E. F. Schumacher argued in Small is Beautiful: Economics as
if People Mattered that from a truly economic point of view
the most rational way to produce is "from local resources, for
local needs." Jane Jacobs, one of today's foremost scholars on
regional economies, emphasizes Schumacher's point through her
analysis of a healthy region as one creating "import-replacing"
industries on a continuing basis. A well-developed regional economy
which produces for its own needs is possible only when control
of its resources and finances lies within the region itself. At
present, the ownership of land, natural resources, and industry
and the determination of conditions for receiving credit have
become increasingly centralized at the national level. Now all
but a few large urban areas find that their economic resources
are controlled from outside the area.
The banking system is one of the most centralized institutions
of our economy and one of the major obstacles to strengthening
regional economies and the communities within them. Yet centralized
banking is only a recent development in the United States. The
customs of borrowing and lending and money-printing grew up over
generations in towns and rural communities to form what we now
call our banking systems. These systems were small-scale, regional,
and decentralized. Paper money was made standard, or national,
in 1863 in order to raise funds for the fight against the Confederate
States, but it was not until 1913 that a central system became
formalized with the Federal Reserve Act. Centralized banking and
control of money called for large banks and wealthy investors
who could assemble huge, unprecedented sums of money. These banks
in the money centers, with their industrial customers, could pay
a higher interest rate to depositors than could the smaller banks,
and these smaller, often rural banks began sending their deposits
to the large cities. The national currency made money more fluid
and allowed rural dollars to support urban industrial growth.
Rural creditors were pleased with this arrangement until the first
time a New York bank closed and carried off the savings of a small
town or until a local farmer couldn't secure a loan because a
Chicago bank was borrowing from his bank at a high rate of interest
.
A national currency facilitated the industrialization of the
United States, which in turn created many jobs; however, the centralization
of the monetary system has served to centralize the benefits of
the system as well.
The effect on small farmers and rural economies has been devastating.
The on-going "farm crisis" is a dramatic manifestation of what
is really a monetary crisis that began in the deep depression
of the 1870s and 1880s and was later codified in the Federal Reserve
Act. Credit for small-scale farming and the small rural businesses
that are a part of the farm community had dried up long before
the Depression of the 1930s, and the United States government
had to create the Farmers Home Administration in order to help
replace-with tax money-some of the rural capital that had been
lost to the large cities.
The "housing crisis" is also in part a monetary crisis. Investors
place money in land as a "hedge against inflation," which drives
land and housing prices up. The high cost of land is a major factor
in the present shortage of affordable housing, and it takes home
ownership out of reach for the majority of Americans.
The local and decentralized banking systems of a hundred and
fifty years ago had the advantage of diversity. The failure of
a local bank-even a New York bank-was still a local failure, and
its costs were internalized. But today we are facing the failure
of an entire system. Consider the billions of tax dollars spent
by the national deposit insurance system to bail out the Savings
and Loan industry. And recall that billions were added to the
national debt in order to bail out large banks when developing
countries defaulted on their loans. These systemic failures are
bound to occur if local economic control of banking customs and
money supply is compromised by centralization and sacrificed to
serve the heedless demands of growth.
This predicament calls for a reorganization of economic institutions
so that they will be responsive to local and regional needs and
conditions. These new institutions would decentralize the control
of land, natural resources, industry, and financing to serve the
people living in an area in an equitable way. We need to create
an infrastructure that encourages local production for local needs.
Community land trusts, worker-owned and worker-managed businesses,
non-profit local banks, and regional currencies are some of the
tools for building strong regional economies.
Because we have all learned to assume that national currencies
are the norm, a regional currency is perhaps the least understood
of these tools. Jane Jacobs, in her book Cities and the Wealth
of Nations, views the economy of a region as a living entity
in the process of expanding and contracting and a regional currency
as the appropriate regulator of this ebbing and flowing life.
Just like a nation, a region which does not produce enough of
the goods it consumes comes to rely heavily on imports and finds
that its currency is devalued. Import costs increase, the exchange
of goods is reduced, and the region has to "borrow," which means
that it exports its capital-dollars, not goods-and ends up importing
nearly everything it needs. But if the region is supplying its
own needs, then its currency "hardens" and holds its value relative
to other currencies. Imports are cheaper, and trade is more equitable-or
even skewed in favor of the self-reliant or "import-replacing"
region.
Jacobs describes currencies as "powerful carriers of feedback
information . . . and potent triggers of adjustments, but on their
own terms. A national currency registers, above all, consolidated
information of a nation's international trade." This feedback
informs economic policymakers. But should the industrial Great
Lakes region or the farm-belt states adjust their economies in
the same manner as the Sunbelt states or the Silicon Valley of
the West Coast? A very significant part of any region's economy
is governed by a monetary and banking system over which members
of a community have little or no control. The dependency on national
currencies actually deprives regions of a very useful self-regulating
tool and allows stagnant economic pockets to go unaided in a seemingly
prosperous nation. What we propose instead is the establishment
of a system with community accountability.
Regional currencies are not a recent invention-the practice is
centuries old. The so-called free banking era of U.S. history,
when many currencies circulated, contributed substantially to
bringing about Thomas Jefferson's dream of a nation of small,
independent, self-reliant farmers who found ready credit with
community banks to produce and sell their goods. Even in the early
years of this century local banks issued their own currency, which
John Kenneth Galbraith says was important for the rapid development
of the American economy.
How were these banks different from banks today? Because they
were located in small towns, the bankers knew the people they
were dealing with in a personal way and could make loans on the
basis of "character," not strictly on the basis of how much collateral
an individual had to secure the loan. A more striking difference
is that each bank could issue a local scrip. Unlike a national
currency, which easily leaves the region in which its value is
created, the local currency could circulate only in a limited
regional area; local currencies and local capital could not travel
to the money centers to finance the operations of multinational
corporations or interest payments on debt. Credit decisions were
made by local bankers with particular personal knowledge not only
of the borrowers but also of the needs of the region as a whole.
One of the major objections to "free banking" in the nineteenth
and early twentieth centuries has been that some of these local
banks failed and some printed money to speculate in land and to
make unproductive loans. The argument is that such abuses can
be controlled if money is issued centrally. But it was unity-a
shared belief in communal responsibility and vigilance-rather
than uniformity that was needed. Community development banks like
Chicago's South Shore Bank and the Grameen Bank of Bangladesh
make up an intellectual diaspora-they are decentralized and unified.
The Savings and Loan industry is uniform.
Decentralization and diversity have the benefit of preventing
large-scale failure. This is as true in banking as it is in the
natural world. Think of seeds. If many different strains of corn
are planted by different farmers and a disease hits the crop,
some strains will resist and the corn will be harvested. But if
all the farmers have shifted to a new hybrid seed and a blight
hits the corn, the result can be widespread crop failure and disaster.
How do we ensure diversity in banking? As the economist Frederick
Hayek has pointed out, to keep banking honest it would be better
to return to a banking system that utilizes competing currencies
rather than to rely on a central system.
In the 1930s a worldwide deflation encouraged many new forms
of exchange that competed with the national currencies. The town
of Woergel in Austria created a scrip system that drew international
attention. The people in this little town were able to trade in
labor and materials, which they did have, rather than in Austrian
shillings, which they didn't have, and they managed to pull themselves
out of the Depression in a matter of months. Local scrip also
sprang up around the United States. A former editor of The
Springfield Union in Massachusetts told us the story of a
scrip issued by his newspaper. He was just a copyboy at the paper
during the bank failures of the 1930s; he remembers that the publisher,
Samuel Bowles, paid his newspaper employees in scrip. It could
be spent in the stores which advertised in the paper, and the
stores would then pay for ads with the scrip, thus closing the
circle. The scrip was so popular that customers began to ask for
change in scrip-they would see Bowles around town and had more
confidence in his local money than in the federal dollars. Newspaper
money helped to keep the Springfield economy flowing during a
period of bank closures, facilitating commercial transactions
that went well beyond the original intent of the issue.
Forty years later in the town of Exeter, New Hampshire, the economist
Ralph Borsodi and Robert Swann issued a currency that was based
on a standard of value using thirty different commodities in an
index similar to the Dow Jones Average. It was called the Constant
because, unlike the national currency, it would hold its value
over time. The Constant circulated in Exeter for more than a year,
proving, as Borsodi had hoped, that people would use currency
which was not the familiar greenback. At the time, it received
national publicity in Time, Forbes, and other magazines.
When asked by a reporter if his currency was legal, Borsodi suggested
that the reporter check with the Treasury Department, which the
reporter did. He was told, "We don't care if he issues pine cones,
as long as it is exchangeable for dollars so that transactions
can be recorded for tax purposes."
This is all that the government requires of a local currency,
and all that a local currency requires of a community is trust.
A currency is only as strong as the confidence that people have
in one another to produce something of value. Trust is at the
heart of the successes in Springfield and Woergel and Exeter.
Borsodi discontinued his experiment after a year, but he had
accomplished his purpose: to demonstrate local acceptance and
verify the legality of locally issued, non-governmental currencies.
The Southern Berkshire town of Great Barrington, home of the
E. F. Schumacher Society, has made strides toward issuing a Berkshire
currency. Our story will make plain the particulars of how local
currency works and how it encourages economic self-reliance. In
1982 a discussion group on regional economies led to the incorporation
of a non-profit organization called SHARE (Self-Help Association
for a Regional Economy), with open membership and a board elected
from its members. The intent was to establish an organizational
base for a local currency.
SHARE's first objective was to make productive loans to people
who were unable to secure normal bank financing but who had the
kind of small, locally-owned enterprises that produced quality
goods and services for local consumption. Some of these businesses
could get bank loans but at rates of 15 or 18 per cent, and SHARE
determined to make low-cost loans available. SHARE members open
savings accounts at the First National Bank of the Berkshires,
and these accounts are used by SHARE to collateralize loans. This
kind of lending requires that the community separate the functions
of banking. The bank makes the loans and handles the accounting,
but the lending decisions, based on a unique set of social, ecological,
and financial criteria established by SHARE, are made by the community
of depositors.
Sue Sellew of Rawson Brook Farm makes a soft chevre cheese from
the milk of her dairy goats and the herbs she grows on her organic
farm. She borrowed $5,000 from SHARE to bring her milking parlor
and cheese room up to state standards. This has enabled her to
sell the cheese to stores and restaurants.
Jim Golden trained his two draft horses, Spike and Rosie, to
haul timber and firewood from forests. Jim can assure his customers
that their woods will be treated in an ecologically responsible
manner and won't suffer the undue stress caused by heavy equipment.
A SHARE loan was made to complete a barn for the team.
Bonnie Smith had never borrowed money, but she had a knitting
machine which took bulk-weight yarn, and she had a talent for
designing clothes. She knits sweaters, tights, leg-warmers, and
scarves in whimsical, colorful designs. Her small SHARE loan bought
a bulk supply of wool yarn, which lowered her overall costs and
established credit with suppliers. She borrowed again for a second
knitting machine when the first loan was repaid. Her business
kept on growing, and she applied a third time to buy a machine
for an employee. The first two loans had established bank credit
for her business, so SHARE sent Bonnie directly to the bank's
loan officer, who readily approved a loan.
The payback record on SHARE-collateralized loans has been 100
per cent, both because of their scale and because of community
support for the loan recipients. SHARE members help maintain this
perfect record by recommending these small businesses to their
friends.
Most loans have been for start-up businesses requiring no more
than $3,000. They are made for equipment or inventory but not
for salary or advertising-productive loans, not consumer loans.
A piano teacher purchased a piano with loan funds in order to
provide lessons in her home, but an application to purchase a
piano for private use was sent to the bank's consumer-loan officer.
The SHARE loan-collateralization program is simple to operate
and easily copied. Similar programs have started around the United States, using the model created in the Berkshires. It is the "grandmother principal" which has made SHARE a success: When people without credit histories decide to go into business, they frequently turn to a family member, such as a grandmother, for help. Instead of lending directly the grandmother might offer a savings account as collateral for a bank loan. The SHARE program simply extends "the circle of grandmothers," creating a family of place.
SHARE puts a human scale and a human touch back into local economic transactions. A newsletter tells SHARE depositors "what your money is doing tonight"-it is working locally to make cheese or sweaters or to house two very big horses. On weekends SHARE members visit Sue Sellew's farm, where the baby goats nibble at the keys in their pockets. They come by the next weekend with their grandchildren and on the next weekend serve Monterey chevre at their dinner party. Monterey chevre is not just any cheese; it is a cheese with a story, and SHARE members are a part of that story. They ask for the cheese at local stores. They think of Bonnie's wool sweaters when contemplating a special gift. They root for Spike and Rosie at the draft-horse pulling contest. These local economic relationships encourage social patterns that in turn shape a uniquely local culture.
Frank Tortoriello is the owner of a popular deli on Main Street in Great Barrington. He turned to SHARE when the bank refused him a loan to move his restaurant to a new location. But Frank didn't need SHARE's circle of grandmothers; he already had a circle of his own in his customers. SHARE suggested that Frank issue Deli Dollars as a self-financing technique. The notes would be purchased during a month of sale and redeemed after the Deli had moved to its new location. A local artist, Martha Shaw, designed the note, which showed a host of people carrying Frank and his staff-all busy cooking-to their new location. The notes were marked "redeemable for meals up to a value of ten dollars." The Deli would not be able to redeem all the notes at once after the move, so SHARE advised Frank to stagger repayment over a year by placing a "valid after" date on each note. To discourage counterfeiting Frank signed every note individually like a check.
We recommended that the notes be sold for ten dollars each, but Frank thought that would be too good a deal for the Deli. With his customers in mind he sold ten-dollar notes for eight dollars and raised $5,000 in thirty days: contractors bought sets of Deli Dollars as Christmas presents for their construction crews; parents of students at nearby Simon's Rock College knew Deli Dollars would make a good gift for their kids; the bankers who turned down the original loan request supported Frank by buying Deli Dollars. The notes even showed up in the collection plate of the First Congregational Church because church-goers knew the minister ate breakfast at the Deli. Regular customers were pleased to help support what they saw was a sure thing-they knew firsthand how hard Frank worked and believed in his ability to make good on redemption. Frank repaid the loan, not in hard-to-come-by federal notes but in cheese-on-rye sandwiches.
Jennifer Tawczynski worked at the Main Street Deli and carried the idea home to her parents Dan and Martha Tawczynski, who own Taft Farm, one of two farm markets in the area. The Tawczynskis came to SHARE with the idea of issuing "greensbacks" to help them meet the high cost of heating their greenhouses through the winter. Customers would buy the notes in the late fall for redemption in plants and vegetables come spring and summer.
At around the same time the other farm market in town, the Corn Crib, was damaged by fire. Customers of the Corn Crib came to SHARE with the idea of issuing notes to help owners Don and Ruth Zeigler recover from the ravages of the fire. SHARE suggested that the two farms together issue a Berkshire Farm Preserve Note. Martha Shaw designed the note with a head of cabbage in the middle surrounded by a variety of other vegetables. The notes read "In Farms We Trust" and were sold for nine dollars each. The Massachusetts Commissioner of Agriculture traveled from Boston to purchase the first Berkshire Farm Preserve Note, and five national networks showed our farmers using Yankee ingenuity to survive a difficult winter. The Berkshire Women with Infants and Children (WIC) program purchased Berkshire Farm Preserve Notes in order to give them to families, part of a local initiative to supplement the federal food program. The notes do not carry the food-stamp stigma, and the Berkshire agency knows it is supporting local farmers at the same time it is supporting local families.
The notes could be purchased at either farm and were redeemable at either farm. At the end of the redemption period SHARE acted as the clearinghouse for the notes. The farmers received the income (ranging from $3,000 to $5,000 per farm per year) from the sale of the notes, and they found a committed base of customers who would travel out of their way to buy from their local farms rather than purchase the jet-lagged vegetables from supermarket chains.
DELI DOLLARS STARTED A CONSUMER MOVEMENT IN THE BERKSHIRES. THE BERKSHIRE FARM PRESERVE NOTES, MONTEREY GENERAL STORE NOTES, AND KINTARO NOTES THAT FOLLOWED GAVE BERKSHIRE RESIDENTS A WAY TO VOTE FOR THE KIND OF SMALL INDEPENDENT BUSINESSES THAT HELP TO MAKE A LOCAL ECONOMY MORE SELF-RELIANT.
The popularity of the scrip inspired the Southern Berkshire Chamber of Commerce to work with the Schumacher Society staff to issue Berk-Shares as a summer promotion. Customers were given one Berk-Share for every ten dollars spent in a participating business over the six-week summer period. During a three-day redemption period customers could spend their Berk-Shares just like dollars in any of the seventy participating stores. The success of the Berk-Share program depended on the energy and cooperation of a small group of merchants and in large part on the sense of community among consumers. Of the seventy-five thousand Berk-Shares handed out (representing three-quarters of a million dollars in Berk-Share trade) twenty-eight thousand were spent during the three-day redemption period! Some families pooled their Berk-Shares for a gift for one member of the family. People who were going away over the redemption weekend were sure to give their Berk-Shares to a neighbor who would use them. A spirit of festivity and excitement filled Main Street that weekend as people chatted about how they planned to use their Berk-Shares.
Although the Berk-Shares and Deli Dollars and Farm Preserve Notes represented a major shift in local attitudes toward an alternative exchange and captured the imagination of both consumers and producers, they were not yet the year-round local currency the organizers had envisioned. A suggestion from several area banks pushed the effort forward to its next stage. The Berk-Share organizing committee proposed that the five local banks participate in a Berk-Shares zero percent loan program during the winter holidays. Spending that would normally flow to catalogue stores and malls would instead go to the locally owned stores that accepted Berk-Shares, helping to secure local jobs and keeping local dollars local. The committee presented the idea at a meeting with the bankers, who in turn proposed that the committee create a year-round Berk-Share which would be a 10 percent discount note. Customers would come to the banks and purchase one hundred Berk-Shares for ninety dollars and redeem them at local stores for one hundred dollars worth of goods and services. The merchants would then deposit their Berk-Shares at local banks at ninety cents per share.
But how to clear the Berk-Share accounts among the five banks? The Federal Reserve system moves dollars (checks) between the receiving bank and the issuing bank. This clearing system is automated and keeps the national currency moving. A local currency needs a local system. The bankers at the meeting came up with the solution. They said, "Well, we can just walk down the street to one another's banks and make the exchange, the way we used to with checks." It gave these individual bankers, who are caught up in a highly centralized and fast-paced system, great pleasure to imagine recapturing in a small way the early days of banking when transactions had a warmer, more community-spirited tone.
The Schumacher Society and the Main Street Action Association of the Southern Berkshire Chamber of Commerce are cooperatively seeking funds to staff the first year of issue. When the program is in place and local businesses and their customers are familiar with the Berk-Share as a year-round scrip, Main Street Action and the Schumacher Society will work with local businesses to develop a commodity backing for the Berk-Share. Eventually, loans can be made in Berk-Shares at an interest rate as low as 3 percent-the cost of servicing the loan. Unlike the current SHARE program, which relies on borrowed dollars, a loan in Berk-Shares would carry no profit costs. A 3 percent loan could encourage new business ventures like local food processing that otherwise couldn't compete because investment capital is too expensive. A local scrip can empower Berkshire residents to shape their own economic futures unfettered by high interest rates and credit decisions made in far-away money centers. Each town can be a money center, and local economic problems will have local solutions.
In the summer of 1991 Paul Glover heard a radio interview with Schumacher Society staff about the Deli Dollars and Berkshire Farm Preserve Notes. The story inspired him to issue Ithaca Hours in his hometown of Ithaca, New York, as a way to create more local jobs and more security for Ithacans who are underemployed. Ithaca Hours has grown from its small grass-roots beginning to include over a thousand individuals and stores. The scrip can buy food items, construction work, professional services, health care, and handicrafts. Each Ithaca Hour is worth ten dollars-the average hourly wage in Tompkins County-so the five thousand Ithaca Hours (or $50,000) in circulation have increased local economic transactions by several hundred thousand dollars annually.
Individuals and stores agreeing to accept Ithaca Hours notes are issued two free Hours to begin trading and are listed in the free monthly paper, Ithaca Money. This newspaper features articles about the local economy and tells the stories of small home-businesses that have prospered by accepting payment in scrip. Only Ithaca Hour vendors can advertise in Ithaca Money, and although the ad will run for two months, it costs only half an Hour (five dollars).
Consumers are led to shop locally because Ithaca Hours can be used only in Ithaca. One market farmer who had difficulty paying bills during the winter was able to secure a loan in Ithaca Hours from a customer who had accumulated more than she could use. She preferred to recirculate them rather than let them lie idle. The farmer's family paid for child care, movie tickets, and other goods and services in Ithaca Hours and then repaid the loan in
produce in the summer. The Alternative Credit Union in Ithaca accepts partial repayment of mortgage loans in Hours because its employees have agreed to accept part of their salaries in scrip.
Paul Glover has opened a downtown Hours Bank in order to regulate circulation of the currency, provide visibility, and supply a diverse array of goods for purchase with Ithaca Hours. The organizers work with local businesses by tracking the goods that these businesses buy from outside the region and then connecting them with local producers of the same goods. This is the substance of an import-replacement program that will create sustainable jobs.
A local currency may be dollar-denominated or measured in chickens (as Wendell Berry once suggested for his part of Kentucky) or hours or cordwood, as long as people know they can spend that chicken cash, that cordwood note. Confidence in a currency requires that it be redeemable for some locally available commodity or service. The Schumacher Society recommends the following policies to maintain confidence over the long haul:
- The issuing organization should be incorporated as a nonprofit so the public understands that providing access to credit is a service not linked to private gain. The organization should be democratic, with membership open to all area residents and with a board elected by the members.
- Its policy should be to create new short-term credit for productive purposes. Such credit is normally provided for up to three months for goods or services that have already been produced and are on their way to market-credit for things which pay for themselves in a very short time.
- The regional bank or currency organization should be free of governmental control-other than inspection-so that investment decisions are independent and are made by the community.
- Social and ecological criteria should be introduced into loan-making. (Community investment funds also use a positive set of social criteria particular to their own region. These funds could join with hard-pressed local banks to initiate regional currencies.)
- Loan programs and local currencies should support local production for local needs.
Local currencies can play a vital role in the development of stable, diversified regional economies, giving definition and identity to regions, encouraging face-to-face transactions between neighbors, and helping to revitalize local cultures. A local currency is not simply an economic tool; it is also a cultural tool.
Community groups in Kansas City, Eugene, Boulder, and in little Philmont, New York, are issuing their own currencies, and each is uniquely tailored to the people, culture, and products of the region. Each community has its own tale of how and why people first organized and what they hope to achieve by their efforts. A Schumacher Society member who was visiting Ithaca looked in Ithaca Money for a way to spend his scrip before leaving town. He decided on a craft item that a woman made and sold in her home. The daughter who answered the door understood that the visitor was not from Ithaca and asked, "What does your hometown currency look like?"
- A handbook of legal documents for starting a SHARE program may be accessed from the SHARE Micro-credit page.
- An Ithaca Hours Starter Kit may be ordered from Paul Glover, Ithaca Hours, Box 365, Ithaca, NY 14851 or online at www.ithacahours.org/kit.html.
- Prof. Lewis D. Solomon's book, Rethinking Our Centralized Monetary System: The Case for a System of Local Currencies, with a Foreword by Robert Swann (Westport, Ct.: Praeger Publishers, 1996) discusses the legal aspects of local currencies.
