Local currencies could reshape Brazilian economy

Local currencies could reshape Brazilian economy

The Wall Street Journal recently featured a story on a currency called the capivari, a local currency emblazoned with the face of a giant rodent.

The capivari is one of 63 local moneys—including bills named after the sun, cactus and the Brazil nut—now circulating in needy neighborhoods throughout Latin America’s biggest economy. The idea is gaining currency as towns seek a share of current economic growth. This month, a new local currency hit the streets in Cidade de Deus, the Rio slum that was the subject of a blockbuster film and a stop on President Barack Obama’s South American tour this year.

The premise behind most of these local currencies is to keep the commerce local. If people have local currency that can’t be accepted anywhere else, they will spend it locally, thus keeping capital in their neighborhood and with their local businesses instead of leaking it to larger cities or distant companies. It is similar to the Berkshare and other American local currencies aimed at sustaining local economies and reducing capital drainage.

While this is an admirable goal, local currencies provide another more important possibility in the realm of denationalizing money. From Part IV of the book:

Denationalizing Currencies

Now, while the government permits these and other currencies, certain innate shortcomings make their widespread use and competition with government fiat currency practically impossible. To begin, these alternative currencies are designed for local use, whether in the spatial sense with a geographic local community or in the digital sense with a web-based community of like-minded individuals. Either way, the currencies cannot be used for exchanges beyond their given environments. One cannot use Facebook money, for instance, to buy a loaf of bread at the local supermarket, nor can a Berkshire resident use a few BerkShares to buy a margarita while on vacation in Key Largo. The currencies are not designed for such exchanges and are therefore not suitable in many cases.

Alternative currencies could be designed for widespread use and thus offer true competition for the fiat dollar. Internet-based moneys are but a few steps from achieving universal utility. Still, the very fact that government operates a fiat currency means that competition cannot be entirely fair. Government management of currency is necessarily based on fiat, which means that the value of the currency can be manipulated at the will of the officials controlling it. Whereas the purveyors of alternative currencies may alter their values at certain times, they are powerless against the market; the government, meanwhile, is not.

A competition between government-issued fiat currency and private alternatives is like the alleged competition in the health care industry generated by the introduction of a government-run health care provider. In the reform debate, the term used to describe government-run health care was ‘public option’, suggesting that it gave patients another option and thus more freedom in choosing their health care. The assumption completely neglected the fact that no government program is ever funded voluntarily, and that providing such an ‘option’ was the same as forcing taxpayers to fund a new state industry. The public option would be subsidized by the taxpayers, whether or not they wanted it, and so it made sense that it would be able to provide lower prices and ‘compete’ with traditional health care providers, which had to rely on their own marketing and product quality to solicit customers.

Similarly, the public money option is not really an option at all, but rather just an order to fund state operations. The U.S. dollar is more or less subsidized by taxpayers, whether or not they want to support it, and so it understandably dominates the market—who wouldn’t want to use a currency backed by the biggest, most powerful company in the world? And so the technical ability for anyone to produce and distribute his own currency does not allow complete freedom in the matter. These alternative currencies can never be as valuable as the fiat money simply because they can never be forcibly backed by the American people. As a result, they will never grow to replace the dollar in any significant way.

Ultimately, the only way to truly free the economy is to do away with the government-run currency altogether, to “denationalize money”, as Friedrich A. Hayek put it. The thought might strike the modern reader as absurd. How can a people even think to operate without a national currency? How is it even possible for an economy as complex as ours to function without a single, approved means of exchange such as the Federal Reserve note?

Of course, these questions are valid considering the house of cards built up around us. It is an intricate system of infinitesimal parts, and government fiat money is interwoven between every one. But, in taking a step back, one can see that a system of competing private currencies is not too dissimilar from our current situation in form and function.

The primary concern associated with the denationalization of money is stability. Individuals and companies rely on the U.S. dollar in large part because it is backed by the most dominant government in the world and so, it is thought, maintains a strength and consistency that could not be matched by any other currency, especially a private one. The U.S. isn’t going anywhere soon, so people can depend on its currency, or so the mentality goes.

This proposition is valid to a certain point, which is to say that the U.S. dollar is stable to some extent, though it is not as stable as it is thought to be. A look at the money supply over the past few decades reveals the fluctuations of the assumed stability of the American currency.

In the arena of international relations, a state is inclined to maintain a stable currency to attract investment. For other reasons, however, a government is inclined to engage in actions that weaken its currency and render it more volatile, actions touched on in the chapter on wealth transferring. In short, government is obliged to purchase goods and services without raising taxes. To do this, a government must print more money, thus diluting the supply and instigating price inflation. If the past decade is any indicator of the dollar’s consistency, the bystander must be highly skeptical of the fiat currency’s stability.

Other concerns rest in the mere efficacy of alternative currencies. The notion is that eliminating state fiat currency would cause multiple currencies to compete with each other for primacy in a confusing hodgepodge of exchange methods. This concern is built upon the fact that money works best when it is a consensus form of exchange—the more people using the money, the more one can acquire with it and the more powerful a tool it becomes. Multiple currencies would diminish the demand for money and thus diminish one’s buying power.

And there can be no doubt that the introduction of multiple competing currencies would devalue each one to some degree. But there is no reason to believe that getting rid of a government fiat currency would necessarily lead to wide heterogeneity. Certainly, producers would be free to establish their own currency, just as they are today, but the competition that would result could very well lead to a single, dominant currency  just like there is today. The difference would be that the currency would be dominant only because its owners believed it to be a strong investment, not because they were forced to use it or taxpayers were forced to support it. Such a currency would have the voluntary, not coerced, endorsement of the people who use it.

Nor is the prospect of multiple competing currencies terribly frightful. International financial markets offer a good example of multiple-currency exchanges that operate seamlessly on a daily basis. Exchange rates must be taken into account, as should brokerage fees, but for the most part, the transactions are no more complex than the average grocery store checkout.

Obstacles that do arise because of multiple currencies are becoming less challenging as a result of technical improvements. Credit card processing and Internet exchanges have allowed for swift, non-material transactions in nearly all corners of the economy. A retailer in Dublin, for example, can accept currency in the form of American Express, Visa, MasterCard, and even Discover, from consumers in Tokyo, Johannesburg, and São Paulo in an instant via modern Internet stores. As the techne continues to improve, so too will affordability. One can even foresee the technical capabilities strengthening to the extent that competition forces transaction fees down and makes the medium altogether smooth and inexpensive. One gadget—the Square—is already forging the path toward this end by granting individuals the ability to swipe credit cards using their mobile device. It is not a stretch to imagine all transactions being made electronically; and from there, it is only a short step to personal, PayPal-esque transactions between unique private currencies all around the world.

Leave a Reply

Your email address will not be published. Required fields are marked *