I’m delighted to see that Stephen Williamson mentioned Ithaca HOURS, a Local Exchange Trading System (LETS) alternative currency operating in Ithaca, NY. It is possibly the most robust complementary currency in the United States, which makes it an exciting experiment in alternative money systems. However, Williamson doesn’t seem to like it, and raises a some very valid points about the motivation to create an alternative currency:

It should be clear that the hours-issuing Ithacans did not attend classes in conventional modern economics. The theory underlying their currency system is in part related to social credit and Marx’s labor theory of value, with some wishful thinking thrown in for good measure. The wishful thinking relates to the ideas that exchange using hours can somehow enforce a minimum wage of $10.00 per real hour (i.e. there is Ithaca hour illusion), and eliminate cutthroat capitalism, thus making the economy somehow more friendly. However, for later use, note three key ideas in their story: (i) money is not neutral: more units of it in circulation increases local employment; (ii) there is a protectionist element: form a local club, which promotes trade among members of the group, the corollary being that there is less trade with the rest of the world.

He is referring to this graphic story about the founding, use, and purpose of the Ithaca HOURS system.

I’ve written about this problem before:

A very common fallacy that you will encounter when doing research about complementary currencies has to do with the nature of trade: a fallacy of composition. It is very common to view the economy as a zero sum game. Thus, if I win, by definition, someone else has to lose. This type of competition does occur within economies. For (a very simple) example; if you buy a Coke, Pepsi loses your business…and if everyone in the world buys Coke, Pepsi goes bankrupt. However, this type of competition doesn’t happen between economies. Economies as a whole do not compete. If everyone buys Toyota cars and GM goes bankrupt, the US economy does not lose — indeed, the economy has become more productive and thus wealthier.

It is common on the left to view complementary currencies as a way to “keep money within the community”. In this view, when we purchase things locally, the money stays within the community whereas if you purchase something from a different city, state, or country, the money leaves the community. There is absolutely no truth to this view, and the logical conclusion to this is that real self-sufficiency maximizes wealth…but then money is absolutely worthless! Never mind the fact that self-sufficiency makes everyone poor.

So if the above is not the purpose of complementary currencies, what is? If you view money from the perspective of traditional economics, then the only reason to have a complementary currency is to avoid the limitations of the zero-bound on positive interest rates. However, since the zero bound simply represents a lack of imagination, even within the current monetary paradigm, that the primacy is important, but it is not the only reason.

More philosophically, if you happen to view our money system as a value transmission mechanism, things are different. I believe not only that money makes transactions easier, but even that the types of money we use emphasize certain types of relationships between people. The way our money system works (and indeed, the way money systems work the world over) incentivizes competitive relationships. These types of relationships leave much demand for services unmet by supply — education is a prime example. I advocate complementary currencies because they can effectively bridge the gap between unused supply and unmet demand.

Complementary currency systems have also been shown to increase the velocity of legal tender within a local economy (Lietaer 1998), a goal which is exactly contrary to the claims made by leftists in the previous section.

The most common types of things that are paid for in complementary currencies are non-tradeable goods/services. Non-tradeable goods (and services) are items that can not be transported and sold in another location. For example, I can’t get a hair cut in Britain from where I live in Omaha, NE…I actually need to go to Britain. Real estate is another popular example…and unsurprisingly, people pay for both hair cuts and partial payment of their rent in Ithaca HOURS.

Complementary currencies are particularly popular in Japan, where two decades of mild deflation (or price stability) in the face of an aging population has taken quite a toll on society. Japan also has a department within the Ministry of Finance whose job it is to create new currency concepts and test them. The most advanced complementary currency in use in Japan is the Yamoto LoVE, which is completely electronic (no hand-to-hand bills).

I think there is an implicit assumption among “respectable” economists that the monopoly of money creation by the Federal government is the optimal state of affairs. It is certainly efficient, but at what cost? There is a strain of research in complexity economics that likens money to carbon in an ecosystem. The efficiency of an ecological system is measured by its ability to process biomass through the system; similarly, the efficiency (in the thermonuclear sense) of an economy is its ability to process money. However, as I have noted, there is a cost for this efficiency, and it is paid in resilience (just like in an ecosystem). Furthermore, complementary currencies such as the WIR Bank in Switzerland (the most “official” complementary currency in existence) actually work counter-cyclically to stabilize business cycle fluctuations.

Throughout history there have been numerous examples of complementary currencies in use which coincided with works of wonder, human enlightenment, and vastly increasing wealth an living standards…and there is good reason to believe that the mechanics of the currency these civilizations were using facilitated this growth. Perhaps it is time to learn from the wisdom of ancient civilization.