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Murray Hunter: Local currency may protect against financial crises, flight of capital

18:29 | 06.05.2015 | Analytic

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6 May 2015. PenzaNews. A local currency that is supported by a union of local cooperative banks and pegged against a national currency may protect a certain region from financial crises and flight of capital, writes Murray Hunter, business expert, author of several books and research papers on entrepreneurship, associate professor at the University Malaysia Perlis, in his article “Is it time for the rise of local currencies?” published in the foreign media.

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The world had a large number of active regional and national currencies before the beginning of economy centralization in early 20th century, he reminds.

“Australia had a number of colonial currencies before federation in 1901. The United States of America had a number of currencies issued by private banks before the Federal Reserve Bank was formed in 1913, and individual states of the European Union had their own national currencies before the mega-currency, the Euro was launched in 1999,” the author writes.

Despite the trend to gravitate towards the “larger and stronger” currencies such as dollar and euro, more than 2,000 projects of local currencies for residents of certain cities or regions, loyal clients, or even Internet users have been launched around the world during the last few years, he says.

“[Many] have failed or ceased to exist through low levels of support within communities, while others like the Kelantan Dinar launched in 2006 was effectively sabotaged by the Malaysian Federal Government through repeated statements that the Dinar was not legal tender,” Murray Hunter points out.

Nevertheless, he adds, some currencies did manage to win the trust of people and authorities and gain the respect of the local businesses. One of such projects is BerkShares that first appeared in 2006 in the city of South Berkshire, but later gained use in the adjacent cities and towns as well. According to him, the local currency gained ground largely due to its well-developed tourism industry and existing pre-disposition to producing products for the local community.

According to Murray Hunter, a reverse situation is also possible, when a successful project of a local currency may act as an impetus to SME development and increased self-sufficiency of local communities, the objectives that would soon become important both in developing and developed countries.

From his point of view, the transition to a centralized economy in the 20th century brought inter-state cooperation issues to the front, while the previously existing currencies may have disappeared because the new globalized industry climate made local-only business competition unprofitable.

“This is very much against the spirit and purpose of macro-economic policy during the development phase of most economies, which has generally promoted centralization, the growth of SMEs into larger corporations so that economies of scale are developed to the point where firms can exercise competitive advantage in the international market,” stresses the University Malaysia Perlis associate professor.

However, the worldwide domination of the few so-called “strong currencies” led to several financial crises provoked both by economic bubbles and bankruptcies of load-bearing banking institutions.

“The banking sector has become so centralized, that most governments across the world have deemed their local banks ‘too big to fail,’ where these privately owned institutions are almost above the law, or worse still, become a law unto themselves. All lending, trade, interest rates, and other credit facilities are controlled by these banks. No government took any great effort to regulate these institutions post 2008, because the job was too difficult and very few had the political will to do it,” the business analyst states.

From his point of view, a local currency may have great potential if the cooperative banks supporting it are ready to offer lucrative banking products in this currency and exchange it for national money.

“Credit unions have existed for a long time and this is not far away from the concept espoused here. However governments through their support for ‘big’ banks, and banks through acquisitions and aggressive commercial practices have done their best to destroy this type of institution, which has stood in the way of banks taking over control of the economic through central lending,” Murray Hunter writes.

A local currency that is pegged against a national currency and has enough public popularity may create good conditions for inflow of capital, he said. Comparing national and international markets, the expert points out that a separate currency in the modern world gradually becomes a tool of economic sovereignty and protection against flight of funds.

“As pointed out by the author of Sacred Economies, Charles Eisenstein, it was Taiwan, Japan, and South Korea, which fostered local production through import replacement protectionist policies in the 1980s that have prospering middle classes today. Compare this with Mexico which opened up free trade and openly allowing in foreign investors, gained very little in know-how, technology, and permanent capital. […] Countries like Brazil and Thailand are taking measures to protect their economies from the flood of cheap US dollars buying up domestic assets,” the author claims.

However, in his opinion, the first and foremost beneficial effect of a successful local currency is its ability to unite a community over its own system of economic relations and protect it from the influence of a global mono-culture.

“[A local currency’s function] is the enhancement of local identity and sense of community within a region. Advocates of local currencies would argue that a local currency helps to form a sense of community which may lead to localized entrepreneurial start-ups in ventures that serve these communities,” the expert concludes. 

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