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Yves here, Notice how this Barcelona plan uses the principles of Modern Monetary Theory. The currency is given value because it can be used to pay local taxes. Now the interesting question will be how well it “trades”. California, during a budget crisis, issued short-term IOUs. They bore interest (3.75%) and they traded at a discount to their fact value. But they could not be redeemed prior to a budget deal being cinched, so they are not a direct parallel to the Barcelona plan. In addition, because the Barcelona scrip is intended for local use, it does not raise the payment systems issue that we flagged for Greece had it tried to reintroduce the drachma (as in it is not to be used for international commerce and therefore on-the-fly approaches like local ledgers and off-line systems should prove to be adequate).
By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street
Socialist mayor to fulfill campaign promises by “printing” money.
Over the next six months, Barcelona’s left-wing city council plans to roll out a cash-less local currency that has the potential to become the largest of its kind in the world. The main goal of the project, according to a council spokesperson, is to boost economic opportunities for local businesses and traders.
The idea is for local stores and residents to be able to exchange euros for the new currency at a one-to-one parity, and use it to purchase products and services at a discount or with other kinds of incentives. But it doesn’t end there: the new parallel currency may also be used to pay certain subsidies, taxes and local services such as public transport, reports El País. Municipal workers could also receive part of their salary in the new money.
Barcelona will not be the first European city to launch such a scheme. Local currencies are all the rage these days. There could be as many as 3,000 forms of local money in use around the globe, says Community Currencies in Action, a global partnership promoting such schemes that is part-funded by the European Union’s Regional Development Fund. Which begs the question…
Why’s the EU Promoting Parallel Local Currencies Around the World?
According to the official blurb, it is to support local small and medium-size enterprises (SME) as well as offer new tools for social inclusion and environmental protection. This comes from an organization that has so far shown scant regard for SMEs [read… Small Businesses Dread the Wrath of US-EU “Free Trade” Deal], social inclusion and environmental protection (read this and this).
Perhaps there are somewhat less altruistic motives behind the EU’s agenda — motives such as encouraging people to embrace cashless currencies. As I warned in The War on Cash in 10 Spine-Chilling Quotes, the war on cash has moved from one of words to actions. As such, is it pure coincidence that most of the local community currencies that have been launched so far are in purely digital format, as would Barcelona’s?
Perhaps that explains why local currencies have captured the interest and support of organizations like the Long Finance Group, whose sponsors include the City of London Corporation, and which recently echoed the Bank of England’s calls for the UK government to adopt a purely digital currency in order to save the national economy (no, seriously).
The EU could also have another hidden motive in promoting community currencies: strengthening regional identity, at the obvious expense of national identity. Strong regional identity certainly helps with uptake, which is why you often find the most successful community currencies taking root in regions with a proud traditional heritage. Europe’s biggest experiments with local currency to date include the Chiemgauer in the German state of Bavaria (total amount in circulation: €521,000), the Eusko in France’s Basque region (€370,000 euros), the WIR in Switzerland, and the Brixton Pound in South London (€150,000).
The Chiemgauer, like many local parallel currencies, has a built-in “value loss” of 8% per year – a sort of automatic inflation – to induce people to spend this money as fast as possible before it corrodes away. That’s why it’s sometimes called the “rusting money.” It’s a heck of a lot worse than the negative deposit rates at some German banks (the hated “punishment interest“). Convert this money into euros to avoid this loss? No problem, just pay a penalty fee of 5%. So users – consumers and SMEs – get screwed, but they’re submitting to it voluntarily and can’t bitch about it.
“Direct Assault on Global Trade”
The biggest inspiration for Barcelona’s community currency is an experiment launched three years ago in Bristol, a medium-sized city in the South West of England. Under the scheme, people can purchase Bristol Pounds, either in cash or digital format, at a one-to-one rate with sterling and spend it with one of roughly 800 businesses. After three years in operation, the currency is now the UK’s largest alternative to sterling.
At the time of its launch in 2012, the BBC called it a “direct assault on global trade,” a statement so loaded with hyperbole as to be risible. Since its inception only £1 million has been issued in the Bristol Pound. Not one to be outdone in the hyperbole department the UK Guardian recently ran a piece headlined (I kid you not), “The Bristol Pound Gives Sterling a Run for Its Money” – all £1 million of it.
But the Bristol Pound has survived for three years, which is a heck of a lot longer than most of these schemes. Indeed, so popular has the Bristol Pound become that a large supermarket chain, a number of high street retailers and a budget airline have asked to be included in the scheme, according to the currency’s co-founder, Ciaran Mundy. They were turned down on the grounds that they were either not based in the area or were quoted on the stock exchange.
A Whole Different Magnitude
While the Bristol Pound experiment has been a big success on a tiny scale, Barcelona’s move toward adopting its own currency is a proposition of a whole different magnitude. With a metropolitan population of 3.2 million people, Barcelona would be far and away the largest city council in the West to trial such a scheme. The council is also proposing using the currency to pay some salaries, social benefits and public services, which could propel the amount in circulation well into the millions, if not billions of euros.
Predictably,the opposition to the scheme in Madrid is fierce. In June, the Bank of Spain’s deputy governor Fernando Restoy delivered a shot across the bow by warning that the scheme proposed by Barcelona’s activist mayor, Ada Colau, was “impossible” as well as “undesirable.”
To launch its own currency Barcelona City Council would have to go directly against the wishes of both national regulators and the central government. It would hardly be the first time in history that it had. Indeed, many of the leading figures of Catalonia’s pro-independence movement, including the region’s premier, Artur Mas, have already called for mass civil disobedience of Madrid. And there are few more potent acts of disobedience than the creation of one’s own currency.
Which begs the question: could Barcelona’s local city currency serve as a springboard to a region-wide parallel currency? After all, if Catalonia’s leaders are genuinely serious about breaking away from Madrid and creating a new nation-state (still a sizable”IF”), they will need to dramatically reduce Catalonia’s financial dependence on the central government’s treasury, the Bank of Spain and by extension, the European Central Bank. The only way to do that is to launch its own currency. As Greece’s Syriza party learnt the hard way, it’s no good threatening to go your own way without first having a parallel currency in place.
Granted, this is the grandaddy of all nuclear options. It is far more likely that Colau’s primary motive in launching a community currency on this scale is somewhat more mundane: i.e. increase local government spending. It’s what she pledged to do before the municipal elections. And there’s no easier way of increasing government spending than printing your own money and then using it to pay salaries, benefits and public services!
The big challenge will be getting local people and local businesses to trust the new form of money, as well as finding a local financial institution willing to back it up with euros. Without that, the currency could lose credibility. Without credibility and trust, fiat money loses value very quickly. And that’s when seemingly easy solutions give way to excruciating pain. By Don Quijones, Raging Bull-Shit.
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Every community should have its own local currency that can furnish the basic needs of life. Corrupt and rigidly inflexible national or international currency regimes, impersonal and disconnected from the daily realities local people face as there are, inevitably become tools for inflicting mass misery (to the advantage of those corrupt corporate state powers manipulating currencies), a description that fits just about every non-local currency.
Also, political entities should be smaller, and much more loosely connected than they are today. Dwindling access to cheap energy inevitably means that societies/states will be descaling and decomplexifying in the not too distant future anyway. Local currencies will be incredibly useful for mitigating some of the more painful impacts of that process, and aid the transition to a smaller and more energy efficient social organization model. So good for Barcelona.
What has been going on in places like Catalonia, Scotland, and Basque is very fascinating.
One comment for people less familiar with alternative currencies: the R/TANs that non-sovereign governments issue from time to time are very different from where Catalonian leaders are (probably) going (or at least, hope to go). Revenue and tax anticipation notes are short-term instruments denominated in the national currency unit that are used for cash flow purposes to finance spending up front that is then paid for by the associated revenue or tax over time. R/TANs are not competing currencies.
A local currency, however, is a long-term project to have people conduct transactions outside the established national currency unit.
Unless “we’ve” been lullabied into sleepwalking, the idea of a cashless society is chilling indeed. To paraphrase Freddie D.-acquiescence defines oppression…the “internet of everything”, “cashless society” etc.etc.etc…hyper-convenience in exchange for agency doesn’t seem like a good “deal”.
The messaging seems to be- don’t think, don’t plan, just “DO”, just “DO” it…remember nike’s ‘admonishment’? When a performer in the ongoing circus was recently asked “HOW he would get his neighbor to pay for our enclosure”, he answered “just do it”…in other words put on your nikes and start digging because somnambulation nation is on a schedule.
Inspiring and worrying at the same time. If they follow up with a form a cash that would appeal more.
Look at the already-successful financial heists of bitcoins. Plus the attempted heist on the Fed in 2012. (For example, as described in Coup de Twelve. The book was written as fiction to get so many of the details out in the open the really nasty last stage could not occur. This approach at deterrence was successful.)
Who knows what other hacks & transfer schemes have already flown under the radar?
As in the “War on Cash” article linked in the main post, cash-less is being aggressively promoted as being more secure and a deterrent to crime. But what about when those bits & bytes disappear without a trace? Won’t criminals be the first ones to figure out ways to use a cashless system for their own ends?
How does this currency help Barcelona from a fiscal spending perspective? It seems the dynamics when it comes to fiscal spending and taxation would be the same as using the euro:
– wouldn’t be able to resort to deficit spending of any significance
– still would have to pick losers to tax and make sure there’s no shortfalls in collections
Now if the Barelona gov prints the currency, I could see that that would liberate them at least on fiscal spending, but I don’t see the referenced article talking about this. Rather I get the sense that the currency is “printed” either by banks as more competitive loans (compared to Euro) or some exchange program with the Euro. And even if the Barcelona gov can print this currency, it would still have the limitation that they would have to keep increase their tax receipts to offset any increased fiscal spending, otherwise inflation would spiral. So they would still have to pick losers from a taxation perspective.
It seems to me that if the Barcelona gov really wanted to do this right, they would issue gov bonds/debt in the new currency. That way, their fiscal spending is 100% sterilized through the combination of tax collections and debt issuance (don’t have to worry about spiraling inflation). And they should be more liberated in the amount of deficit spending they can engage in, as nobody else would be able to compete with them from a risk-free rate-of-return perspective (as nobody else outside of Barcelona would be using the same currency or issuing bonds in said currency).
Of course, once you go this far, you’re essentially your own sovereign country. But if you don’t go that far, and remain a state, you still end up with all the fiscal and tax limitations of being a state.
“they would have to keep increasing their tax receipts to offset any increased fiscal spending, otherwise inflation ”
“you still end up with all the fiscal and tax limitations of being a state.”
When there is unemployment there is room for fiscal spending without leading to inflation. The demand can be absorbed by more production.
States aren’t limited by taxes.
In a way the euro is still doing the ‘heavy lifting’ by having state backing and providing an overall measure of value. But to the degree the local currencies are accepted they are augmenting the euro.
But that’s the thing. The euro can only do that heavy lifting if Barcelona imposes enough taxes in aggregate to keep the exchange rate steady at approximately 1:1. You can’t increase spending while holding both taxes and inflation constant.
It’s a simple identity conceptually.
Spending = taxation + inflation. Or said differently, inflation = spending – taxation. If you raise spending, and don’t raise taxes, then inflation funds the difference.
Sure, there can be insufficient aggregate demand. Maybe inflation is exactly what you want. But let’s not pretend that handing government workers a depreciating scrip is something else.
The heavy lifting part is to create the money of account.
The exchange rate will depend on how well the new currency is accepted which is only intended to be on a local basis.
Why benchmark Barcelona’s currency to a euro which is controlled by others who are geographically, ideologically and economically distant and who are intent on transferring and concentrating your City’s wealth into their own hands through their control over debt-money and financial & currency markets. To do so is to bear their subsequent privatization of your public assets and imposition of stark austerity on your citizens?
Instead, why not benchmark your municipal currency to a basket of commodities, including the price of sustainable green energy, and to the municipal CPI? It seems to me this action would work to disempower the financial and political intermediaries who presently control and manipulate the international financial and currency markets, and instead would empower the citizens of the City of Barcelona. Control over global financial and currency markets is key to currency control by those who benefit from artificially-created money scarcity, whether that is done through low levels of money creation or by reducing the velocity of money to levels below those of the Great Depression of the 1930s through their money distribution networks and imposed debt servicing requirements.
Besides the issues discussed in the article relating to IT transition and the transnational payments system, those associated with Spain’s unique history during the 20th C, and the anticipated propaganda appearance of the boogeyman of Weimar Republic-Zimbabwe hyperinflation (which can be addressed through taxation), there may be other potentially perverse risks to Barcelona’s effort that do need to be thoroughly vetted. J.D. Alt, a proponent of MMT who has occasionally posted articles here at NC in the past, discussed one such risk – increased vulnerability to transnational corporate control – in a recent post at New Economic Perspectives:
http://neweconomicperspectives.org/2015/10/the-ideology-of-money-scarcity.html
I think it’s more piggybacking on the euro rather than trying to create a separate, benchmarked currency.
I don’t think it’s the right approach to treat a currency as a commodity. I think it’s better to view it as a money of account backed by taxes and the implied power behind the tax collection.
I think the piggybacking effect works ok on a small scale and could be very beneficial to Barcelona but to ratchet it up to a more fully tradable currency would take more state backing.
One quibble, Don Q: you use the word “scheme” eight times in your article to describe local currencies. I suggest using a neutral word, one without the negative connotations associated with con-men and Wall St bankers (but I repeat myself..). Maybe describing a parallel currency as a “program” instead of a “scheme” would cast it in a better light?
“Scheme” doesn’t carry the same negative connotations in British English as in American.
This^^^^
Scheme is synonymous with plan.
Would it not be possible for different areas/cities/regions who are opting for local currencies to join together and agree to honor each other’s currency? People could then travel or trade with other local currency groups on a one-to-one basis, gaining benefits for the people (travel, fun, business) without being locked into the neoliberal looter central government currency.
On the other note of “an assault on cash”, I am STRONGLY in favor of any form of alternative currency that comes in an untraceable form. Cash gives privacy. Cashless provides the government or business with direct eyes on every single purchase you make and to whom/what. While I’m not keen on the tax dodging that many alternate currency users are actually seeking it for, I AM keen on keeping prying eyes out of my business, regardless of how innocuous my purchases may be.
I LIKE my local grocer not being able to track my purchases of this coffee or that cheese. They cannot then “profile” me or target me with obnoxious spam (adverts) in the mail or by email. I LIKE that the government cannot track what books I buy (with cash) or what hotel I stay at while traveling to wherever I want without necessarily wanting the government to track me. Privacy for privacy’s sake is its own good.
I like my grocer sending me discounts for the stuff I buy. A different perspective…
If they want to discount what I buy, I like it.
Good I hope initiatives like this do in fact stimulate business for local SME’s. I agree with the approach that some of it should be hard as well as the digital currency.
We should have continental community web conferences on local community currencies opportunity to help to drive this. Anyone interested in North America send me an email re 21st Century Financial System (conference)?
NC readers often opine “it’ll never work” because IT, etc. But that has changed entirely with the advent of a new, ubiquitous distribution channel: the mobile phone.
Structurally the great example is Ecuador: they are taking the national currency, putting it on mobile phones. But the key takeaway is this: it’s being issued not by banks in the form of credit, but on the asset side of the books, issued by the nation’s central bank. Voila: sound money.
And the real improvement comes when there is not one monoculture CB currency, but many currencies with many issuers and many users for many purposes. Japan’s furrea kippu, for example, is one hour of elder care: you earn them by caring for an elderly person for an hour, then you get to spend them when it’s your turn. There may be inflation in the meantime, but an hour will still (presumably) be an hour.
Interop and exchange rates between them is an ongoing IT development challenge but Silicon Valley and others are hard at work, and they’re pretty close. It’s orders of magnitude easier than many IT capabilities we now use and take for granted every day.
Towards an antifragile money system: watch out all MMT’ers and debt-based money vampires.
You’re saying that cell phone systems have no back-end IT issues?
I share reservations on cash.
Apart from on-line transactions, all my transactions are in cash.
If everyone followed my example, used cash, not cards, we would be hurting the banks.
We have got to a ridiculous state, where people go into a coffee shop and pay for a cappuccino with a card.