On ‘Reimagining Money’

In a recent article at The Atlantic, Douglass Rushkoff waxes romantically about local currencies and time banks. He thinks both will shift the focus from wealth to trust. I disagree. As I explain below, both local currencies and time bank coupons are worse monies than those we commonly use. Moreover, they do not “encourage admirable human behavior”—in part, because Mr. Rushkoff and I disagree over what is admirable and, in part, because Mr. Rushkoff confuses the redenomination of wealth with the removal of wealth.

Traditional Money

Economists define money as a commonly accepted medium of exchange. Without money, transacting is difficult: you have to find someone who wants what you have and has what you want. Money makes transacting easier by providing a single medium that virtually everyone accepts. If you find someone who wants what you have, you can take money instead of whatever good or service they happen to produce. You can then use that money to purchase some good or service from anyone else—even if the person you ultimately buy from doesn’t want what you are selling. In this way, money lowers transaction costs.

Money and money-prices also help us deal with the fact that some goods and services are more valuable, by our own assessments, than others. Money provides a way to exchange items of varying values. Offering half a cow might significantly reduce its value. With money, you can sell a whole cow—in tact—and use half the proceeds to purchase a good or service worth half a cow. Likewise, money-prices allow us to express value in more precise terms, thereby facilitating comparisons. If you say you will accept half of a cow for a few hours of work, I will have a hard time evaluating whether I am willing to pay for your services. At a minimum, I will have to think about how much the job you will do is worth to me and how much half of a cow is worth. But I might also have to compare your offer with those of others willing to work for two dozen chickens or a truckload of tomatoes. If all of those potential exchanges are denominated in a single unit of account, like dollars, comparisons are much easier to make. Again, money and money-prices lower transaction costs.

Now that I have expressed some of the advantages of traditional money, it will be easier to see the disadvantages of local currencies and time bank coupons.

Local Currency

According to Mr. Rushkoff, “The simplest approach to limiting the delocalizing, extractive power of central currency is for communities to adopt their own local currencies, pegged or tied in some way to a central currency.” In other words, local currency encourages local trade by making it harder to transact with non-locals. Mr. Rushkoff is correct. If you force people to use a currency that is only accepted in a narrow network, they will find it more difficult to trade with those outside the network. But there is nothing admirable about that. Why would we want to encourage people to purchase goods and services that are worse by there own assessment? (If the goods and services were better, we wouldn’t need to strong arm them… they’d make the purchases without local currency gimmicks.) The hallmark of a good money is that it lowers transaction costs; it makes it easier to transact. Local currencies do just the opposite. And, by raising transaction costs, local currencies make us worse off. Indeed, that is precisely why these local currencies usually fail to circulate in the absence of force.

Take the BerkShare, Mr. Rushkoff’s best-case example. I happen to own a set of BerkShare notes. I acquired them a few years ago during a fellowship at the American Institute for Economic Research. They are an interesting novelty for monetary nerds like me. But they don’t routinely circulate. You can buy BerkShares at the bank for $0.95 on the BerkShare dollar. Some stores then accept them at par with USD. So, local currency spenders get a 5% discount if they buy them from the bank and if a store accepts them at par. If you accept a BerkShare from a store, dollar-for-BerkShare dollar, there is no discount to be had. So locals—to the extent that they deal with BerkShares at all, purchase them from the bank and spend them in one of the few local stores that accept them. The store then returns the notes to the bank for $0.95 on the BerkShare dollar.

So, why doesn’t the bank just sell them dollar-for-BerkShare dollar, thereby removing the incentive to return them after the initial spend? Simple. If it did, there would be absolutely no incentive to use them.

Why would a consumer trade a dollar, which can be spent anywhere, for a BerkShare dollar, which can only be spent at a few select locations that also accept dollars? To be sure, I asked around for BerkShares. Few people knew what I was talking about. And no one had any on hand. So, like everyone else interested in local currency (though, perhaps, for different reasons), I went to the bank. The notes I received were crisp and new—as if they had never been used.

Time Banks

Time bank coupons are a form of credit money that one earns by providing some services to others. The time employed is recorded and can be drawn down in exchange for someone else’s time at some future period. Time banks are usually premised on the idea that one hour of labor is equal to another hour of labor. It ignores the simple fact that some people are more productive than others. A heart surgeon creates more value in one hour than a plumber. (Both might replace a valve, but one is literally a matter of life and death.) By failing to take in the varying value of time (i.e., labor hours), time bank coupons offer a cruder record keeping device than traditional monies.

That isn’t to say time bank coupons are never useful. When money is tight in an economy, time banks can help fill the gap for some services. Indeed, Mr. Rushkoff notes that time banks took off in Greece, during the Euro crisis, and Japan, during the recession—two episodes characterized by tight money. In other words, time bank coupons are an excellent alternative when traditional monies are not available. But those using time bank coupons would have been even better off with traditional monies in these circumstances.

Wealth and Value Creation

Contrary to Mr. Rushkoff’s claim, local currencies and time bank coupons do not fundamentally change the nature of exchange. They do not remove issues of wealth—they just redenominate it. One can accumulate local currency or time wealth. It just cannot be spent as widely. And, in the case of time bank coupons, it is not a very good measure of value.

Nor do they differ significantly in terms of trust. Like traditional monies, local currency and time bank coupons are record keeping devices. By providing a record, they keep us honest. They facilitate exchange in the absence of trust. In other words, local currencies and time bank coupons are just inferior versions of traditional money—acceptable in bad situations, but unnecessary when traditional money is readily available.

We can describe local currency as helping local businesses—but that just obscures the fact that they harm more distant businesses and make consumers worse off. We can talk about time banks as counting everyone’s time equally. But the value of our time is not equal. We have different skills and different wants. Traditional monies don’t benefit those who happen to live near us over strangers. They treat like things alike. At the same time, however, they allow us to celebrate differences by awarding the most value to the most valuable.

Finally, there is perhaps nothing more admirable than creating value for someone else. Money and money-prices are tools that enable us to create value for others through production and exchange. The easier it is to exchange, the more value we can afford to produce for others. By raising transaction costs, local currencies and time bank coupons enable us to produce less value for others than traditional monies. What is so admirable about that?

I am all for reimagining money. But, in doing so, we should keep in mind the transaction-cost-reducing role of money. And we should reject novel alternatives that fail to achieve that end.

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