This is Naked Capitalism fundraising week. 1181 donors have already invested in our efforts to combat corruption and predatory conduct, particularly in the financial realm. Please join us and participate via our donation page, which shows how to give via check, credit card, debit card, or PayPal. Read about why we’re doing this fundraiser, what we’ve accomplished in the last year, and our fifth target, more original reporting.
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.