the area. Lietaer and Dunne suggest that there is special opportunity for such private currencies anytime there are unused resources that can be linked with unmet needs, which the established currency is not serving, as in the example above. They suggest that such LETS currencies “are the most frequent cooperative currency system in the world today.”
Indeed, such private complementary currencies have arisen to serve local economies around the globe on a regional basis. Lietaer and Dunne write, “Germany and Austria are now spearheading regional currencies, generically called regios, which complement the euro.” Participating local businesses, from shops to restaurants, accept the regional currency for their goods and services.
One example is the Chiemgauer system based in Bavaria in southern Germany. Lietaer and Dunne explain,
“Today, there are 600 participating businesses with 550,000 Cheimgauers in circulation and a turnover equivalent of over 6 million euros in 2011….The Sternthaler currency, which operates in the adjacent area of Upper Bavaria, and partnering with Chiemgauer, provides access to an additional 500 businesses to the system. Seventy-five percent of the money is now in electronic form….Ten local branches of cooperative banks provide banking services in Chiemgauer.”
Another such private, regional currency is Berkshares, traded in the Berkshire region of Massachusetts. Lietaer and Dunne write, “The 13 branches of five local banks operate as exchange bureaus and have issued 3.3 million Berkshares to date [since 2006]. Currently, more than 400 businesses have signed up to accept the currency.” The banks grant 100 Berkshares for $95, and participating businesses accept each Berkshare as $1, providing an incentive for consumers to use Berkshares to shop at local businesses. This represents one feature of such currencies, each can be designed as the issuer thinks would best serve the targeted market. People are free to use the currency or not, and no government permission is needed to launch it.
Merchants use the Berkshare to trade among themselves as well, and some local employers partially pay their employees in the currency. Local banks accept Berkshare deposits.
The most prominent of such regional private currencies is the WIR in Switzerland, started by businesses in the economic crisis of the 1930s, when the banks cut off their lines of credit, threatening their survival. They started the WIR mutual credit system among themselves, paying each other for goods and services in the currency, instead of succumbing to the worldwide depression. Their employees and customers began trading in the currency as well. A cooperative among these businesses keeps the accounts dealing in the currency.
“Over time, the system grew to include up to a quarter of all the businesses in Switzerland,” Lietaer and Dunne write. The WIR is administered by a bank headquartered in Basel, with 7 regional offices. The same concept is now being tried in Vermont.
[First published at Forbes.]