Not Brixton, Barking

150 years ago, John Stuart Mill described national currencies as a “barbarism.” Brixton seems to want to bring this barbarism nearer home, as this week it launched its own currency.
This seems a bad idea. The mere existence of an exchange rate brings with it costs. These are not just the inconvenience of exchanging money.  There’s evidence that the mere existence of exchange rates causes big and inefficient price variations (say, between Canada and the US) and can hugely retard (pdf) trade.
So what are the offsetting advantages to a local currency? The theory of optimum currency areas suggests that it would work if five criteria are met*:
1. Are prices and wages inflexible in Brixton, relative to the rest of the UK? If so, a local currency can do the job that wage and price moves don’t. For example, if weak demand in Brixton causes unemployment to rise there, a fall in the exchange rate can offset this, by making Brixton workers and goods cheaper, relative to the rest of the UK’s.
2. Is there factor immobility within Brixton? A fall in demand for labour in Brixton would be a big problem if workers were stuck in Brixton, but less of a problem if they could find jobs in Peckham.
3. Is there goods market integration within Brixton, so Brixtonians trade heavily among themselves and little with non-Brixtonians? If this is the case, the costs of an exchange rate - the hampering of cross-border trade - are low.
4. Is the Brixton economy subject to idiosyncratic shocks not felt by the rest of the UK? If the answer’s yes, a local exchange rate is a good idea, as it can fall in response to a fall in demand in Brixton relative to the rest of the country.
5. Does Brixton have a fiscal authority, which can transfer income within Brixton, thus ensuring that some Brixtonians won’t be better off breaking away if they suffer problems not felt in the rest of the borough?
Now, the answer to all five if these questions is, I suspect, a definite no. So it seems that a Brixton currency is, well, a barking mad idea. I fear its authors are unfamiliar with optimum currency theory - and, I suspect, with Ealing comedies too.
Paradoxically, the argument for the Brixton pound is what most economists regard precisely as an argument against such currencies - that it would retard cross-border trade, by keeping money within Brixton.
This is, of course silly. As Luis says, if people want to help local businesses, they can do so with English pounds. The only argument for a Brixton pound is, as Luis says, a way for weak-willed Brixtonians to tie themselves to the mast. Maybe some would like to help local businesses, but they just can’t resist nipping into Greggs or Primark. If they held Brixton pounds instead of English ones, their temptation to do so might be limited.
But even this is a weak argument. It requires that people hold lots of Brixton pounds. But this brings with it other inefficiencies, albeit ones that are smaller when interest rates are as low as they are now.
And of course, you don’t need a local currency to help local traders. Up here in less barbarous areas, a simpler scheme is being launched.
You might wonder why I’m labouring all this. I do so to show that there’s a vast gulf between conventional economics and some popular ideas. And with conventional economics discredited (perhaps wrongly) by the crash, anti-economic ideas are gaining support. To paraphrase G.K. Chesterton, when people stop believing in economics, they’ll believe anything.
* I'm assuming the Brixton pound would eventually float. Fixed exchange rates are a bad idea; they give us the costs of local currencies with fewer of the benefits.

Comments

[Leigh Caldwell]

Nice summary. I've always known LETS and local currencies were a bad idea, and now I have a clear set of arguments for why.

I trust we will be able to persuade that other local currency scheme based in Threadneedle Street that their madcap ideas are similarly ill-founded.

[Winstanley]

The point of a "complementary currency" is to supplement the existing one, not replace it.

Users create the money by going into debt to each other, and then pay it off by providing services for others. They can create capital amongst one another in this currency, to alleviate the problems of raising conventional capital.

"And with conventional economics discredited (perhaps wrongly) by the crash, anti-economic ideas are gaining support. To paraphrase G.K. Chesterton, when people stop believing in economics, they’ll believe anything."

There is more than one type of economics; alternative currencies can be based on mutuality and trust. If that's anti-economics, then so be it.

Having said that; I agree with you this one probably won't work.

[Francis Sedgemore]

Chris - Do you distinguish between token-based local currencies, such as the "Brixton Pahnd", and LETS, which are in effect mutual credit systems?

When it comes to currencies, you make a good argument for businesses and communities adopting the euro on an informal basis. The only difficulty I can see is when it comes to paying Caesar his dues.

[Miguel Madeira]

An argument in favour (sort of) of local currencies:

http://www.marginalrevolution.com/marginalrevolution/2008/05/do-local-curren.html

[Tim Worstall]

The Brixton Pound is supported by the new economics foundation.

It is therefore, by definition, an insane idea which is bound to fail.

[jameshigham]

It might be bound to fail but 'tis fine to see a folly crash to the ground, a bit like socialism.

[Planeshift]

"It is therefore, by definition, an insane idea which is bound to fail."

And then it can get a multi billion pound bailout from the taxpayer, like other ideas that have failed.

[Miguel Madeira]

"The only argument for a Brixton pound is, as Luis says, a way for weak-willed Brixtonians to tie themselves to the mast. Maybe some would like to help local businesses, but they just can’t resist nipping into Greggs or Primark. If they held Brixton pounds instead of English ones, their temptation to do so might be limited."

A variant of this argument is that John could want to spend is money at a local shop, but only if the owner will also spend the money at another local shop.

[Paulie]

One argument for the Brixton pound is that it creates a currency area that isn't (unlike everywhere else) dominated by monopolies.

[Adam]

You're assuming that retailers value the Brixton pound at parity with the GBP. They're more likely to offer discounts to people paying with Brixton pounds as they will tend to be used by local customers who will bring repeat business.

The concept will truly have arrived when you can pay for your eighth in Brixton pounds and get your change in GBP.

[jean]

You dismissed a bit too rapidly (just a very little bit) the idea of a Brixton currency board: the Brixton pound emitter would be able to levy a seignoriage normally earned by the bank of England.

Admittedly, this is probably much lower than the incremental transaction costs, and this gain is a loss for the rest of the country.

@Leigh Caldwell: One reason of the success of LETS is (unconscious?) tax evasion. Now that LETS get older, they recommend to pay taxes on goods and services traded inside them.

[Mark Herpel]

Wow are you wrong on all points. Local currency does NOT discourage 'out of town' or 'cross border' trade. Local currency is used alongside the national currency, NOT in place of it. You you cannot buy all your products using the local notes you still need actual money. Buying goods one town over is using the national currency as you would always use it, there is no effect to outside trade. What is effected by local currency are the big chain stores. Chain retailers will take in money and send it out of your community. Spend a dollar at a chain fast food shop and that money immediately is transferred out of your community back to the retail outlet's headquarters and not respent locally. Local currency by it's nature cannot leave the town, it is respent with other shops. The fact that there is a two way exchange for from Brixton Pounds to national money, means this program will be a success. I'll see you in one year we can discuss it again. I suggest you gain some more knowledge on how these successful systems work, like reading about http://www.berkshares.org and stop trying to put a Macro Economic face on a local problem. The Berkshares local currency circulates on average through 4 local transactions before being converted back to USD. That is 4 times the local business of a USD spent on a chain store. Also the exchange rate for Brixton Pounds is FIXED, they won't be discounted, this, "...if weak demand in Brixton causes unemployment to rise there, a fall in the exchange rate can offset this" is a ridiculous non nonsensical point. You are looking at this wrong, it's not Macro Economic "Guns and Butter" story, it's simply a local person wanting to spend a portion of his income ONLY on local products so the money stays local. A very large recent study in Michigan, showed that just a 10% shift in spending to local shops and not the Wal-Marts of the world created jobs on the local level and was a big benefit to the local economy. Shop at Starbucks, McDonald's etc and about 90% of the money you spend will leave your community the day you spend it.

Mark
editor@ccmag.net
http://www.twitter.com/dgcmagazine

[rolex air king watches]

And a lot of it reflects a switch from bank deposits to securities; foreigners “other investments” in the UK, http://www.watchgy.com/ mostly bank deposits, fell by £143.2bn in Q1. And of course there’s no guarantee such buying will continue.
http://www.watchgy.com/tag-heuer-c-24.html
http://www.watchgy.com/rolex-submariner-c-8.html