Daily Archives: October 3, 2008

Using local “currency” for liquidity and social capital

Douglas Rushkoff has an interesting post, indirectly on how local currency” can spur social capital:

“A great, tiny organic cafe in my town, Comfort, decided to expand to a second, larger location last year. The owner, John Halko, has been renovating the new space for a year, and – thanks to the credit crisis – has been unable to raise the cash required to finish and finally open. With currency unavailable from traditional, centralized money-lending banks, Halko has turned instead to his community – to us – for support. Granted, this is a small town. Pretty much everybody goes to Comfort – the only restaurant of its kind on the small strip – and we all have a stake in its success. Any extension of Comfort would bring more activity, vitality, and commerce to a tiny downtown (commercially devastated in the 1970s by the chain stores and strip malls of automobile-friendly Central Avenue). So Halko’s idea is to sell VIP cards. For every dollar a customer spends on a card, they receive the equivalent of $1.20 worth of credit at either restaurant. If I buy a thousand dollar card, I get twelve hundred dollars worth of food: a 20% rate of return on the investment of dollars. Halko gets the cash infusion he needs to build the new restaurant – and since he’s paying for it in 20% tab adjustments, it just comes out of profits. He gets the money a lot cheaper than if he were borrowing it from the bank, paying back in cash over time. Meanwhile, customers get more food for less money. But wait, there’s more: the entire scheme refocuses a community’s energy and cash on itself. Because our money goes further at our own restaurant than a restaurant somewhere else, we are biased towards eating locally. Since we have a stake in the success (and the non-failure) of the restaurant in whose food we have invested, we’ll also be more likely to promote it to our friends. And since we have already spent a big chunk of money on Comfort’s food, we’re more likely go get food there than dish out more cash for a meal somewhere else. When it gets really interesting is when other businesses begin to accept Comfort’s VIP card and dollars for their services as well. But even in its current, limited incarnation, it’s easy to see how the math of an extremely simple alternative currency works, why its existence gets cheaper money into the hands of people who need it, and how it circumvents centralized control over commerce.”

It’s an interesting story although presumably less doable in larger communities (cities) that have less of a stable clientele, where residents have greater choice of where to go for eats, and where social capital may well be lower.  But one can certainly see how the purchasing of these VIP Cards induces individuals to patronize that store more frequently which could help to build more social capital (by community residents feeling that they are in this together, and by fostering more stable social networks).

For more on local currencies read here and this description of some local currency efforts.