What Could a Local Currency do for Powell River?
by Barry Bookout
There are many models for local or community currencies, but all of them are intended to solve a single problem â€” how to make a local economy stronger, more resilient, and less affected by external investment, income, and influence. While national, debt-based currencies are based on a model of scarcity, the best of local currencies are based on a model of abundance.
Adopting a local currency does not mean that good fiscal hygiene can be neglected. Â â€śPlugging the leaksâ€ť of money leaving the community and increasing income to the community are also important. Â This article discusses some ways a community can manage its own financial health.
The amount of money available to a community equals income minus outgoings plus locally generated currency.
Conventional approaches to economic development primarily address income, asking “how can we get more money into the community?”. Exporting valuable products and attracting industry, tourism and â€śjobsâ€ť fall into this category. It is an essential part of the picture, because income in the national currency is needed for all purchases of external products.
Outgoings include purchases of imported goods and services (food, fuel, tools, mortgages, insurance) and investments outside the community such as stocks, bonds, and mutual funds. This outflow of money is often not addressed at a community level, and represents a major opportunity to improve the health of the local economy. Â Controlling outgoings may seem obvious, but most communities make little effort to maximize the spending of available money within the local economy before it is eventually spent on imported goods or captured by outside investments.
If the total income is greater than the outgoings, then the community as a whole is becoming wealthier. While the distribution of wealth may be unequal, as long as the holders of surplus money invest in local enterprises they can provide earning opportunities throughout the community.
Roles for Local Currencies
Models in which the local currency is convertible with the national currency (e.g. Salt Spring Dollars) don’t do much to change the picture â€” they are an alternative to the national currency rather than a complement to it. They do restrict the money to being spent locally, and this helps with plugging the leaks, but not with creating new wealth. The local currency is effectively less valuable because of this restriction.
Truly complementary currencies are locally generated, and backed by local value. The more service or product a person or organization provides, the more local currency they can create for their own use. Â If that currency is accepted by other providers, it serves as a medium of exchange for locally created value.
When products are sourced from imported goods, the local currency is not a good vehicle for exchange, so part of the selling price may be in national currency (to cover the wholesale cost of the imported item), and part in local currency. Â Local currencies encourage â€ślocal production for local consumptionâ€ť, which may ultimately lead to production for export.
Types of Local Currencies
One way to categorize local currencies is as Mutual Credit or Fiat currencies.
Mutual credit models allow individuals to control the supply of local currency. Â Whenever one person is willing to grant credit to another for a good or service, wealth is created. Â That credit becomes a call on goods or services from other willing providers. Prices are arranged between buyer and seller, in a free market relationship. The amount of economic activity is entirely controlled by the individuals involved.
A common fear with mutual credit systems is that someone may run up a large debt, then fail to pay it back. One way to minimise this kind of problem is transparency of account status. Â For example, before selling to an unfamiliar person, his â€śdebt to activityâ€ť ratio could be checked. Also â€śtrust ratingsâ€ť could be used, as on eBay. Â As you can see, this is a very different way to do business than the way we are used to, but has the potential to create and strengthen connections between people and improve community spirit along the way.
One type of mutual credit local currency is the time bank. Members offer goods or services priced in hours, and can request services as well, either using a computer bid system, or directly from other members. Transactions may be managed online, so little human intervention is required. Â Checkbooks could allow offline transactions to be secure and accountable. Â Each member starts with a zero balance and accumulates credits and debits as they perform services or receive them from others – called a net-zero balance system. Currency may be printed, or not, according the design of the system.
There are many different models of mutual credit systems. Another example is the Local Exchange and Trading System (LETS). Â This thoughtfully designed system has â€śequivalenceâ€ť with the national currency as a key principle, to improve its usefulness to local businesses. Yet another is the Robust Complementary Currency System (ROCS). Learn more about these at the weblinks below.
Fiat models (fiat means â€śby decreeâ€ť, or â€śby commandâ€ť) have a centralized structure, with an organization managing the supply. Â The total money supply is controlled by the central authority. Â New issues of currency are made as deemed desirable. Â Individual participants in the economy cannot create additional money, but trade the limited supply among themselves. Â The central authority also decides if the money is convertible with the national currency, and if so, how to fund the currency.
Some problems with fiat currencies include inflexibility of the money supply, the need to print paper currency, and potential for lack of transparency of process.
Ithaca Hours, Salt Spring Dollars, Guernsey Pounds, Calgary Dollars, and the Canadian Dollar are fiat currencies, as was the lunch scrip once furnished here by the mill.
What About Taxes?
One common question about a local currency is â€śHow does that work with taxes?â€ť Â The Canadian Government says that taxes should be paid on income earned in local currencies just as on the Canadian Dollar. So, if a transaction would be taxable if it was carried out in Canadian dollars, it is taxable if it is carried out in a local currency. Transactions which would not normally be taxable are still not taxable in a local currency.
Income in currencies which are convertible with the national currency would be converted to Canadian dollars and taxed on that value. If there is a commonly accepted value of one â€ścreditâ€ť in the system, that would be used as a basis for calculating taxes.
For a time-based currency, goods or services are assumed to be sold at â€śfair market valueâ€ť, and taxes are due as if the same transaction Â had occurred in Canadian Dollars.
Other transactions carried out in local currencies, such as charitable and political donations, may also be tax deductible if they would be so if carried out in Canadian dollars.
When community currencies increase economic activity and income in a community, the local and national governments will benefit since their tax income will increase. So it would be in local government’s interest to accept some part of fees or taxes in a local currency.
Options for a Local Currency Project
There are many other options, issues, and concerns which come up when designing a local currency. Â In fact, a community is not limited to a single currency option. Different parts of the community may be Â best served by different types of currency, so there is no reason not to have as many as needed.
Designing an effective local currency is not a process to be undertaken lightly, but it is important to building a truly resilient local economy. Â Conventional wisdom says that a local currency is most important when the national currency is in short supply. Â When an economic shock happens, having an alternative currency allows trading and services to continue in spite of a shortage of national currency. Â The right local currency would also be useful now, to allow people whose products and services are underused to turn their abilities into credits, thus increasing local economic activity. Â Also, to have a community currency system in place when it is needed, we have to build it now, when it is not.
For more information on these and other local currency models, you can visit :
LETS pioneer and Community Way $ organiser Michael Linton from Courtenay will be in Powell River on Friday Sep 16th to give a Local Currency presentation. Join us at 7pm at the Community Resource Centre for Michael’s talk, or come earlier (from 5:30 pm) to the Meet & Greet and share information about Powell River’s local economy.
To discuss issues related to the Powell River local economy, and help design the perfect local currency for our community, please join the Transition Town Powell River local economy discussion list here:
September 7, 2011
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Tags: community way, economic development, fiat currency, LETS, local currency, local economy, Michael Linton, mutual credit, plugging the leaks, time bank Â· Posted in: Good Advice