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Fiscal localism comprises institutions of localized monetary exchange. Sometimes considered a backlash against global capitalism or economic globalization, fiscal localism affords voluntary, market structures that help communities trade more efficiently within their communities and regions. [1]
"Buy local" or local purchasing is the most visible face of fiscal localism. There are more complex institutions (both new and well established) that contribute to a community's ability to flourish. Institutions like credit unions, CDFI's (Community Development Financial Institutions), and local currency or complementary currency all can contribute to making communities more resilient and wealthy.
Local currency has been in the news most, with journalists citing the Berkshares in Massachusetts, and the Ithaca Hours in Ithaca, New York. Beyond these salient examples, there are thousands of local currencies all over the world. [2]
Fiscal localism is rooted in the concept of decentralization. The creation and maintenance of a regional economy is supported by communities who believe that their community is economically better off sustaining itself rather than being part of and relying upon a larger economy, such as a national economy or the global economy. This is a movement against the increasing globalization of all economies around the world. The main tenets of fiscal localism include buying products that are made locally and using a currency that is unique to that local economy. [3] This allows a community to grow at a controllable and sustainable rate by supporting farmers, shopkeepers, and service providers of a community. Consumers in these communities are more informed about how their foods and products are grown and made. Using a unique form of currency allows a community to determine its economic growth and health more accurately than using metrics of a national economy to gauge economic health. [4] Taxation in these communities is emphasized at the local level and low importance is put on national taxes. These communities want to separate themselves from the larger national economy so they must rely on revenue generated from local taxation. Banking is also preferred to be done on a local level. Communities that follow fiscal localism would rather have one local bank than be customers of a massive bank that does business across the country as well as internationally.
Unique currencies used by local economies are often backed by a national currency. The town of Totnes, England, from 2007 to 2019 used the Totnes Pound, which was backed by the British Pound sterling at a one-to-one ratio. The idea behind using a unique, local currency is to keep money flowing through the community while preventing money from leaving or relying on money to enter the community. This allows a community to become self-sufficient, have enough funds to create an energy source for the community to use, and eliminate transportation costs for bringing products into the community. A large reason Totnes wanted to become self-sufficient is to decrease its dependence on the use of oil; the town believed that it would be better off in the long run if it were able to operate without relying on oil, which is a finite resource. Following in Totnes' footsteps, several other English towns have established currencies of their own: the Bristol pound, Brixton Pound, Stroud Pound, and Exeter Pound. [5] A few towns in the United States have also adopted unique currencies. Berkshire, Massachusetts and Ithaca, New York have implemented Massachusetts BerkShares and the HOUR, respectively. While a BerkShare is worth $.95 US dollars, the HOUR is not convertible to US dollars or any other type of national currency. [5]
Calgary Dollars, created in 1996 as the Bow Chinook Barter Community, has not been backed by or exchangeable with national currency, Canadian dollars. Their belief is that the valuation of 1:1 without exchangeability allows exchanges to be simplified but reduces the linkages to the problems associated with national currency that complementary currencies are seeking to address such as currency speculation and interest-bearing design. This concept is to "complement" the national currency with unique Calgary Dollars economic activity and increasing the local multiplier of both the Calgary Dollars and the associated percentage of national currency that is often included in the transactions.
A British Quaker colony in Pennsylvania created and used the Pennsylvania Pound in the 18th century, but fiscal localism failed for the colony and the currency was abandoned.
Lorenzo Fioramonti, director of the Centre for the Study of Governance Innovation at the University of Pretoria in South Africa, believes that the European Union would be more stable if it used multiple local currencies combined with a "digital euro". [5]
Proponents of fiscal localism argue that paying higher local taxes and lower national taxes will help communities grow and thrive. A report from The TaxPayers' Alliance states that a decentralized form of taxation leads to a more efficient public sector. [6] This report references a German econometric study which found that "government efficiency increase with the degree of fiscal decentralization". [6] Reasons used to support local taxation include responsiveness, cost efficiency, incentives, and accountability. The Spanish Institute of Fiscal Studies conducted a study over a period stretching from 1972 to 2005 using data from 23 countries regarding taxes. The study found that "reducing the share of central government in total tax revenue by one percentage point boosts long-run GDP growth by about 0.06 per cent per annum". [6] Setting local taxes is complicated, because too high a tax rate will lead to taxpayers refusing to pay while too low a rate will not give the local government enough funds to function and operate effectively. These taxes are separate from state and federal taxes and are not set at the state or federal level. Increasing local taxes allows a community to reinvest revenue generated from the taxes into public institutions or programs that help the local community. Residents are able to physically see and experience where their tax money is going and how it improves their lives.
Modern banks have become monolithic institutions with thousands of branches in their respective countries of service. This globalization of banking institutions and the banking practices used by these organizations is the antithesis of what fiscal localism is about. Toby Blume argues for a shift in the banking system in his essay "Changing the Debate: The Ideas Redefining Britain." [7] Blume writes, "A more localised banking system - which is more common in other countries but we don't have in the UK - provides a way to connect surplus capital with productive purpose (for the mutual benefit of savers/investors and borrowers)." [7] Advocates for fiscal localism argue that the banking system should be restructured to accommodate the needs of smaller, local communities. These communities that are built around the tenets of fiscal localism want to have local banks that have consumer bases which are limited to the population that is geographically located around the bank. This allows the bank to know its customers on a personal level in order to determine the risk of giving a loan out to someone who lives in the community. It also allows the bank to use its excess capital to invest in services and businesses that are located in these towns, which in turn spurs the local economy at a consistent growth rate.
A local exchange trading system (LETS) is composed of local members that want to trade goods and services with other members in the group. These LETS use a unique local currency on which all trade is based upon. Those who are in LETS believe that they benefit both the members and the local community due to the organized nature of these LETS. The five core traits of a LETS include “cost of service, consent, disclosure, equivalence to the regional currency, and interest-free.” [3] Member transactions through a LETS do not have to be solely monetary. A purchase can be repaid through a service performed for the other member involved in the transaction.
A recent, and perhaps the most widely known, push for fiscal localism occurred when the United Kingdom voted to leave the European Union in 2016. The European Union is an economic union that was formed in order to allow free movement of resources and capital between the countries that compose the organization. Discussions of the United Kingdom leaving the European Union have gone on for many years, but was not made official until the public of the United Kingdom voted to leave. Many of those who were proponents of leaving the European Union wanted to do so for economic reasons. Nigel Farage, one of the most prominent endorsers of the United Kingdom leaving the European Union, wrote, "We know that the European Union is hell bent on further, deeper centralisation." [8] The disdain that Nigel Farage has for centralization is rooted in both economic and political reasons, but the economic reasons lie in his desire for increased fiscal localism. Many citizens of the United Kingdom share the same negative view of centralization. This resulted in the voting populace choosing to leave the European Union. This historic decision of the United Kingdom is an example of a community choosing to reject the increasing globalization of economic institutions and policies. However, many citizens of the United Kingdom did not want to leave the European Union. These opponents of Brexit preferred to remain in an organization that encouraged wealth and services to move freely among countries within the union. Then Prime Minister of the United Kingdom, Theresa May said in April 2016 that if the United Kingdom left the European Union, "There would be little we could do to stop discriminatory policies being introduced, and London's position as the world's leading financial centre would be in danger." [9]
A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a system of money in common use within a specific environment over time, especially for people in a nation state. Under this definition, the British Pound sterling (£), euros (€), Japanese yen (¥), and U.S. dollars (US$) are examples of (government-issued) fiat currencies. Currencies may act as stores of value and be traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are either chosen by users or decreed by governments, and each type has limited boundaries of acceptance; i.e., legal tender laws may require a particular unit of account for payments to government agencies.
In economics, a local currency is a currency that can be spent in a particular geographical locality at participating organisations. A regional currency is a form of local currency encompassing a larger geographical area, while a community currency might be local or be used for exchange within an online community. A local currency acts as a complementary currency to a national currency, rather than replacing it, and aims to encourage spending within a local community, especially with locally owned businesses. Such currencies may not be backed by a national government nor be legal tender. About 300 complementary currencies, including local currencies, are listed in the Complementary Currency Resource Center worldwide database.
A local exchange trading system is a locally initiated, democratically organised, not-for-profit community enterprise that provides a community information service and records transactions of members exchanging goods and services by using locally created currency. LETS allow people to negotiate the value of their own hours or services, and to keep wealth in the locality where it is created.
A reserve currency is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency.
The economy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the economy.
Currency substitution is the use of a foreign currency in parallel to or instead of a domestic currency.
The Central Bank of Ireland is the Irish member of the Eurosystem and has been the monetary authority for the Republic of Ireland from 1943 to 1998, issuing the Irish pound. It is also the country's main financial regulatory authority, and since 2014 has been Ireland's national competent authority within European Banking Supervision.
The Bretton Woods system of monetary management established the rules for commercial relations among the United States, Canada, Western European countries, and Australia among 44 other countries after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar convertible to gold bullion for foreign governments and central banks at US$35 per troy ounce of fine gold. It also envisioned greater cooperation among countries in order to prevent future competitive devaluations, and thus established the International Monetary Fund (IMF) to monitor exchange rates and lend reserve currencies to nations with balance of payments deficits.
A currency union is an intergovernmental agreement that involves two or more states sharing the same currency. These states may not necessarily have any further integration.
Community development bank (CDB) or Community Development Financial Institution (CDFI) is a development bank or credit union that focus on serving people who have been locked out of the traditional financial systems such as the unbanked or underbanked in deprived local communities. They emphasize the long term development of communities and provide loans such as micro-finance or venture capital.
The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. Silver was far more widespread than gold as the monetary standard worldwide, from the Sumerians c. 3000 BC until 1873. Following the discovery in the 16th century of large deposits of silver at the Cerro Rico in Potosí, Bolivia, an international silver standard came into existence in conjunction with the Spanish pieces of eight. These silver dollar coins played the role of an international trading currency for nearly four hundred years.
A community development financial institution (US) or community development finance institution (UK) - abbreviated in both cases to CDFI - is a financial institution that provides credit and financial services to underserved markets and populations, primarily in the USA but also in the UK. A CDFI may be a community development bank, a community development credit union (CDCU), a community development loan fund (CDLF), a community development venture capital fund (CDVC), a microenterprise development loan fund, or a community development corporation.
A private currency is a currency issued by a private entity, be it an individual, a commercial business, a nonprofit or decentralized common enterprise. It is often contrasted with fiat currency issued by governments or central banks. In many countries, the issuance of private paper currencies and/or the minting of metal coins intended to be used as currency may even be a criminal act such as in the United States. Digital cryptocurrency is sometimes treated as an asset instead of a currency. Cryptocurrency is illegal as a currency in a few countries.
The Totnes pound (t£) was a complementary local currency, intended to support the local economy of Totnes, a town in Devon, England. It was in circulation from March 2007 to June 2019, when it was discontinued due partly to an increasingly cashless economy.
Paul Bernd Spahn is emeritus professor of public finance at the Goethe University Frankfurt.
A currency transaction tax is a tax placed on the use of currency for various types of transactions. The tax is associated with the financial sector and is a type of financial transaction tax, as opposed to a consumption tax paid by consumers, though the tax may be passed on by the financial institution to the customer.
The economic and monetary union (EMU) of the European Union is a group of policies aimed at converging the economies of member states of the European Union at three stages.
The Community Exchange System (CES) is an internet-based global trading network which allows participants to buy and sell goods and services without using a national currency. It may be described as a type of local exchange trading system (LETS) network based on free software. While it can be used as an alternative to traditional currencies such as the Australian dollar or euro or South African rand, the Community Exchange System is a complementary currency in the sense that it functions alongside established currencies.
The Bristol pound (£B) was a form of local, complementary, and/or community currency launched in Bristol, UK on 19 September 2012. Its objective was to encourage people to spend their money with local, independent businesses in Bristol, and for those businesses to in turn localise their own supply chains. At the point of the close of the digital scheme in August 2020, it was the largest alternative in the UK to official sterling currency, and was backed by sterling.
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