There's a growing movement afoot to have alternative money systems, or "complementary currencies", as they're called. The people involved are not cranks or tax-evasionists, they include people like Bernard Lietaer (called "the father of the Euro" by some, and in 1991 named the best currency dealer in the world by Business Week). We've mentioned local currencies before, and there are many great resources, link lists, and in-depth articles elsewhere. More recently, Lietaer did an interview with Ode magazine, and at last spring's Doors of Perception conference I saw Margrit Kennedy talk, who has basically all of her presentations and papers online.
But I wanted to mention it here because it would be helpful tool for hurricane Katrina redevelopment in the long term. Also, I disagree with Kennedy and Lietaer about some of the potential of complementary currencies--like whether they make money more environmentally responsible and redistribute wealth--and I wanted to describe why. Maybe it will cause some interesting discussion on what "green" money would really be.
For those unfamiliar with it, alternative currency is someone printing their own money. You've all used some kind of complementary currency before--frequent flier miles, gift certificates, etc.; maybe you've bartered an hour of your time for an hour of someone else's time. Many different systems have sprung up to formalize these exchanges, from Japan's Hureai Kippu to New York's Ithaca Hours to Germany's Weimar Regio. Generally these systems only work when trusted groups do it (like town governments, large companies, or specially-constructed high-transparency organizations), and generally its done to limit peoples spending in certain ways (like frequent-flier miles, which can mostly just be spent on plane fare).
The greatest success stories of complimentary currencies are in picking up ravaged communities and helping to get them on their feet. A primary example that Lietaer and Kennedy cite is the Worgl, a currency created by a small Austrian town during the great depression. The town of Worgl had high unemployment and lacked the money to pay for its normal infrastructure services, so they killed two birds with one stone by printing a local currency they could pay people to do civic work with, and which could only be used in the local area. They also made the value of the currency time-decaying (or "demurring", as it's properly called) by 12% per year, which caused people to spend it rapidly--increasing the "velocity of money", which in a sense multiplies the amount of money in the community. In about one year, Worgl dropped its unemployment rate by 25% and increased public-works investment by 220%, while the rest of Austria slid further into depression. The experiment was only stopped because the Austrian government was worried that its control over the national money system would be threatened. Today in the Brazilian favela of Palmeira, a local currency called the Palma is helping to lift the residents out of poverty; it is working much more slowly than the Worgl did, but it does not circulate as much because its value does not demur over time.
New Orleans and surrounding areas could benefit greatly from creating a local demurring currency. It would help people who have no "real" money and no jobs to start working and spending to rebuild their lives. It would also help keep relief money local, instead of going in one pocket and out the other to large national contractors.
Complementary currency can also be a tool for social engineering--a clever game theory sort of solution, where you look at the incentive structures that our normal system of money has, and try to design a different monetary system to incentivize other behavior. It allows you to take a systems-thinking approach to social engineering, instead of a central-planning approach (which historically requires significant overhead, fails to respond to change rapidly, and has difficulty being comprehensive.) For instance, the Saber (as in the Portuguese verb 'to know', not the English word for a sword), is a Brazilian currency that the government hands out to 7-year-olds, and it can only be redeemed as university tuition payment (usually by 17-year-olds). The Saber eased a huge educational infrastructure burden by encouraging older kids to tutor younger kids, and made it easier for older kids to go to college; it did this without having to coordinate or staff thousands of after-school programs, but by creating an economy whose incentive structure was socially productive. (In addition, the value of a Saber decays 20% per year, so each Saber circulates many times through kids of many ages--according to Margrit Kennedy, a $1 billion monetary investment has caused an estimated educational benefit of $10 billion.)
For all these benefits, I do think alternative currencies are not a panacea, and think their proponents can be overly optimistic. Kennedy and Lietaer have some differences in their agendas, but both argue that demurring currencies are more socially equitable than money which gains interest. (In fact, both get most of their inspiration from the early 20th century economist Gesell who first suggested negative-interest-rate money as kind of a soft-path version of Marxism.) Lietaer says that a demurring currency would be 'greener' than interest-earning money, because it cannot be used to store value, only material things can. He mentions that when Worgl's complementary currency was issued, people started planting trees because the future value of the trees would be greater than the future value of the money, while today interest-earning money means it always pays better to cut down trees, sell them, and invest the money. I am skeptical of this notion, because while this one example is a positive one, I think in general it would cause huge amounts of overconsumption if everyone had to store their wealth in material things. Gesell argued that hoarding wealth hurt the producers of real goods and services, and this is often true of big investors who have giant sums to throw around, but individual people need to store wealth for times when they do not earn money (e.g. retirement, or a drought year on a farm). Often these hard times require a liquidity that you could not get by having material goods that would have to be sold. Perhaps time-decaying money would motivate more people to invest their capital in productive ventures (e.g. stocks, real estate, etc.) instead of having it sit in bank accounts, but sensible people do this already, because it's also advantageous in our existing money system.
Kennedy and Lietaer also argue that demurring currency would eliminate inflation, and will stop the centralization of wealth that interest-earning money causes, which constantly pulls money from those who work to those who lend. These are complicated issues that you are not going to understand from one little article, and I don't fully understand myself, but it seems clear they are wrong about inflation. Some inflation is good--it makes our existing currencies work like the demurred currencies they advocate. In fact, inflation is the easiest implementation of currency decay, because it doesn't require you to date-stamp banknotes or otherwise make the physical medium of the money dynamic. (Although it does eventually require annoying things like ten-million-Lire banknotes.) With decaying-money systems, price tags stay the same and banknotes lose value; with inflation, banknotes stay the same and price tags go up. It is mathematically equivalent. Lietaer and Kennedy could just as well be arguing that price tags and salaries should rise every year to keep pace with interest rates (meaning we should have much higher inflation). The people who run our monetary systems know that some currency decay is good, and know that the difference between interest rates and inflation is the main knob by which to adjust the velocity of money in the economy--that's why Americans hear about Greenspan tweaking interest rates now and then to strengthen or dampen the economy. The problem is that no one can set what the inflation rate is; it is the consequence of millions of individual decisions on how much to raise price tags. I would argue that the same thing would be true for demurring currency systems as well.
In the end, complementary currency systems are undoubtedly a great tool for communities without 'normal' financial capital, such as places suffering from economic depression or natural disaster; they can also be a tool for adjusting people's spending behavior. They clearly should have some sort of place alongside normal money. However, it's not clear to me that they are useful beyond niche applications, despite some of their advocates' arguments.
When we have negative interest rate, wouldn't that bring about deflation instead of inflation?
I agree with you about complementary currency is an equal of typical currency.
Thanks for raising some interesting questions, Jeremy.
Part of the appeal of complementary currencies is that they can, in principle, be tailored to local needs and conditions. This being the case, perhaps they could also behave differently with respect to demurrage and inflation. As you suggest, we don't have a good handle on the theory behind widespread use of complementary currencies, so experimenting with many different models is probably the way to go.
A demurrage currency does seem to be inappropriate for savings, and yet savings are essential for risk management and time-shifting income throughout one's life. Perhaps an alternate type of currency which is tied more directly to baskets of real goods would be appropriate for this. One could even issue currency notes (bonds, really) that were tied to future income of a person or area - this has been done, but not at a "retail level".
The advantage of having many different kinds of currencies around is that one could hedge one's bets, and not be completely dependent upon a few central banks and governments to behave well. Each kind of currency would also induce corresponding dynamics in the real world, e.g. the Saber and other examples you mention. If we understood the dynamics of each kind of currency with respect to a series of indicators, one could imagine a complex system of thousands of "currency levers" across the world, some local, others national, and still others global - all co-operating dynamically to more directly maximize human welfare.
There are a lot of useful resources on the internet about complementary currency:
These are some good places to start.
Asia Program Coordinator