Undercover Economist

Can the Brixton currency ever pay its way?

I was recently invited to appear on radio to give an economist’s perspective on the costs and benefits of local exchange trading schemes (LETS), which are alternative currencies that circulate around a small community. This made me scratch my head a bit. I could not think of any real benefits, but then I couldn’t really think of any serious costs, either.

Advocates of community currencies argue that they have social, economic and environmental advantages. BerkShares, which organises a local currency in Massachusetts, claims that the currency helps businesses to connect with their customers, and strengthens the regional economy by favouring locals. In the UK, “transition towns”, which are seeking to use less oil, are exploring the environmental benefits of local currencies.

The common-sense economic case for these currencies was summed up for me by John Walker, acting treasurer of Brixton LETS in London: “They’re more appropriate for local communities, because the money doesn’t drain out of the local community.”

That seems plausible: the money (“Brixton Bricks”) goes round and round Brixton and isn’t sucked away by the insidious multinationals of neighbouring Clapham.

But this is one of those cases where common sense lets us down. Money (whether pounds or Brixton Bricks) isn’t wealth. It’s just a way of keeping accounts, and swapping one system of accounts for another isn’t going to alter the basic productive potential of Brixton.

True, community currencies may very gently encourage trade with locals rather than strangers. But the gains from more trade with locals are more than offset by the losses from less trade with strangers – otherwise, economic sanctions would be a blessing. This also explains why no community currency movement tries seriously to restrict broader trade. Everyone knows that is a recipe for a return to the dark ages.

There have been times and places when national currencies have so malfunctioned that community currencies would have been preferable: Weimar Germany, modern Zimbabwe, perhaps also the Depression-era US, where community currencies briefly flourished. There is also a healthy debate in economics over the appropriate size of a currency union, but few serious economists think that the optimal currency area is the size of Brixton or the Southern Berkshires.

Nor are the environmental benefits of community currencies terribly persuasive. Local trade sounds environmentally friendly, but it is a distraction: the environmental costs of driving to the shops or growing food on inappropriate local land far exceed the costs of carbon emissions from long-range shipping.

The real benefits, if they exist, are not economic but social, and best explained not by an economist like me, but by a sociologist such as Ed Collom, a professor at the University of Southern Maine.Collom’s work looks at first glance like bad news for the community currency movement.

He has found, for example, that most currency schemes in the US last only a few years before collapsing. The ones that thrive are in places that already have strong, liberal, middle-class communities, such as Portland, Oregon, or Ithaca, New York.

In rust-belt regions that would seem to need them more, they have not taken root. Also, the schemes take a lot of effort to set up: Brixton LETS, for instance, is only in its early stages.

But despite the obstacles, Collom is convinced that local currencies can strengthen neighbourhood ties and allow people to make friends: they are a focal point for the community-minded, even when they do not last.

That is possible. I live near a determined, community-minded entrepreneur who owns the local cafe, the sort of person who helps to get community currencies started. But rather than minting a Hackney dollar, she has founded a traders’ association and is trying to set up a street market. I think she has her priorities straight.

Also published at ft.com, subscription free.

3rd of May, 2008Undercover Economist • Comments off