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Rethinking Our Centralized Monetary System
Thursday, September 8, 2005 [4:50 pm]

The Case for a System of Local Currencies

by Lewis D. Solomon

This is supposedly the technical local currency book. I'm reading it because it actually references U.S. Code to back its claims that local currencies are legal.

This book is only 131 pages long, and I still felt like I was wading through filler much of the time. Many of the key points seem to be repeated over and over.

Some high points:

-- A detailed discussion of Borsodi's Constant project, which issued a currency backed by a hypothetical "basket" of commodities. The value of a Constant could be computed by summing the current market values of all of the commodities in the basket. There is an article from Mother Earth News posted here about the Constant project.

-- A good overview of all the various currency projects (LETS, Hours, Deli Dollars, Berk-Shares, and Berkshire Farm Preserve Notes).

-- Coverage of the legal issues facing local currency projects in the US. Federal law prohibits private coinage (USC vol. 18, sec. 486, 1988). Federal law prohibits the circulation of notes with values less than $1 (USC vol. 18, section 491, 1995).

Inflation-free Currency

Solomon claims that we must move towards local currencies that are not pegged to the U.S. dollar so that we can avoid the inflation of the dollar. One goal of a local currency project, he states, should be to provide a stable money instrument that does not fluctuate in value.

But what is the core value of inflation-free currency? Phrasing it a different way, what is the problem with slow-and-steady inflation? Inflation reduces the value of long-term savings. Money kept under the mattress for 100 years will dwindle in value. So, we must want a stable currency, in part, so that people can save money without fear of it losing its value.

But money kept under the mattress does not "stimulate" the economy in any way. Money only enables trade, and thus increases collective wealth, when it circulates. Thus, an inflation-proof currency would tend to reduce circulation and investment. Inflation, in fact, increases people's tendency to spend and invest. Better spend your money today, since it will be worth less tomorrow. Better invest your money in some business, since if you simply hold onto it, it will lose all of its value.

Thus, I see two conflicting goals in the alternative currency movement: one goal is to stop inflation, while the other goal is to keep money circulating and stimulate the economy.

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