Jun 17, 2010

Currency competition: the next driver for innovation in money and payments?

The economic crisis is a great motivator for innovation. Since fiat money is at the heart of this crisis, we could see a resurgence in private currencies. Dave Birch's Digital Money Blog has brought up private currencies many times. Now, with government fiat currencies devaluing around the world, the topic is being looked at through the angle of currency competition.

"In the two years since the recession began, in order to fight off a depletion of local wealth, local communities have created their own currencies," writes Jeffrey Lewis in this article. "The benefit here is that the money spent at these shops can openly circulate throughout the community, ensuring that at least a small amount of liquidity stays local and keeps the economy moving."

Downside?

"One of the biggest disadvantages to these local currencies is that they are unfortunately pegged to the US dollar, so it is just as encumbered with the threat of inflation as the dollar. However, their popularity does suggest that consumers are at least willing to drop the greenback as a medium of exchange, and we can only expect that as these currencies spread further and further, Americans will begin looking at their dollars a little bit differently."

The Next Step?

"The next step in moving forward with competing currencies and the eventual resurgence in metals as money is right around the corner. Following the success of currencies backed by the US dollar that can be readily exchanged in local businesses, we should only expect that the next step will be a currency system that is devoid of any ties to the greenback. Instead, the new currencies will be backed by metals, labor, or another fungible product that is easily monetized. Their use in local businesses will help propel an economy that is strained by debt and fear of the future, and we can only hope that they will go mainstream."

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