Funny Money in Canada

Fast Company has an oddish story about the emergency of a new local currency in Canada. Local currencies, a kind of scrip, have existed where local merchants agree to accept the alternative. The underlying idea is that the if the local currency is used broadly in addition to the official currency (the dollar in the United States), then local interest rates should drop due to the barrier to entry. See this history of the Wörgl experiment for more information.

Things don’t always work out that way and most local currencies fail quickly. There was an attempt here in Columbia to do this, but reducing interest rates was never mentioned as the goal. The most well known of this is probably the Ithica Hour. Besides convertibility and acceptance, the biggest problem with local currency is forgery. Central banks spend a great deal of time and money ensuring physical currency is secure. Local currencies don’t have this ability, and this is where the Canadian story gets interesting.

The notes used by currency, called the demi, is a Canadian dollar cut in half. The Bank of Canada spent a fortune making that money secure.¹] So why not steal it? This, to an extent, also solves the convertibility problem, as a $20 bill can be turned into 2 $10 demis relatively easily. Given both halves and scotch tape, they can also be converted back. But then you lose the advantage of a free floating currency. The value of the demi is effectively pegged to the Canadian dollar.

Martin Zibeau, the demi’s creator, says,

He sounds almost hopeful about the idea that someone could convince a business in Montreal to do business in demis. The owner of a small business might entertain it, but it will never be accepted at Walmart. And that’s as encouraging to him as if the transaction took place in his backyard.

And that’s telling. As a means of supporting local business, the demi may be useful, but Zibeau’s vision is the currency is not accepted broadly within the locality and instead becomes a second de facto national currency. And I don’t think that will work. The Canadians already have Canadian Tire money.

Image by Sara Long / Flickr.