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Local currencies in Baltimore and Washington, DC

The Washington Post has an article on local currencies in use in Baltimore and Washington, DC. Local currencies are a form of free banking on a very limited scale. Use of the currency is voluntary; there is no element of forced tender, or even legal tender (that is, local currencies are not the default means of settlement for any obligation, in the eyes of the law). Local currencies tap local willingness to grant credit, through holding currency, that might not be tapped through big financial institutions. I view them as miniature models of certain aspects of free banking, from which some lessons might be cautiously drawn, but not as the basis for any future free banking system precisely because they are so small and determinedly local. A modern financial system implies large financial institutions, though not necessarily not gigantic ones and certainly not ones that are too big to fail. Small institutions can exist as well, but their influence in the system is no more than proportional to their size.


  1. Neither this post not the Washington Post article suggest that these notes actually represent anything – no commodity (not copper, sliver, gold NOTHING) would be given if one handed in one of these notes to their creators.

    So I am going to assume they are just bits of paper (not even required for taxes or supported by legal tender laws) no different from the bits of paper in front of me on my table.

    However, if people want to hand out goods and services in return for these bits of paper I, as a libertarian, support their right to do so.

    As for this being some sort of model (although on very small scale) for "Free Banking".

    Well if the banks concerned were honest – fair enough.

    If they issued bits of paper clear that they represented NOTHING I can have no objection to that.

    The trouble is that banks in the past often issued pieces of paper (of various sorts and names) claiming that they represented gold or silver – when the banks concerned did not have the commodity they claimed the bits of paper represented. This was clearly fraud (as an ordinary person would understand the word "fraud") – although banker influence on the drawing up of regulations and on court judgements allowed them to pretend that fraud was not fraud.

    1. A promise of future redemption cannot be fraud if the redemption occurs as promised, and need not be fraud even if it doesn't. If I promise to pay you Tuesday for a hamburger today, I am not necessarily committing fraud just because I don't currently have the money to pay you. And it makes no difference if you trade my hamburger IOUs to others or not.

      Anyone, including bankers, can commit fraud or roast turkeys, but that certainly is not what traditional fractional reserve banking was about. Instead, it was about loaning gold. When you loan your gold, you necessarily no longer possess that gold. When you loan, you take on risk. That is just as true for depositors as for bankers. That is, after all, why the borrowers are paying interest to the lenders.

  2. I repeat what I have already said.

    As for banks pretending they have X amount of a commodity when they do not, well we may disagree on whether this is fraud (I say it is), but when such a bank goes bankrupt I think we can agree that it should go bankrupt.

    No government interventionism – no "suspension of cash payments", "bank holidays", bailouts or other such.

    1. When a bank is 'pretending they have X amount of a commodity when they do not', that is indeed a textbook case of fraud.

      However, what you seem to be perennially unable to get, banks don't 'pretend they have X amount of commodity when they do not'. The contract depositors sign when they open an account with a bank promises redemption of the bank's debt obligation on demand, it says absolutely nothing about keeping the whole of the deposit on hand at all times. That's why there's a difference between the contract you sign when opening a checking account and the contract you sign when you buy a safety deposit box.

      On the subject of government intervention and payment suspension…what about when a deposit contract has a clause which allows the bank to refuse redemption when demanded, perhaps in return for a small interest rate paid during the period of suspension? Oh, wait, banks can't do that because most governments outlaw option clauses? Whoops…

    2. The fractional reserve mechanism of lending institutions has not been a secret for a long long time, if ever. Banks didn't have to pretend. Instead they openly practiced what you read about when you open up your granddaddy's encyclopedia to the entry on "Banking". Banks openly acting as banks were understood and expected to act, could not possibly be construed as fraudulent.

      If a person doesn't understand the age-old practice of insurance (that other industry where only a fractional reserve of potential payouts are kept on hand), he can look up "insurance" before he calls an agent. If he doesn't understand the age-old practice of banking, he can look up "banking" before he goes to the bank. Or not, it is his choice. But I don't recall any depositor questioning why interest was being added to his account.

      But yes, if your neighbor loans you $1000 and you cannot pay it back when it is called-in or matures, then you should face bankruptcy. That is true whether you are a plumber or a banker. Of course, if you are a plumber, then you are more likely to face bankruptcy, since it probably isn't your practice to keep carefully-determined reserves.

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