Economics

Local Currencies to Replace the Dollar in Communities

This article was written by Flexo in Economics, Economy. 10 comments.

It may be illegal for states to print money for commerce, but local communities have no such restriction from the federal government. And in some communities, local currencies have been successful, at least in gaining the support of some retailers and consumers.

There’s no law of nature that says that an economy functions best when the broadest number of people use one currency exclusively. Currency is just a placeholder that creates efficiency. Without it, we’d have to barter for products and services. Without currency, a tailor would need to trade his services whenever he wanted to buy food for his family. In a free market, theoretically, anything could be used as a currency. The government or quasi-government organizations help by establishing a currency as a standard, so there is faith in its consistency.

Dollar currency Not everyone is satisfied with this solution, however.

A community may start its own currency for a few reasons:

Local currencies can help keep more funds invested in the community instead of helping national or global companies profit. When you buy a light bulb at Home Depot, part of that profit goes to the headquarters, and eventually shareholders, including global investors. When you buy a light bulb at a local hardware store whose owners live within the community, more of that profit stays in town — but not all unless the light bulb supplier and manufacturer is also in town.
When companies pay a part of their employees’ salaries in local currency, or when a consumer participates in a community marketplace by selling their items or services while taking payment in the local currency, the profit stays in the community.
A town or city bonded together by a unique currency builds the sense of community and encourages businesses to work together, not just for the greater economic benefit of the town, but to ensure that all consumers and retailers engaging in economic activity using the currency remain good citizens and fair businesses.
Local currencies present an alternative choice for people who believe the federal government cannot be trusted with the responsibility of ensuring economic stability through monetary policy. A community-based financial system can help people in the community feel better about threats of inflation or devaluation.
With local currency in hand, a customer will peruse the directory of merchants accepting the currency and make purchasing decisions based on this list, effectively ignoring companies whose profits benefit those outside the community.

In Philadelphia, the “equal dollar” is a local currency that has flourished for over a decade. Philadelphians can earn equal dollars by volunteering in the community or by selling items. There is a $10 (USD) membership fee and a =$50 (equal dollars) sign-up bonus for individuals; merchants can join for a $25 (USD) fee and receive a =$125 (equal dollars) bonus. It’s unclear how many merchants accept equal dollars, but those who do often require the bulk of the transaction to be in U.S. dollars.

This system isn’t too far removed from certain gift cards. Replace the idea of the community with a mall, and you’ll recognize the paradigm. One of my local indoor malls is owned by a national mall company. They offer gift cards that can be used in any store within any of this company’s branded malls. This is a currency as reliable as the U.S. dollar (as the value is denominated in dollars, not a separate currency of its own), but just like a local currency that ties its spending to the community, the gift cards tie spending to stores that pay rent for space in the mall properties.

Philadelphia is not the only community that has created its own currency to increase local solidarity. You can find local currencies in the Berkshire region of Massachusetts, Seattle, Portland, and Traverse City, Michigan.

I’d be concerned about counterfeit currency. Official government currency like the U.S. dollar is though to counterfeit effectively due to a large number of security measures, but it seems to me that this technology is not readily available to whatever printing services are used by communities that offer their own currency. Of course, since the U.S. dollar is incredibly popular, more counterfeiters aim at overcoming the security measures. Thus, popular currencies may be subject to fraud more than a community currency, but the concern still exists.

Would you use a local currency to replace some or all of your U.S. dollar use in your community?

Images_of_Money

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Buy a Meal at Panera, Pay What You Want

This article was written by Flexo in Economics, Featured. 5 comments.

In the movie Clerks, the convenience store cashier, Dante, occasionally takes a break from manning the counter. Rather than ensuring every customer paid for his or her items, he leaves a sign: “Please leave money on the counter. Take change when applicable. Be honest.” Dante believes customers assume they are being watched and will leave the correct amount.

While this scenario is just a movie, the upper-scale fast food chain Panera is experimenting with a similar approach. The company may not have been inspired by Clerks; more likely, they are taking a page from museums or parks where admission may be free but the facilities list a suggested donation. At one location in Missouri, Panera is taking the “non-profit” approach. The idea is customers pay what they can for a meal, based on the suggested price. In theory, rich people pay more and poor people pay less — or nothing at all.

According to the restaurant, 60% to 70% of customers pay the suggested price, 15% pay more, and 15% pay less or take their meals for free. The store does not seem to be attracting the area’s poor in large numbers as one might expect from an establishment offering basically free food, like a soup kitchen.

The store has not covered its costs yet, but the management expects it will within months. “Non-profit” doesn’t mean that the company doesn’t earn money above its expenses. An organization needs to make money to survive. Is a non-profit fast food restaurant a sound business idea? If you are a business owner, would you take the chance of giving your services for free by allowing your customers to pay what they wish?

Panera is taking the chance, relying on honesty and on the kindness of rich strangers to subsidize the poor or those who just don’t want to pay. They will be opening more of these restaurants where diners are free to leave as much or as little as they want in exchange for their meals.

Photo: bgottsab
Panera to open more pay-what-you-wish restaurants, Christopher Leonard, Associated Press, June 2010

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Thinking is Not Enough

This article was written by Frank Curmudgeon in Economics. 7 comments.

This is a guest article by Frank Curmudgeon, author of the Bad Money Advice blog. For updates from Frank, subscribe to the Bad Money Advice RSS feed.

We often see the struggle to get control of our spending as being the conflict between our emotional and logical selves. Emotion wants to go out to that new restaurant tonight, logic says cook at home.

We say to ourselves “If only I could stop and think about all my spending decisions, I’d soon be rich.” That’s not wrong, exactly, but it makes at least one big faulty assumption, that it is easy for us to be logical around money when we want to be. The truth is that just thinking about it is not always enough.

There is an entire field of economics, behavioral economics, which studies the differences between what logic would have people do with their money and what they really do. The academics in this area have collected many such “anomalies.”

One that illustrates well the illogic of our thinking selves is anchoring, the tendency for people to be influenced by even the most ridiculous estimates of a number. The classic example is that if you ask people if the Mississippi is more than 6000 miles long and then ask them to guess its exact length, they will give much higher guesses than if you had just asked them to estimate its length. (It is 2340 miles long, by the way.)

Dan Ariely, a professor at MIT/Sloan, conducted a striking demonstration of this effect. He asked a group of MBA students to write down the last two digits of their social security number. Then he asked them if they would be willing to pay that amount of dollars for a bottle of fine wine he was holding. Finally he had them submit actual bids for the wine, which he really sold to the winner.

Sure enough, the students tended to bid higher if they had social security numbers that ended in higher digits. So the anchoring effect was there even though the participants were fully aware that the suggested value was completely random, even though they were sophisticated and thoughtful (have I mentioned I got my MBA at Sloan?) and even though it was their own real money at stake. This was not an impulse decision in which consumers let emotion get the better of them. These were would-be shrewd businessmen who undoubtedly assumed that Prof. Ariely was up to something sneaky.

And anchoring explains a few oddities in our everyday lives. It is why houses, cars, and jewelry often have high “asking” or “sticker” prices. The seller does not really expect to get this price and the buyer does not expect to pay it. So why bother? Because by attaching a tag on a watch that reads “$500″ the jeweler can more easily talk you into paying $425, even if you know full well that the $500 price was just for show.

And anchoring also helps explain some stock price movements, specifically the phenomenon called price momentum. That is the tendency for stocks that have been going up over the past few months to continue to do so.

Imagine that there is an exciting growth company that announces some positive news when its stock trades at $50. There is a large group of investors who love this company, are excited by the news, and would, in principle, pay $100 a share. However, because of anchoring, they just cannot bring themselves to pay more than $10 above what the stock was trading at in the past month. It just seems expensive. When the stock goes above that level these buyers back off, temporarily. After a few weeks, the current price does not seem so unreasonable, because they get used to it, and they resume buying. The result is that even though in a more logical environment the stock would have gone to $100 immediately, what actually happens is that it climbs steadily at about $10 per month over five months.

It’s important to understand that anchoring doesn’t happen because you are stupid, or too emotional, or overly influenced by advertising. It happens because you are human. It is the way your brain is wired up. You can’t stop yourself from doing it, although being aware of it is a great help.

The point is that merely resolving to think about how you spend is not enough. Spending logically is harder than it looks.

Photo credit: Don3rdSE

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