Local Currency Regimes: Part 2 of 2

This post is part 2 in a short series on local currency regimes. Part 1 can be found here. We ended Part 1 with a discussion of  the federal legal framework for currency issuance as part of a broader discussion on whether Utah could legally create a functioning local currency. The prompt for this query was the passage of legislation by the state earlier this year of a bill dealing with the recognition of gold as legal tender.  

At first blush, this would appear to create a fairly restrictive environment. This was, of course, the intent of the framers as potential affronts to the sovereign's ability to control monetary policy, depreciation and counterfeiting were all very real threats in the early years of our democratic experiment. However, despite the clear restrictions, there nonetheless remains some room for alternatives. For example, through a process of elimination of the negatives, a careful reader might be left believing that a private body could issue paper money. This would be true, and is exactly what BerkShares and, at last count, over 100 other local currency regimes across the U.S. have done.

Under the BerkShares model, local banks issue BerkShare notes for dollars at a 100 to 95 ratio. According to the BerkShares website, this creates a built-in 5% discount for consumers using the currency. The discount that venders give is theoretically more than made up for in sales volumes when they attract more local consumers. Venders may also presumably be able to take advantage of discounts themselves if the system is large enough that they are buying their goods from venders who accept the shares. Modeling out a complete transaction flow might help illustrate the point better for any readers who are wondering how this works.

First, a consumer brings $95 to a participating bank and walks away with 100 BerkShare units. They can then go to dinner at a restaurant that accepts Berkshares and ring up a $100 bill. The restaurant will accept the 100 BerkShares for the meal in lieu of $100. This is a 5% discount on the meal, but perhaps the customer would not have chosen the restaurant if they weren't on the system, so the restaurant deems the discount to be a fair trade-off for volume. The following day, the restaurant manager can either go to the bank and exchange the shares for $95 in cash. Alternatively, she could use the shares to buy tomatoes for the next night's service from a local farmer who accepts them, thus gaining her own discount on the transaction. The farmer then goes to a participating hardware store, and the cycle continues.

Under the eyeball test, the type of model described above is the most prevalent among local currency movements. However, some others do exist, including those based on barter/credit and man-hours. Readers who who like to learn more about local currencies can visit the New Economics Institute website. According to Wikipedia (we have no reason to question the veracity of the site in this case), over half of the states in the union have some sort of local currency regime in place. As of today, Utah doesn't appear to be one of them (though at least one enterprising squatter seems to believe that this could change at some point).

So where does this leave Utah? Well, Mr. Newhall was certainly right to conclude that the state itself cannot issue its own version of legal tender. But we have learned that alternative currencies can and do exist across the country. Would it be possible for Utah to pass legislation which would facilitate the creation of a local currency by private individuals? Could the state encourage banks within its borders to participate in such a scheme? We spoke to Professor Solomon about this very point.

The professor indicated that this would be a legal gray area which would create more questions than it would answer. For example, at what point would state involvement cross the line? Could it facilitate a public/private hybrid? In short, he believed that involvement by a public body would be difficult without running afoul of the constitution. In other words, while any steps that the state of Utah takes toward instituting an alternative currency would be a clear breach of the Constitution, even legislative efforts short of direct intervention could taint the process.

If it does its homework, Utah's new Revenue and Taxation Interim Committee will conclude and report that state action in developing alternative currencies would be unconstitutional. It will also very likely avoid creating even a hint of state intervention which could taint the development of a local currency. Therefore it is unlikely to fulfill its mandate to propose legislation for the establishment of alternatives to the greenback. However, it would be very possible for private individuals to establish a local currency a la BerkShares. Considering the fact that so many Utahns applauded the symbolic efforts of the Utah legislature in May of this year, it seems that such an alternative would be well-received. Since it is also the only option without legal questions surrounding it, it would also appear the most likely future conclusion to this story.

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