By now, almost everyone has heard of one or more of the many local currency experiments that have sprung up in various places around the world in recent decades. Many of these have gotten a considerable amount of media attention and support from local government, but none of them has achieved the desired results of making their communities stronger, more prosperous and more resilient. Why is this?
First of all, community currency organizers typically begin with the wrong premise. Their objective has been to keep money circulating locally instead of leaking out. The presumption is that this will be sufficient to enhance the vitality of local economies and improve the prospects of local businesses in their struggle to compete with large corporations and merchandising chains. But this supposition misses the main point of what ails communities: the more fundamental problem is not that money leaves the community too quickly, but that not enough money is provided to the community to begin with.
Banks create money (liquidity) by making loans, through which process they monetize the promise of the borrower to repay. But experience has shown that banks can’t be relied on to provide an adequate supply of credit to small and medium sized enterprises (SMEs) that form the foundation of every economy. Instead, they prefer to lavish money on corporations and market speculators and to fund the ever-expanding debts of national governments that waste it on weapons, wars, and the enrichment of special interests. Nor is conventional money a friendly instrument for enabling local trade. Rather, centrally controlled currencies like the US dollar flow to centers of power, and when banks do lend to SMEs it is on onerous terms including high interest rates, burdensome repayment schedules, and demands for collateral.
