A Camden church has started accepting Bitcoin donations. St Martin’s in Gospel Oak says it wants to keep up with the times and has warned that the current financial system is not all that reliable. I’ve just checked where else I an use my Bitcoins in Kings Cross. Clink hostel takes them, but that’s it so far. So how far is the Internet currency from being one more tool in the creation of a localised economy?
Back in the 80s a big new alternative economy idea was LETS – Local Economy Trading Schemes. The idea was to bypass the mainstream economy by creating local networks of exchange and trading that would be mutually supportive. These could be local currencies or simple barter systems – antecedents to the currently fashionable idea of the ‘sharing economy’ – where time became the currency that was the basis of exchange. Hence time-banking. In that pre-Internet age the logistical tasks must have been daunting – all that photocopying, keeping paper records, passing information around at meetings or by post.
So I was pleased to find the idea still survives – a LETS network is still in existence and you can find local time-banks from Penwith to Thurso. A small number of local currencies are still in circulation too, and occasionally generate media interest – Brixton, Bristol, Totnes. This despite the difficulties in creating notes and having to beat the pavements to generate interest amongst shoppers and shop-owners. Not surprisingly all are in strong outposts of the transition movement. Other initiatives have stood the test of time less well. It’s several years since I last used my Big Issue ‘Wedge’ card to get a discount from local stores.
For the LETS community the idea was to facilitate exchange without a money system at all, and there will always be a place for that idea. But could the local currencies be overtaken by the rise of Bitcoin, the alternative currency for the cyber age, making feasible an ideal that was practically so difficult in pre-digital times? It’s tempting to feel the social need for an alternative currency is now matched with the technology that can make it a reality: that financial crisis and technological developments have in tandem created the conditions for crypto currencies to emerge. And that could in turn spur the development of City economies, able to create their own currencies.
It’s not obvious why parallel currencies should emerge. Whether Bitcoin or Brixton pound, they involve consumers in an extra transaction, converting between the ‘standard’ currency and the alternative. In the Brixton case its easy to see how the costs of this extra transaction are outweighed by the benefits it brings. Traders benefit if more transactions take place in the area covered by the currency; consumers get the reassurance that local shops are more likely to survive. And the costs are very low; there is little risk of not being able to spend your Brixton pounds.
For Bitcoin the potential gains look bigger. Forex transaction involve the costs of currency conversions anyway, so it’s easy to see this being cheaper through a web-based account with no need for a money changer. Peer to peer payments can also be kept out away from prying eyes of government, to avoid tax or make payments for illegal goods, which has inevitably caught the media eye.
But to be ‘real’ money crypto currency needs to be more than an internet transactions token. It would have to move beyond fulfilling just one of the economist’s standard definitions of money – a means of exchange – to meeting the other two as well – a unit of account and a store of value. But this is less technical than it sounds. Whether a currency is a unit of account or not is really a matter of sentiment: when comparing the monetary values of goods for exchange do I “think” in terms of pounds, dollars, euros or Bitcoin? This is a bit similar to becoming fluent in a language, when you stop translating in and out of a mother tongue. Money as store of value is simpler – can I be fairly sure the cash I have in my account today will be worth much the same tomorrow, next week or next year?
How could crpto currencies move beyond being a means of exchange and take on these two extra roles? Their fate will be the mirror image of trust in State backed fiat money. Another financial crash, after the stoking of yet another asset bubble, followed by mass loss of savings as governments are unable to afford more high profile bail-out, and we could see trust in national currencies ebbing away very rapidly.
We’re now so used to State money it’s difficult to imagine it not existing. But paper money was the invention of goldsmiths in the 16th century, a promise to pay against gold holdings, and as recently as 1921 banks in England were still able to print their own notes – so long as they were located more than 65 miles from London. The last to do do was a bank in Somerset with a name, “Fox, Fowler & Co”, redolent of financial cunning. From the Bank of England being given a monopoly on note printing, it was then but a short decade to the 1931 break with the gold exchange, marking the arrival of modern ‘fiat’ currency: money backed by nothing more than trust in the state. It’s enshrining in law – ‘legal tender’ – gives but a veneer of solidity. Legal tender has no real practical application.
So a system created less than a century ago has no claim of permanence. A central bank issuer made sense for a period, roughly equating to the dominance of the nation state. But it will fail to prevail if a debased, untrusted currency loses its role as a store of value, creating the opening for a modern version of Fox Fowler & Co.
For sure, Bitcoin as set up couldn’t the job. To go viral it would need the backstop of a transparent and trusted institution – something a bit more transparent than the shadow world of mysterious data miners that currently control the supply of Bitcoins. There’s also a debate about whether the ‘cap’ on Bitcoin creation is dangerously deflationary, based on the economic theory that wages sometimes need to fall, when the skills of those workers get out of date. Given that money wages are sticky – people don’t like taking a pay cut – inflation does that important job instead. This is much the way public sector workers are being treated at the moment. This use of inflation to ‘grease the wheels’ of the economic engine is of dubious morality. But more importantly for this debate is that it’s a technical issue that can be resolved if crypto currrencies bring in some economics knowledge to go with their competence in algorithms.
And perhaps this need for new monetary institutions is where smaller economic units like city economies and devolved nations come in – with local banks creating their own crypto currencies. How about it Scotland?