A few months back one of my readers asked me if I’d write something about Bitcoin and I’ve been mulling the idea in my head since then. I have a lot of thoughts about the subject, mainly because of my own background. You see, years ago I ran a project called Guelph LETS (Local Exchange Trading System).
The idea behind a LETS is that money is nothing more than a mechanism for measuring economic activity. It’s like the centimeters on a ruler or the grams on a scale. Saying that your local economy is failing because there isn’t enough money, therefore, is sorta like saying to you can’t build a house because your carpenters don’t have enough centimeters on their tape measures and the masons don’t have enough kilograms to measure the concrete.
The idea is that money is at its root nothing more than simply a means of exchange that is more convenient than barter. So if a community finds itself in a situation where all it’s money keeps being siphoned out of the community, why not create a local currency that no one outside of the area wants? This would mean that people could provide locally created goods and services for one another, which might keep things running even when there is a national down-turn.
This is not a new idea. In fact, in the 19th century both banks and ‘general stores’ routinely issued local currencies.
How these worked was a bank would have a safe where locals would store their ‘hard currency’, which mostly consisted of things like Mexican or US silver dollars. The bank would then print off their local dollars and loan them at interested to people in the community. Since rural areas back then were mostly self-sufficient, this worked fine as the local blacksmith, grocery, etc, could source most of what they sold locally. This allowed people to save the non-local currency they made from selling out of the community to pay for things they had to source outside of it. This included iron for the blacksmith, needles and cloth for clothing, taxes, etc.
People could cash-in their local currency for hard currency at the bank if they wanted, which meant that people who only dealt with local currency could use it to get the money they needed for the items that couldn’t be bought with it. But most folks were happy to keep that national money (usually silver Mexican or American dollars) in a bank because it was safer in the strong box than under their mattress—and it earned interest too.
General store tokens worked because these businesses bought as much from producers as they sold to consumers—who were often the same people. Most people had some sort of product they could sell—eggs, butter, cheese, apples, whiskey, maple syrup, etc. The store owner would pay for these using tokens like those above and then ship some of these goods to cities where people would buy them using the national currency. The store owner would then use this national currency to buy out-of-the-community sourced things like cloth, needles, thread, spices, etc. Then he could sell these things to his customers for trade tokens. Rinse and repeat. This allowed the store owner to hold onto a greater fraction of the hard currency he needed to purchase out-of-town products while at the same time allowing people who had no direct access to national currency the ability to purchase things created outside of the community in his store.
Before the American Civil War there were thousands of local currencies issued by local and regional banks and many more sets of trade tokens from general stores. This stimulated a huge sustained period of economic growth that was the wonder of the world. Seeing the inherent logic of the system plus the historical precedent, it seemed to a lot of people in the 1980s to be an idea who’s time may have come again.
(Any reader interested in more info about the use of local currency in the development of the American economy, should read John Kenneth Galbraith’s Money: Whence It Came, Where It Went. It’s an easy read, and explains monetary systems in a way that you’ll probably never hear from anyone else.)
Once someone convinced me at an activist conference that a modern local currency was an experiment worth trying, I decided to give it a go in Guelph. And, being the pushy sort of person I am, I managed to get a fair number of people involved. If memory serves, at it’s height I had 23 stores downtown taking the money and generated something like $400,000 of economic activity.
I learned a great deal from this experiment in ‘hands on’ economics.
One thing that surprised me was how much work it takes to set up and manage a currency and/or banking system. This is the bane of micro-currency schemes. That is, it takes just as much work to loan someone one dollar as it does to loan someone one million dollars. I don’t want to offer apologies for filthy capitalists, but this might have something to do with the fact that the only people who really want to offer retail banking to very low income people are loan sharks and their next-of-kin in the ‘payday loans’ industry. (This is why I am extremely happy that Canada Post has recently announced that they are getting back into one of their traditional services—postal banking.)
Another thing I learned about is the ‘welfare trap’.
I’d originally thought that the LETS would be good to help poor people. I came about this idea naturally, because as someone who grew up poor on a farm in a rural community I was surprised to see how little people helped one another in the city. I thought that a local currency would help foster the ‘sharing economy’ and barter that my family had used on a regular basis.
What I found when I talked to poor people on welfare, however, was that they mostly lived in terror of having their benefits cut off and they had been warned to never, ever take on any ‘side hustles’ to augment their income because it could mean losing childcare, dental coverage, subsidized housing, etc. If you are afraid of losing your benefits for hard currency, imagine how little incentive you’d have to ‘take a flier’ on something as nebulous as a local currency.
Here’s a useful video that explains the welfare trap.
I also learned that hordes of people in our society have been significantly ‘deskilled’. Growing up on a farm, my family taught me a host of different skills that have stuck with me all my life. These included how to grow my own food, how to preserve it, how to do simple carpentry, how to cook a meal from scratch, how to do simple repairs—everything from darning a sock to gluing together a piece of broken furniture to gutting and insulating a home, and so on. What I assumed was that most other people had learned similar things that they could share with others.
What I found instead was that there are a great many people in society that either do not have any practical skills, have been convinced they don’t know how to do anything, or, are convinced that they can never teach themselves how to do something useful. I don’t know how many people I talked to who said they had never done any job except ‘shuffling paper in an office’ and who’s only hobbies consisted of ‘watching tv’ or ‘reading books’—but there seemed to be a lot of them.
Even worse, none of these people had a scrap of ‘entrepreneurial spirit’. I can remember as a little boy having my father teach me how to grow sweet corn, harvest it, and, then drove me around grocery stores to see if anyone wanted to buy it. It was only while I was running the LETS that I realized what an important lesson he had taught me!
(Of course, I’m just relaying a naive understanding of people’s complex lives—strained through a short conversation. I suspect a significant fraction of these people were suffering from depression or some other complex life situation that they didn’t get into with me. But that’s just more grist for the over-arching point—a lot of the poor are suffering from a lot more than a simple lack of currency.)
Another big take-away I gleaned from the experience is how perversely idiosyncratic human beings can be. For example, a few people hoarded the LETS dollars and never spent them, which diminished the velocity of trading in the community. This really surprised me, because there is actually a phenomenon described in economics as Gresham’s Law says “bad money drives out good”. That’s to say, if you have $25 in money that’s only going to be accepted at a small number of places and may become worthless in a short period of time, most reasonable people would spend it before they’d use any currency that is accepted everywhere and will be just as good years from now as it is today.
When I asked one of the people why she had built up a large quantity of the Guelph bucks but never spent them, her response was that ‘she was saving them up for something special’. (Which just goes to show that economists should spend a little more time learning how people really act instead of thinking that they already know.)
I could go on, but it’s important to not leave readers with the idea that this was a unmitigated failure. On a person-to-person basis, a lot of good examples came out of it. One member was an out-of-work sheet metal worker who got hired to build a milk-room in another member’s barn and used the LETS bucks earned to buy food for his family. He thought the system rocked. That farmer paid for the milk room by selling eggs to lots of other members—he thought it was great too. At it’s height, you could could buy a beer, rent videos, get custom furniture built, get stuff moved in a pickup truck, buy food, etc, for either 100% or some fraction of local currency. There were even businesses downtown that weren’t even members who were taking a percentage of LETS dollars for things in their stores.
I developed a bit of a reputation with the system and people visited from various places in Canada. An economics professor from Japan even came to interview me. (He told me that local currencies had been used by some Samurai lords to help modernize Japan in the 19th century!) There was an ‘sidebar article’ included in an economics textbook that cited the Guelph LETS.
Eventually, however, I pulled the plug on the system because it had pretty much plateaued and it was nowhere near successful enough to generate even a partial income for me. Moreover, as a bank, it was simply too complex and easily screwed-up to hand over to the sorts of people who would volunteer to run something like this. (Even if there had been volunteers—which there weren’t.)
Like any other organization in this situation, I applied for a grant from the government to hire someone. But at this point I learned something else. Government grants are not designed to help community projects work. Instead they are designed to never, ever, ever risk the government of the day looking foolish. This means that any monies given out have such onerous paperwork and oversight issues that they pretty much sabotage any value the group might get out of the support.
In the particular case of the LETS, I had to wait (for some unspecified reason) for over a year after the project had been ‘OK’d’. (A friend in a local non-profit told me that she had had this happen so many times she had simply stopped applying for government grants because the results weren’t worth the institutional chaos the process created.) By the time I was able to hire someone to try to get the system expanded to a size where it might be self-sustaining, the moment had passed.
What I took away from this exercise was that the problems facing people under capitalism aren’t only—or even predominantly—lack of money.
Government programs that are supposed to help the poor often work to keep them poor.
The economic system ‘deskills’ people by slotting them into jobs that do nothing to increase people’s ability to do other types of jobs. It also encourages recreational activities that do nothing to expand people’s abilities or understanding of the world around them.
People’s life experience often ‘beats out of them’ any ability to get out and create ‘side hustles’ that can help then get by. (This is hardly surprising—every job I’ve had or government program I’ve applied for actively discouraged initiative or thinking ‘outside of the box’.)
The above issues are not emphasized in public discourse because they undercut the notion that people can pull themselves up ‘by their bootstraps’. I found that the LETS idea was easy to sell to people on both the left and the right because it played to the ideas of building community and self-reliance—but this support ignores issues 1 to 3.
Ultimately, I decided that the local currency system was the right answer to the wrong question.
Local currencies can help skilled people who have access to natural resources develop localized economies in situations of maximum self-sufficiency. But in our modern economy, the people who are most able to benefit from a local currency are exactly the same fraction that need it the least.
That’s the lesson to be learned from the success of local currencies in 19th century America. They dramatically improved the economic well-being of rural Americans because:
The people in the country-side had a lot of very useful life skills learned from growing up in pioneer families.
These people had access to land that had been stolen from the First Nations. This gave them an enormous advantage over urban Americans or people in Europe who lived as tenant farmers living on the estates of the aristocracy.
The economy of the early and mid-19th century was one where the vast majority of goods and services were either provided by the farm itself or by others in the local community. This meant that the impact of the outside economy was far, far less than what we take for granted now.
Modern poor people have been deskilled, have zero access to natural resources, and, live in a society dominated by globalized production. As a result, local currency systems have a lot less value to poor people than they did before.
In my next post I’ll move onto crypto-currencies. I hope by comparing what they are and how they compare with both national and local currencies I’ll be able to parse out what makes them ‘tick’.