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Whatarethegeneralargumentsagainst
localcurrencysystems,
andhowdowerespondtothem?
Contents:

1.Parallelcurrencysystemscauseareductionineconomicefficiency

2.Parallelcurrencysystemscauseinflation

3.Parallelcurrencysystemsencouragetaxevasion

4.ParallelcurrencysystemsabusetheSocialSecuritySystem

5.Parallelcurrencysystemsareunabletofinanceinvestments

6.Parallelcurrenciesareeasilycounterfeited

7.ParallelCurrencySystemsLeadtoanInformalizationoftheEconomy

8.Badparallelcurrencydrivesoutgoodconventionalcurrency

9.LocalCurrenciesCauseConfusionRegardingtheBasicFunctionsofMoney

1.Parallelcurrencysystemscauseareductionineconomic
efficiency
Argument:

Sincethecirculationofacommunitycurrencyisrestrictedtoarelativelysmall
area,itcanbearguedthatlittlecompetitionexistsbetweenproducersofthesame
goodsandservices.Moreover,sinceproducersdependonamuchsmallermarket,
theywillnotbeabletoachievethesamescaleadvantagesaslargerproducers.
Thismaygiverisetohigherpricesforconsumersduetothelackofcompetition
drivenefficiency.

Response:

However,ratherthanreplacingthenationalcurrencywiththeparallelcurrency,
consumersgenerallytradeusingaportionoftheparallelcurrencyincombination
withthenationalcurrency,thereforeproducerstakingpartintheparallelcurrency
systemsarenotinsulatedfromoutsidecompetition.Becauseusuallyonlyaportion
ofthepurchaseismadeusingtheparallelcurrency,producersarenotdependent
uponthealternativecurrencysystemfortheirincomeitisoftenonlytheexcess
capacitythatissoldthroughthissystem.Bymakinguseofthisidlecapacity,
producersactuallyseetheirunitpricedecrease,thusincreasingtheirefficiency.

Evenifaparallelcurrencysystemgrowsineconomicimportanceandconsumers
andproducersbecomedependentonthesystemforalargeproportionoftheir
needsandincome,onecanenterthediscussionoftradeoffbetweeneconomic
efficiencyandeconomicstability:atwhichpointeconomicefficiency(through
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specialization)startstoendangereconomicdependence.Adversariesofthese
systemsemphasizetheeconomicefficiencyeffectofspecializationandconsider
themtobeadisguisedformofprotection,whereasontheotherhandproponentsof
alternativecurrencysystemsemphasizethereducedeconomicdependenceand
higherselfrelianceasresultofparticipating,andseeeconomicdependencyasa
potentialsourceofnotonlyeconomicalinstability,butalsopoliticalandsocial
unrest.

Oneofthefundamentalprinciplesofneoclassicaleconomicsisdivisionoflabour
throughspecialization.Persons,communities,regionsandevencountrieshave
becomeincreasinglyspecializedandthereforedependentonexternaltrade.Ina
dynamicworldmarket,acomparativeadvantagetodayisnotaguaranteeforthe
sameadvantagetomorrow.Althoughitisundeniablethatglobalizationhasleadto
moreproductsavailableatlowerprices,ithasalsoleadtoincreasedinequalityof
wealthdistribution,moreincomeinstabilityandenormoustransitionscostsfor
communitiesthathavelosttheircompetitiveadvantage.Thesetransitioncosts
includenotonlyalossofincomeandemployment,butalsosocialcostssuchas
risingcrimerates,drugabuse,prostitutionetc.Themainformofspecializationin
developingcountriesisinagriculturalexports.Localeconomiesarelefttothe
mercyofinternationalmarketsthatarecompletelyoutoftheircontrol.

Acertaindegreeofspecializationisbeneficialandcommunitycurrencysystems
certainlydonotpretendtobringcommunitiesbacktointerdependencewithother
communities:productswhichdemandahighdegreeofspecializationandinwhich
scaleadvantagesplayanimportantrole,aresimplynottradedwithintheparallel
system.Newcomputers,cars,andotherhighlyspecializedproductsconsistofso
manyspecializedelements,thattheycannotpossiblybedevelopedatthelevelofa
communityunlessallthevariousfactorsofproductionareinplaceatacostwhich
iscompetitivewithothersources.

Parallelcurrenciesarenotintendedasanalternativetothenationalcurrency.
Howeverasaresultofspecialization,communitieshavelostagreatdealoftheir
skillsdiversity,makingthemmorevulnerabletooutsideshocks.Ifskillsinsuch
essentialareasasagriculture,housingandclothingarelostbecausemanypeople
specializeintasksthatareonlyofvalueintheworldmarket,thecommunity
degradesfromaneconomicallyproductiveunityintoasubsidizedcollectionof
individualhouseholdsthathavenoviabilityontheirown.Anewbalancehastobe
foundbetweenthedependenceonoutsidemarketsandselfrelianceatcommunity
level.Itiseasytolooseaskillitismuchmoredifficulttoacquireone.Parallel
systemscanhelptoemployandretainskillswithinthecommunity,thus
contributingtotheirveryrightofexistence.

2.Parallelcurrencysystemscauseinflation
Argument:

Thisconcerniscloselyrelatedtothequestionofwhetherthenewcurrencysystem
isparalleloralternativetothenationalcurrencyandtheconventionaleconomy.
Dolocalcurrenciescreatenewtradeoraretheyratherasubstitutefortrade
formerlyhandledinthenationalcurrency?

Ifthereisalargetradesubstitutioneffect,thiscouldmeanthatpriceswillrisedue
toanexpansioninthemoneysupply.Thisisespeciallytrueiftheparallelcurrency
isissuedasFiat,inwhichthemoneysupplyisexpandedgreaterthaniftheparallel
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currencywasissuedaspartiallybackedbyconventionalmoneyorasamutual
creditsystem.Fiatparallelcurrencysystemscancauseinflationifthereistoo
muchmoneyincirculationandifthismoneycannotberemovedintime.
However,onlyinthecaseoftheSaltaBondsinArgentinahastheissueofinflation
beingcausedbyafiatparallelcurrencybeenraised.Itappearstonotbeanissue
withHourssystemsatthisstage,howeverthisisoneofthereasonsbehind
argumentsforwhatarecalled"demurrage","negativeinterest"or"depreciating"
currencieswhichterminateafteraperiodoftime.

Response:

Tradecreationisseenasawaytopossiblyreducetheeffectsofexpansioninthe
moneysupplybyprovidinganexpandedrangeoflocallyproducedgoodsand
serviceswithwhichtopullexcessmoneyoutofthelocaleconomy.

Anotheroptionistoshowthemethodsyouhaveforcontrollingthemoneysupply,
howcurrencyisissuedintotheeconomyandhowitisremovedfromtheeconomy.

3.Parallelcurrencysystemsencouragetaxevasion
Argument:

Inmostcountries,notaxesarepayableonpurchasesofgoodsorservicesunless
theincomeisearnedinconnectionwithabusiness,oramountstoacertainincome
threshold.Thusmanyofthetransactionsthattakeplacearenontaxable.Ifthe
moneycomesthroughabusiness,itmustberecordedasincomeforthebusinesses
ownpurposes,aswellasfortaxationpurposes.

Response:

Sincetheturnoverandprofitsoflocalbusinessesmaybeexpectedtoriseafter
joiningaparallelcurrencysystem,anincreaseoftaxrevenuesmayevenbe
expected.Moreover,iftransactionsareregistered(asiscommoninmostmutual
creditsystems),taxevasionoflocalcurrencyincomeispracticallyimpossible,
eventhoughthesystemitselfmaynotdivulgethisinformationtoagovernment's
RevenueDepartment.Inthiscasetheparallelcurrencysystemactuallyworksin
favourofthetaxcollectorbecauseanactiveeconomygeneratestaxrevenue.

4.ParallelcurrencysystemsabusetheSocialSecuritySystem

Argument:

SomeissueshaveraisedontheissueofreceivingSocialSecuritybenefitslike
welfareandunemploymentinsurancewhileearninganincomeinaparallel
currency.Giventhatthesocialsecuritysystemwasneverdesignedforthemodern
realityofmarginal,occasionalandtemporaryemploymentopportunities,there
havebeeninstancesofindividualslosingtheirSocialSecuritybenefitsbecauseof
theirparticipationinaparallelcurrencysystem.Moreandmoregovernments
understandthatbenefitlegislationisdifficulttoapplyagainstindividualswhoare
tryingtoliftthemselvesoutofwelfaredependencebyparticipatinginsuch
systems.RecenteffortsinAustraliaandEnglandareshowingsignsthatfederal
governmentsarewillingtodowhateverisnecessarytohelppeoplegetoffof
welfareandintowork,includingallowingpeopletoexempttheirlocalcurency
incomefromtheirSocialSecuritybenefits.
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Response:

However,governmentsmayexperienceadropintaxrevenuesifsalesofcertain
enterprisesfallbecausepeopleprefertobuyservicesandproductsfromindividual
members(whoaretaxexempted)usingthelocalcurrency.Moreresearchwould
benecessarytoexaminetheimportanceofthissubstitutioneffectandtowhich
degreethistaxlossiscompensatedbyoverallhighersaleselsewhereanddecreased
expensesonwelfare.

Indevelopingcountries,thetaxevasionargument(andevenlessthebenefit
evasionproblem)ishardlyvalidsinceinmanycasessuchsystemsdonotexist,the
incomesearnedintheinformalsector(oneofthemaintargetgroupsforparallel
currencysystem)aresominimalthatitisimprobablethattheywouldbetaxable.
Thustheissuevariesfromcountrytocountry.

Insteadofregardingparallelcurrencysystemsasataxevasionproblem,many
localandnationalgovernmentsnowacknowledgetheusefulrolethatsuchsystems
canplayinreducingthecostsofSocialSecuritysystem,providingincome
opportunitiesforpeopleatthelowerendofthesocioeconomicspectrum,and
increasingindividualwellbeingandthemeetingofneeds.InAustralia,incomein
localcurrencyisnotappliedagainstSocialSecuritybenefitsinEngland,the
governmenthasemployedcivilservantstoinstallsystemsinNewZealandpeople
whoregisterasunemployedandlookingforworkareencouragedtojoinasystem
intheUSAincomefromTimeDollarsareexemptedfromtax.

Indevelopingcountries,whereformalsocialsecuritysystemsareunderdeveloped
orevennonexistent,governmentsupportforparallelcurrencysystemsiseven
moredesired.Onepossibleargumentforgovernmentsgivingpreferential
treatmenttoparallelcurrencysystemsisthatsuchsystemsareafinancial
instrumentthatreducestheneedforgovernmentexpendituresonincometransfers
orsubsidies,thusliberatingpublicfundsforother,trulyproductiveinvestments
suchaseducationandinfrastructure.

Inshort,argumentsagainstparallelcurrencysystemsasawayofavoidingtaxes
aredifficulttodefend,especiallyin"developing"countries,andin"developed"
countrieswheregovernmentsaregoinginnewdirections.Levyingtaxeson
enterprisesthatusescarceresources(energy,naturalresources,space,environment,
wastestorageand/ortransformation,etc.)areanewdirectioninwhichsome
governmentsareheading,suchasGermany.Thiswouldmakelabourcheaper
andenvironmentallydestructiveproductsmoreexpensive.Discussionson
theintroductionofthissocalled'ecotax'intheEuropeanUnionareinthe
finalstages.

5.Parallelcurrencysystemsareunabletofinance
investments
Argument:

Atanearlystageinthedevelopmentofmodernparallelcurrencysystems,
somearguedthatthezerointerestpolicymakesitunattractiveforthe
participantstosavemoney,whichdeprivedparticipantsthesavingsthey
needtofinanceinvestments.

Response:
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Atfirst,parallelcurrencysystemsarguedthattheydonotpretendto
substitutetheconventionalcurrencysystems,andthattheymayeven
enhancetheindividualsabilitytosavemoneyforinvestmentpurposes.As
explainedinearlier,themainfunctionofmoneyistofacilitatetransactions,
nottoaccumulatewealth.Oneofthestrongcharacteristicsofparallel
currencysystemsisthataccumulationofmoneyisdiscouraged,thus
preventinganyinterferencewiththefunctionofmoneyasanexchange
medium.

Recentdevelopmentsareshatteringthismyth.Themicrocreditconcept,in
whichfundsmaybecontributedfromoutside,orpooledbetweenthe
participantsandlentinturnhavewonsignificantmentionfortheireffectsin
BangladeshandIndia.Aswillbepresentedlater,joiningaparallel
currencysystemtothisconceptcanbeverybeneficial.

6.Parallelcurrenciesareeasilycounterfeited
Argument:

Itcanbearguedthatlocalcurrenciesareeasytofalsify,becausethehigh
techanticounterfeitingmeasurestakeninthecaseofnationalcurrencies
aretooexpensiveforlocalcurrencies.

Response:

Whilethismaybetrue,noexchangemedium,whetherlocalornational,is
completelysafefromcounterfeiting.Fromthegoldencoinsofprevious
agesthatwereshavedorreduced,tofakecreditcards:thefactthatmoney
issomethingthatcanbecounterfeitedisandwillalwaysbeanissueof
concern.Nevertheless,thenumberofcasesofcounterfeitingoflocal
currenciesisverysmall(althoughnotnonexistent)forseveralreasons.

Thecounterfeitingoflocalcurrenciesisnotveryinterestingforcriminals
lookingforaneasyprofitwhilekeepingalowprofile.Asthecircleofpeople
thatacceptsthelocalcurrencyislimited,andbecauseitisusuallyspentin
combinationwiththenationalcurrency,thewouldbethiefwouldneedsome
moneyofhisownifhewantedtospendthemoney.Thechanceofbeing
caughtisconsiderablyhigherthaninthecaseofnationalcurrency.
Moreover,peoplewithinthesystemarenotlikelytounderminethesystem,
sincetheybenefitfromit.Finally,itisrarethatpeoplespendlargeamounts
ofmoneyinashortwhilewithinthesystem.Peoplewhospendlarge
amountsintothesystemwithouthavingearnedthemfirstareeasily
detected.

Severalsimpleandlowtechmeasurescanbetaketoreducetheriskof
counterfeiting:

1.periodicrecall(timedexpirationand/ordepreciationandnewdesignof
thepapermoney

2.useofspecialcoloursand/ortypesofpaper,difficulttofindorspecially
madeforthepurpose

3.useofoffsetratherthanphotocopyingtechniquesforreproduction

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4.serialnumberingthenotes

5.stampingandsigningthenotes

6.makinganimpressiononthenote(suchasthesystem'slogo)usinga
specialstamporplier.

Other,morehightechmeasurescanbeused,buttheyrequirethefinancial
meansavailableforthispurposeandonthetechnicalpossibilitieslocally
available.Theinvestmentmadeinanticounterfeitingequipmenthastobe
seennotonlyinthelightofreducingtheriskofcounterfeiting,butalsoasa
confidencebuildingmeasure,whichisespeciallyimportantduringtheearly
stagesoftheintroductionofthecurrency.Somecommunitycurrencies
havesurpassedsomenationalcurrenciesintheiranticounterfeiting
protection.AsPaulGlover,founderoftheIthacaHourssays,"multicolored
HOURS,someprintedonlocallymadewatermarkedcattail(marshreed)
paper,orhandmadehemppaper,somewithnonphotocopiablethermal
ink,allwithserialnumbers,arehardertocounterfeitthandollars."

Mutualcreditsystemsdon'thavetheseproblemstheycan'tbelost,stolen
orforged.Anymisuseofthesystemwillappearintherecords.

7.ParallelCurrencySystemsLeadtoanInformalizationof
theEconomy
Argument:

Thisargumentalsotouchesthetaxevasionproblemdealtwithpreviously.
Ifasubstitutiontakesplacefromactivitiesformerlydonebyformal
enterprises(whopaytaxes)toindividuals(whodonotpaytaxes),onecan
speakofaInformalizationoftheeconomy.Thiswouldprobablymeanthat
one(taxable)fulltimejobwouldbelostandreplacedbymany(untaxed)
parttimejobs.Enterprisescanregardthisasunfaircompetitionbecause
theindividualparttimeproducersdonotcarrybusinessoverheadssuchas
insuranceandrents,nordotheycomplywithrequirementsforhealth,
safetyandfireregulations,foodhygienelaws,publicliabilityinsuranceetc.

Response:

Ontheotherhand,itisquestionablethatthisInformalizationeffectexceeds
thenewemploymentandincomecreatedasaresultofbetterutilizationof
theexcessproductioncapacityofformalenterprises:whilesome
enterprisesmighthavetocutcertainjobs,manyenterpriseswillbeableto
employmorepeopleasaresultofincreasedsales.Theoveralleffecton
employment(andthusincometaxrevenues)mightbepositiveandthejob
losscouldbeconsideredareadjustmentofthelocaleconomy.

Secondly,thetermInformalizationonlymeansthattheincomeisnot
consideredtaxableandthatitdoesnotfigureintheGDPofthecountry.It
saysnothingaboutthevalueofthatincomeforthesocioeconomicwell
beingofthecommunity.PayingtaxesorcontributingtotheGDPareno
objectivesinthemselves.Taxesarepaidinordertocorrectaskewed
incomedistributionandtopayforgoodsandservicesthatarenotproduced
bytheprivatesector.Ifaparallelcurrencysystemcanredistributeonefull
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timejobovermanyparttime,itcontributestoabetterincomedistribution
justastaxesdo,butinanaturalway.Jobsarenotlosttheyare
redistributed,whichreducestheneedforcorrectivesocioeconomic
measuresbygovernment,suchaswelfare.

8.Badparallelcurrencydrivesoutgoodconventional
currency
Argument:

SirThomasGresham,financialagentforQueenElizabethIwasnotthefirst
torecognizetheeffectsofweakcurrenciesdrivingstrongercurrenciesfor
circulation,buthiselucidationoftheprinciplethat"badmoneydrivesout
good"becameknownasGresham'sLaw.

Whendepreciated"bad"moneycirculatesconcurrentlywith"good"money
ofhighvalue,thegoodmoneyishoardedand"drivenout"ofthemarket.
Thiswasfirstnoticedwhensilverandgoldwereusedincoinagesilver
wasusedinsteadofgoldbecauseofitsweakerandmoreunstablevalue.
Speculatorswouldmakepurchasesofgoldusingsilver,andonthemint
market(theratepaidbythemint)silveroftenfetchedalowerpricethanon
thecurrencymarket,meaningaprofitforthespeculator."Bimetallism",as
itisknown,wasthemethodofusingGresham'sLawinspeculation.

Althougheconomistsrarelymakesuchclaimsaboutparallelcurrencies,it
couldbearguedthatparallelcurrencies,especiallyfiatcurrenciescirculate
inpreferencetothenationalcurrencybecausetheyareweaker,drivingthe
nationalcurrencyfromcirculationandresultinginmonetaryproblemsifthe
useoftheweakercurrencybecomeswidespread.

Response:

Proponentsofparallelcurrenciesarguethattheircurrencyfreesscarce
nationalcurrencyfortradecreationthroughpartialsubstitutionofthe
parallelcurrencyfortransactionsthatformerlytookplaceinthenational
currency.Bytyingthetwotogetherinaparallel,ratherthanalternative
system,theyargue,Gresham'sLawisnotentirelyapplicable.Instead,it
maybebettertosaythattheparallelcurrencypushesthenationalcurrency
aroundwithincreasingbenefittotheeconomyasawhole.

9.LocalCurrenciesCauseConfusionRegardingtheBasic
FunctionsofMoney

Argument:

Nationalcurrencyfulfillsthreemainfunctions:asacirculatingmediumof
exchange,adivisibleandmeasurableunitofaccount,andastoreofvalue.
Introducingalocalcurrencyconfusesthisbytryingtoseparatethe
functionsofmediumofexchangeandstoreofvalue.

Response:

Nationalcurrenciesfulfillotherfunctionsaswell,suchas:

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AStandardofDeferredPayment:Becausemoneycanbestored,itis
convenientforcreditoperations,thebuildingofcapital,andforinvestment
purposes.

Atoolforspeculativeprofit:todaymorethan95%ofallcurrency
transactionsaremotivatedbyspeculationlessthan5%arefortradesof
goodsandservices.

AToolofEmpire:Moneyisusedbypowerfulcountriestounderminethe
currencyofweakercountriestoforcedependenceuponthestronger
currency.TheRussianRubleduringthecommunistera,andtheUSdollar
areexamplesofthis.

LocalCurrenciesseektoseparatethefunctionofmeansofexchangeand
storeofvaluefunctions.Toseparatethecontradictoryfunctionsofmoney
asastoreofvalueonexternalmarketsandamediumofexchangeatthe
communitylevel.Thesesystemsariseoutofacritiqueofthedominant
debtbasedeconomy,andaredesignedincontrasttoit.Thedominant
economyisoneinwhichmoneyisownedbyBanks,issuedasdebtto
Governments,inscarcesupplyinordertomaintainitsvalue,andwhichcan
goanywhere.Asthiscurrencycancirculateinsideandoutsidenational
borders,acontradictionarises:thecurrencymustbescarcetomaintainits
valueonforeignmarkets,buttheremustbeenoughinthecountryto
facilitateexchange.Intimesofeconomiccrisis,thiscontradictioncan
reachdisastrousproportions.Thus,communitycurrenciescanfillan
importantrole,holdingthedomesticeconomytogetherwhilethenational
currencyisbeingbatteredoninternationalmoneymarkets.

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