Tuesday, April 07, 2009

Local Currency

Almost every time there is a recession, we hear more about the issuance of local currency. This was probably most prevalent during the Great Depression, when the federal currency was in contraction (see Williamson et al.). Suzie Witmer at 4 am frames the concept correctly and then asks all the right questions:
This would be like saying Walmart created its own currency when it started creating gift cards. An interesting part about this system though is while you can purchase almost everything at Walmart, people would be protesting if this company started paying their employees with gift cards....what happens though when participating members want to go on vacation in an area beyond Ithaca's borders?...What if they wanted to purchase a car that is not created in Ithaca and therefore does not accept Ithaca Hours as trading power? What if a neighboring community has higher quality products or lower prices on equal goods?
Indeed,Claudia has pointed out that coal mines in West Virginia often provided their own "company stores" as part of a package of benefits to their employees, and that company store "price gouging" was a myth. There is no functional difference between company stores, gift cards, and local currency.

On the surface Ithica Hours do seem to be voluntary, employers don't have to pay them and employees don't have to accept them. Given all the constraints Witmer points out, why does anyone adopt them? This isn't the Great Depression, where the federal money supply was choked off.

The motivation of the organization behind Ithica Hours seem to be your run-of-the-mill buy local fallacy, and amusingly they clearly recognize the advantages of expanding membership to as many people as possible. The organization appears to attract members by creating networking and advertising opportunities, as well as offering business loans in Ithica Hours at a interest rate of zero percent.

This subsidization appears to rely on donations, so fortunately the unseen consequences of the underlying fallacy are largely voluntary in their distribution. Since it is voluntary buy local bias, the people who prefer them are probably only substituting the color of their money, so the marginal cost of this program is probably pretty small.

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