Distrust of Banking System Sows Return of Homegrown Currencies
One gloomy day in May, outside a storefront in Ardmore, Pa., people lined up around the block — some had come from as far as 20 miles away — to buy what, at a glance, looked like Monopoly money.
But play money this was not. Holders of so-called "Downtown Dollars" would receive a 50% discount on purchases at participating merchants in Ardmore, near Philadelphia. The dollars were gone "almost instantly," said Jil Rappaport, project manager at the Ardmore Initiative, the nonprofit group that created the currency.
Ardmore is one of several communities across the country experimenting with the concept of a local currency. The currencies are perfectly legal and have gone in and out of vogue for decades. They became extremely popular during the Great Depression, when distrust of mainstream financial institutions reached a fever pitch.
Similar dynamics are at work today.
"I think the obvious problems with the global financial system ha[ve] shaken people's confidence," said Susan Witt, a co-founder of a local currency program in the Berkshires region in Massachusetts and executive director of the New Economics Institute, a think tank in Great Barrington. "And so they're asking more questions about how is money issued, for what purposes, what keeps it sound. And that has brought up questions about the value of more regionally based currencies."
Each local currency program is set up in its own way. Some use community banks as conduits to exchange dollars for the local currencies and the reverse; in other programs, banks and credit unions let customers pay a portion of loans and fees with the local money. Still others don't involve banks at all.
The banks that are active participants say it is a good marketing tool — something they can offer that the megabanks cannot because it would be too complicated and not worth the effort.
The premise is to create a paper currency (which, by law, must not resemble federal greenbacks) that can be used at participating merchants to stimulate the local economy.
Research suggests that these programs flare up in times of financial distress but quickly fade once the economy improves. However, some experts believe the growing "localism" movement could fuel a more lasting commitment to the concept.
"There is a lot of concern about the lack of community in this country," said Ed Collom, a University of Southern Maine sociologist who has studied local currencies. " 'Local' is a hot topic, and that's why local currencies will continue to grow."
Collom estimates that more than 200 currency systems are operated in the U.S.
Some say the fate of local currencies lies in the hands of the banks themselves and depends on how quickly they can reestablish consumer trust.
"Complementary currencies are sort of a stopgap," said Hazel Henderson, president of Ethical Markets Media LLC, a research organization in St. Augustine, Fla. "To the extent that banking goes back to its roots and serves the local economy, there may not be the need for local currencies. And [if] the process of credit allocation and money creation is more democratic and just than it is right now, people won't need to work that hard for alternatives. They'll go back to trusting their local banker. But right now, the trust is gone."
Places like Ithaca, N.Y., and the Berkshires have had successful currency programs for some time. Now Ardmore, Detroit and Brooklyn, N.Y., also are getting in on the idea.
Higher-than-expected demand for the first $10,000 of Downtown Dollars prompted the Ardmore Initiative to release another $5,000 worth, and still people were left out, Rappaport said.
Part of the impetus for Ardmore's program was frustration with the lack of federal stimulus efforts in the community, said John A. Durso Jr., the chairman of the Ardmore Initiative and a vice president at the $311.9 million-asset St. Edmond's Federal Savings Bank, the flagship unit of SE Financial Corp. in Philadelphia.
"We looked at all the stimulus money that was trickling down, and we felt that the small businesses weren't getting anything, and we said, 'You know what? We're going to make our own stimulus program,' " he said.
The currency is offered at a two-to-one exchange rate with the dollar, giving consumers a deep discount at local stores and restaurants. Consumers cannot receive cash back on purchases and the currency expires after several months. Participating merchants get the full value of the purchase when they exchange the Downtown Dollars for U.S. dollars.
At first, the banks in town were not interested in participating, Durso said. However, after the initial allotment of Downtown Dollars sold out so quickly, "the banks' ears perked up," he said.
Four locally based community banks — St. Edmond's, Beneficial Bank, part of Beneficial Mutual Bancorp Inc., Bryn Mawr Bank Corp.'s Bryn Mawr Trust Co., and Firstrust Bank — put up $2,500 apiece to fund a second round of Downtown Dollars, worth $20,000. (The Ardmore Initiative subsidized the first $15,000; the next batch is to be issued in November by a lottery system; people will be able to enter at various sites around town or online for a chance to buy up to $100 of the currency.)
Local branches of big institutions like Bank of America Corp., Wells Fargo & Co., Citigroup Inc., the Citizens Bank unit of Royal Bank of Scotland Group PLC and Sovereign Bancorp, a subsidiary of Spain's Banco Santander, all declined to participate, Durso said.
He has high hopes for the program and sees a growing role for the local banks. "We might come to a point where you can walk into a bank with dollars and walk out with Downtown Dollars," he said. "This is a way that these four banks directly benefit the business community that bank with them."
Robert Juliano, a community development officer at Beneficial Bank, agreed, saying his $4.7 billion-asset parent company is "reinvesting back into the community … to keep it stable."
Proponents of local currencies contend they are not meant to replace the current monetary system but to complement it.
Mary Jeys, founder of the Brooklyn Torch Project, which is trying to bring a local currency to three neighborhoods in Brooklyn, the most populous of New York's five boroughs, said the group is "not interested in replacing the dollar" despite some people's impression "that we're anti-capitalist or anti-federal government."
Once people learn more about the project, "they are disappointed that our mission is not anti-establishment or angry," she said.
The idea to create a local currency came to Jeys nearly two years ago when she was unemployed. As an artist, she was particularly interested in the concept as a way of giving other local artists and merchants a tool to promote their businesses and foster social interaction.
The 31-year-old Jeys has recruited a small group of like-minded artists and young professionals to help roll out the Brooklyn Torch, as the denomination will be called.
The plan is to launch a currency with a one-to-one exchange value with the dollar and to begin with denominations of one Brooklyn Torch. The currency is to be exclusive to individuals and businesses in the Greenpoint, Williamsburg and Bushwick neighborhoods.
The idea is still very much in the gestation stage. How the currency will be distributed and whether any bank will play a role remains uncertain.
Right now, the focus is on coming up with a design for the bill and finding a printer. After delaying the roll-out a few times, Jeys said she is confident that bills will have been printed by yearend.
In trying to establish a local currency, Jeys looked to a system known as BerkShares established in 2006 in western Massachusetts. The BerkShares program works directly with five local banks to distribute and exchange the currency, which is offered at a 5% discount to federal dollars. (So $95 in official currency buys $100 of BerkShares.)
Witt, the program's executive director, says it certainly makes more work for banks but that it has been a worthwhile commitment for them.
"They have to train tellers how to use [the BerkShares]. They have to keep them in a safe spot. But they've judged that that extra time is worth it because it's helping their customers," she said. "And as a result, they see more foot traffic in the banks. Because it is cash, people must come into the bank to exchange federal dollars to BerkShares, and once they are in the bank it is an opportunity to establish a banking relationship with them."
That's the benefit, in theory, at least.
Jeanne Oliver-Larkin, the vice president of community banking at Lee Bank, a $280 million-asset savings bank in Lee, Mass., said she has noticed no increased business attributable to participating in the BerkShares system. Community interest seems to have fallen off recently, she said.
"It's a wonderful program, and I think it really stimulates the local economy, but to be honest with you, we just haven't seen a local result with it lately, in terms of people wanting to come in and buy them and then spend them at local businesses," she said. "I don't know if it's just the economy in general. … I'm kind of disappointed that we aren't seeing more activity." Granted, she said, the bank does not actively promote the program.
Louann Harvey, an assistant vice president at the $2.7 billion-asset Berkshire Bank, the flagship subsidiary of Berkshire Hills Bancorp Inc. in Pittsfield, Mass., said marketing the currency and educating consumers on its benefits are half the job.
She acknowledged that use of BerkShares declined in the last year, once the discount was reduced to 5% from 10%. But she said she is not worried about the system's sustainability. "With all of our marketing efforts and efforts in our education, I think it will survive," she said. "With everything that's happening, people are all about supporting their local businesses. ... This is the perfect time for this."
Steven Kyle, a professor of applied economics at Cornell University in Ithaca, N.Y., home to the longest-running local currency system in the country, the Ithaca Hours, said such programs can grow only so much.
"Nobody only uses Ithaca Hours," he said. "To the extent that you do, you are basically limiting your options to spend that money that you have. It is, to some extent, a disincentive."
Kyle said he has never actually seen an Ithaca Hour being used, despite living in the area for 25 years.
"I know Ithaca Hours exist, but I wouldn't say they are widely used," he said. "You have to have people that are dedicated to doing it. It is rather inconvenient."
Stephen Burke, who heads the program, which was started in 1991, acknowledged that local currencies take hard work to keep going. "It is harder than pulling out a credit card or using cash," he said. "But people want to save [money]. … To the extent that they are spending local money, they can save dollars and can use those dollars to do things like pay taxes or make major purchases."
One Ithaca Hour is worth $10 of federal money. To become a member, an individual gives $10 and gets $20 worth of Ithaca Hours in return (or two Hours). Ithaca Hours Inc., the nonprofit group that manages the system, does not exchange Hours for U.S. currency, and it does not sell additional Hours, either. The idea is to keep the money circulating among individuals and businesses.
A few financial companies are among the 400 member organizations that accept the currency. At Alternatives Federal Credit Union in Ithaca, for example, members cannot deposit Ithaca Hours in its vault but can pay fees and portions of loan installments with them.
The $65.2 million-asset credit union also encourages use of the local currency by paying a portion of its employee bonuses in Hours.
Carol Chernikoff, the chief lending officer at Alternatives Federal, said participating in the Hours program dovetails with the credit union's nonprofit mission. But when asked whether she believes its acceptance of Ithaca Hours has stimulated its business, Chernikoff was not so sure.
"Nobody's going to come bank here because we accept Ithaca Hours, I don't think," she said. "We're not making money by taking Ithaca Hours. We're supporting our mission, we're supporting our community."
Burke said he has recently seen renewed interest in the program, after a few years of declining membership that he attributed to greater use of credit cards. But the local currency system has subsisted.
"We just kind of held tight because we felt, it's a bubble … and it can't last forever," he said. "We're not like a major bank with a whole lot of money to lend or circulate, but again, people are coming back to us because it's some kind of help."