Local Currencies in Wisconsin

I noticed this article linked through the Drudge Report this morning and my colleague, James Cardon, pointed it out to me as well.

From the online site of the Chicago Tribune
Milwaukee neighborhoods could print own money.
2 neighborhoods consider printing own currency for exclusive use in local stores.

By Erika Slife Tribune reporter
December 3, 2008

They may be talking funny money, but it's not funny business.Residents from the Milwaukee neighborhoods of Riverwest and East Side are scheduled to meet Wednesday to discuss printing their own money. The idea is that the local
cash could be used at neighborhood stores and businesses, thus encouraging local spending. The result, supporters hope, would be a bustling local
economy, even as the rest of the nation deals with a recession."

You have all these people who have local currency, and they're going to spend it at local stores," said Sura Faraj, a community organizer who is helping spearhead the plan. "They can't spend it at the Wal-Mart or the Home Depot, but they can spend it at their local hardware store or their local grocery store."

Incentives could be used to entice consumers into using the new money. For example, perhaps they could trade $100 U.S. for $110 local, essentially netting them a 10 percent discount at participating stores.

It's not a new concept—experts estimate there are at least 2,000 local
currencies all over the world—but it is a practice that tends to burgeon during economic downturns. During the Great Depression, scores of communities relied on their own currencies.

And it's completely legal.

As long as communities don't create coins, or print bills that resemble federal dollars, organizations are free to produce their own greenbacks—and they'd don't even have to be green.

In Wisconsin, could that mean dough that looks like cheese?

As the article points out, this is not a new idea. For example, in the late 1990's and early 200's before it abandoned its currency board, Argentina had a great deal of this local currency circulating. Much of it even looked like real bank notes.

The issues involved with issuing local currencies like this are almost exactly the same as those nations face when they choose fixed or floating exchange rate systems.

From the article, it is not clear which system the locals are planning on using. One could imagine the local city government mailing a envelope full of local currency "coupons" to each household. The article says these would be accepted at businesses with a 10% premium over dollars. But it makes one wonder how this fixed exchange rate would be maintained.

Suppose as a local merchant I accumulate a big pile of local currency coupons and I want to exchange them for dollars so I can order inventory from out-of-state. Do I go to the city government and exchange currencies? What type of guarantees does the issuer of the currency make about its value in dollars? If there are none, then what ensures the coupons have a 10% premium over dollars? Their value would fluctuate just like a floating currency.

If the city promises to guarantee the price of coupons in dollars, then it is a fixed exchange rate system and the city will, at least occasionally, provide dollars in exchange for local coupons. Does the city have a sufficient inventory of dollars to back up the coupons it issues? If not, they could end up with a speculative attack, just like the Asian Currency Crisis of 1997.

Or does the city back up every coupon with the necessary number of dollars, like the currency board in Hong Kong? In which case it can't just mail the money to people for free. Instead, it must withdraw dollars from the local economy in order to introduce the local currency, which would leave the real money supply unchanged.

There was a related scenario in the early 1990's after the collapse of the Soviet Union. The Ukraine wanted to introduce its own currency to replace the rubles whcih were circulating there. The plan was to introduce coupons for local currency, but let people keep their rubles. On a specified date, the government would begin accepting and making payments only in local currency coupons. This meant that rubles would've become less valued in the Ukraine and people would most likely have used them to buy goods from places that still used the ruble, i.e. Russia. The net result would've been a transfer of real goods and services from Russia to the Ukraine in exchange for ruble notes. That is, a transfer payment from Russia to the Ukraine. The Russians were a bit upset when they heard of this plan and since they still controlled the old Soviet nuclear arsenal they convinced the Ukrainians to go with a different plan. Ultimately the old rubles in the Ukraine were withdrawn from circulation and destroyed.

Something similar could happen in Milwaukee, albeit on a much smaller scale. Widespread use of local currencies would allow local authorities to impose an "inflation tax" on residents living in other localities in the U.S. This might be a neat idea if you live in the right neighborhood in the Milwaukee area, but it wouldn't be so great if you lived close by.