Wednesday 18 December 2013

Towards more experimental money

The news that UK banknotes are going to be made of plastic has got more coverage than it really quite deserves.

Canadian dollar bills have been made of plastic for years (when they are worn out, they get made into plastic wheelbarrows). This is not monetary news, especially since notes and coins now only make up about 3 per cent of money in circulation.

But it happens to coincide with a very interesting and thoughtful report by the Bank of England’s bank note department about the likely impact and future regulation of local and complementary currencies.

The officials who wrote it know their stuff. They have read the right things and the report is worth reading.

They are also right that the existence of a few local currencies in the UK – the Bristol pound and Brixton pound are the best known – have not yet made a major impact on local economies.

But things are stirring out there. The European initiative, Community Currencies in Action is now up and running and increasingly bringing together the knowhow across the continent,  The ambitious new currency in Nantes, the brainchild of the French prime minister, will soon be making loans and supporting small business.

And of course there is an urgent need for new mediums of exchange that are disconnected from the euro in the struggling regions of southern Europe.

There is an obvious new approach to monetary politics emerging which is neither clinging to national currencies, nor subsuming national sovereignty into 'optimal currency zones' which actually turn out not to be optimal at all.

It is an approach where parallel currencies circulate alongside each other, keeping people alive in Greece or Portugal, for example, while the euro debts are paid off.

The coming political disaster in Europe will be a subject for this blog next year (and probably rather too much), so I won't bang on about it here – but multiple currencies way to rebuild.

Quick note on bitcoin. Yes, it proves the basic case that other currencies are possible, regionally, locally or internationally.  No, I personally wouldn't use it – I don’t trust it to keep its value.

Which brings me back to the Bank of England. Their main concern is that people will confuse local currencies with national ones and believe they have some kind of regulatory protection. This is an information problem and is solvable.

Their concern, which they admit is theoretical, that local currencies could be inflationary.

This is true. But inflation in a local currency involves a catastrophic loss of belief, which kills it.  It doesn't work like inflation in a national currency.  It does not, even theoretically, spread into the national currency. That is its virtue, and why these tools are potentially useful.

From what I see, after writing about this field for more than two decades, is that there is now the beginning of a body of knowledge, practical and theoretical, and a cadre of people who know what they talk about (I’m not talking about myself either).

What complementary currencies urgently need is a licence to experiment, to push forward the boundaries of monetary possibility.

My fear is that the Bundesbank or some of the other central banks of Europe, which have a more Napoleonic approach to this, would tend to regulate the emerging sector out of existence. The Bank of England may be the only one that really understands the importance of experiment.

What I hope is that they will now take a lead in bringing together their continental colleagues to find a permissive framework that will keep the regulators happy - but allow experiments to press onwards.

Because, even if multiple currencies don't yet exist on the scale they would need to if they are going to have a real impact on people's lives in struggling local economies – they could do. That's enough for me.

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