Tuesday, March 06, 2007

Germany's new Notgeld 

Back in the 1920s, Germany and Austria were devoid of money in circulation, as much of it was used to help pay reparations under the Versailles Treaty. There was in particular a lack of coins for smaller payments. Thus developed Notgeld, an emergency money, in the two countries as local areas offered alternative currencies either to replace the missing notes or as a means to deal with inflation (as happened towards the end of the notgeld period in 1923.) I have a couple dozen pieces of it as part of my collection of paper monies. As you can see from the pictures on the page I've linked, it's pretty stuff, and I have one that was printed on cotton cloth.

But those were difficult times for Germany and Austria, and the existence of an emergency requiring the unusual step of local currencies unquestioned. So when I read, via Captain Ed, that local currencies have returned to Germany, I have to admit I was puzzled. The explanations offered in the Spiegel article aren't very helpful:
Regional currencies prevent money from being drained from the area where the currency is in use and transfered to booming regions like China or India, says Margrit Kennedy, the author of several books on alternative currencies. "Regional money is like a homeopathic cure for the chaos and suffering international financial markets cause in the world," Kennedy says.

Gerhard R�sl, a political economist at Regensburg Technical College, is not convinced. "Social romanticism on the part of people who don't think in a structured way" is how he characterizes this way of thinking. R�sl has carried out a study on regional currencies for Germany's central bank. The basic thrust of his study is that regional money may be an entertaining gimmick for tourists, but it's largely nonsense from an economic point of view.

Regional currencies are only helpful in the context of a generalized deflation, when shrinking liquidity needs to be compensated for, R�sl says. That was the case in the Austrian town of W�rgl in 1932, for example, when the township successfully issued a local currency or scrip. Admittedly it's also the case today in the region where the Urstromtaler is circulating, where people are gradually running out of euros.

In Chiemgau, on the other hand, the initial impulse for the new currency came from wealthy parents who exchanged �200 ($263) a month for Chiemgauers in order to get their childrens' school project started. The alternative tender remains a luxury currency. What with the "topping up" charge, the reconversion fee and the costs of inflation, Chiemgauer holders are effectively paying a surcharge of 15 percent on every Chiemgauer -- which translates into risk-free gross income for Gelleri's bank.
In a non-globalized world as existed after WWI it made sense that a local scrip could circulate for several turns in a country -- and the turnover of currency was lower then as it served often as a store of value, at least before 1922 and the onset of hyperinflation. Local banks issued currency in the U.S. before the Civil War and notes circulated a fair bit -- it was an act of Congress during the Civil War that taxed the private notes out of existence.

It seems far less likely that such currencies could exist now, though. As Ed notes, barter guilds do exist in the US. My favorite such story is the famous DC babysitting scrip story told by my former teacher Dick Sweeney and his wife, a little older story but I think quite relevant. In short, the co-op was a barter guild wherein each member promised 14 hours of babysitting, and scrip was used in lieu of paper entries in a ledger. As the Sweeneys tell the story, the scrip worked very poorly for the co-op because it was hard to balance the quantity of scrip with the amount of hours of babysitting desired (and since the price of babysitting was fixed at one-half hour per piece of scrip, the shortages and surpluses couldn't work themselves out in the usual way.) Likewise, to replace the euros in these areas that are in shortage -- likely because the areas where the local monies are issued are growing faster than Germany as a whole -- someone has to constantly adjust the amount of scrip to the quantity of local goods bartered, or allow people to post two prices (one for euros, the other for local currency.) Rather than do that, particularly in this electronic world where euros clear instantaneously but some guy has to drive around town collecting and cashing scrip, the scrip is driven out of existence. Gresham's Law comes into play here, though in the form that Rolnick and Weber imagined -- the euros should trade at a premium and in so doing remove the incentives for people to issue parallel local currencies.

So I doubt this story will last long.

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