Finance, Communities, and Climate

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Looking for our main Finance section? It’s here.

How Finance Works in Communities

Money, they say, makes the world go around, and to some degree, it’s true. We generally need some kind of currency to buy most of what we need to survive and enjoy ourselves. We often think that the only way to get what we need is by working hard as individuals to earn enough money to buy it.  But there are other approaches, approaches that can strengthen communities, making them more cohesive, collaborative, and better able to withstand shocks (via the Multidisciplinary Digital Publishing Institute), such as those climate change is likely to bring. Most of us, however, don’t know enough about those other approaches.

Before we get to those options, however, it may be wise to consider how “new” money enters economies.

First, in most cases, new money is created as debt through loans from private banks.  A 2014 study (sciencedirect.com) determined that:

In the process of making loaned money available in the borrower’s bank account, it was found that the bank did not transfer the money away from other internal or external accounts….Instead, it was found that the bank

Photo by Jonathan Cooper via Unsplash.com

newly ‘invented’ the funds by crediting the borrower’s account with a deposit, although no such deposit had taken place.

So banks are essentially creating new money out of thin air to create loans.  Borrowers must then pay the loan and the interest back.

There’s a different model for creating loans (and thus money), though — one that does more for local economies: public banks.  The difference is that public banks have a set mission to reuse paid loan and interest money for civic needs, and the public, your local community, can influence how that money is spent. The Public Banking Institute in the U.S. defines them this way:

Public banks are run by professional bankers. The local or state government sets up the mission and guidelines to serve the public good. Governance is transparent to the public and, while public banks globally can have different models, it typically includes a community advisory board or community members sit on the board of directors. A public bank on the model of the Bank of North Dakota (currently [the U.S.’s] only state-owned public bank) holds the state’s deposits and revenues, saving large sums in Wall Street fees. Other public banks, including federal postal banks, hold and manage private deposits. In both models, bank profits benefit the public, not private shareholders….

The focus is on making loans that serve state and community needs, such as building infrastructure and supporting local businesses. A key advantage over the “revolving funds” that most local governments use for these needs is that a “bank” can leverage its equity at 10 to 1, which means it can turn $100 million in equity into $1 billion in loans. A public bank can also refinance its own municipal debt at lower rates than are provided by the private bond market.

The Bank of North Dakota

The state of North Dakota in the U.S. has had its own public bank for over 100 years. As of last year, the state of California in the U.S. has been moving towards the creation of public banks for the state and in cities.

Many national governments also have had public banks, and some still do, like the Bank of Japan and the Reserve Bank of Australia. 

In terms of communities again, would you like your city to invest in renewable energy? A municipal (e.g., city, town) public bank could be one way to fund that. But as of this writing, the vast majority of municipalities don’t have a public bank. However, privately run community banks (link via Independent Community Bankers of America) can also be helpful. They create loans created for profit for the bank, as opposed to a source of funding for civic needs, but some community banks are responsive to their community’s desires, and a group of concerned citizens may be able to influence how these banks use their money.

Next, there’s the question of how money circulates in economies. Does the money spent in your community or your city stay there, or does it go somewhere else? If you make purchases from a locally owned store as opposed to a chain, more of the money stays in your community. When you purchase from a corporation, whether it’s a chain restaurant or a store with many locations, some of your money goes to the owners and, if the corporation is publicly owned, to the share-holders.

But why does that matter? According to the Institute for Local Self Reliance in regard to the United States,

“​​Local stores keep profits circulating within the local economy….They create opportunities for service providers, like accountants and printers. They do business with the community

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bank. They advertise through independent radio stations and other local media outlets. They purchase goods from local or regional distributors. In this way, a dollar spent at a locally owned businesses [sic] sends a ripple of economic benefits through the community. By contrast, chain stores typically centralize these functions at their head offices. They keep local investment and spending to a minimum. They bank with big national banks… In this way, much of a dollar spent at a chain store leaves the community immediately.

[Because] small, independent stores are locally owned, these stores are firmly rooted in the community. They are unlikely to move and will do their best to weather economic hard times. Chain stores, by contrast, tend to be fair-weather friends. They are highly mobile and will abandon

Photo by Anete Lusina via Pexels.com

a location if profit margins do not meet their expectations. The worst case scenario is when a big box store builds on the edge of town, destroys the central business district, and, then a few years later, decides that it too will close its doors. The town is left with a dead Main Street and nothing to show for it. Nationwide, there are more than 300 empty Wal-Marts.”

We should also consider what money is: a means of exchanging value.  Think of every object or service you could provide or might need as something that has value. In order to get what you want, you need to make some sort of exchange. Money allows more flexibility than simple trade or barter.  If you have childcare skills and need a carpenter, but I’m a carpenter with no children, we’ll have a hard time trading.  If you’ve got some cash, we can do business.   

But we don’t actually need government currency to exchange value, and it’s possible to create systems that allow for more complicated exchanges than carpentry for child care. Below, we’ll discuss options like regional currencies, buy-nothing groups, time-banking, and mutual aid as alternative approaches to exchanging value that have the extra benefit of increasing trust and cohesion in communities.

​Here are some options for steps:

What next?

If you don’t really know your neighbors, you may need to find ways to get to know them before you can suggest any of this, and we have lots of ideas for that on the main Community Steps page. Keep in mind that people are more likely to try something if they’ve heard of it, so shopping local may be a good starting point. The local chamber of commerce or business association may already have a campaign; perhaps you could get involved there.

If you are familiar with your community, why not try something bold, like stirring up interest in a regional currency or a really, really free market? Good luck, and please let us know how it goes!

Contributors: Mark Stewart, Dang Du, Annette Olson

Photo credits:

Header: Photo by Pratikxox via pexels.com

• Shop window and brick wall: Photo by Maria Orlova via Pexels.com
• Piggy bank and alarm clock: Photo by The Burtons via Getty Images.com
• Indoor food stand: Photo by Enric Cruz López via Pexels.com