A new local currency, dubbed the “Farinet“, was launched recently in the canton of Valais. A similar one called the “Leman” landed in some pockets in Geneva and Lausanne in September 2015.
— Swiss Consulate NY (@SwissCGNY) May 15, 2017
The idea is simple enough. Create a local currency, print bills and get shoppers to use them. The only thing is these monies score poorly on most currency essentials.
On the first, a measure of value, they pass with flying colours. The Farinet even comes in a funky 13 franc bill symbolizing the 13 stars on Valais’s flag. However from here it is all down hill.
Early currencies were worth something in their own right. Gold coins contained the value of the gold they were made from. Paper fiat currency on the other hand is worth far more than the paper it is printed on, and only has value because a credible central bank sits behind it and guarantees its stated value. For some of history that guarantee was that it could be converted into gold on demand. But now that is history too and value is determined entirely by the credibility of the issuing central bank.
Now if the Farinet was issued by the eponymous three-vine vineyard in Valais, currently owned by the Dalai Lama, it is unlikely many will feel it is robustly guaranteed. In fact not even this 1.67 m2 vineyard stands behind it.
The issuer spotted this problem and employed an old trick. They pegged it one-for-one to a currency, the Swiss franc, which has a solid issuer behind it: the Swiss Central Bank. This works but can never eliminate the risk of the peg being broken. After a financial crisis in 2001 the Argentine peso went from being pegged one-for-one to the US dollar to a floating exchange rate of 4 to 1.
To compensate for this peg risk, holders of pegged currencies demand a higher interest rate to compensate for the risk of holding them. The Farinet and Leman, yield no extra interest and could lose value precipitously if their peg to the Swiss franc is broken. This makes them a poor store of value.
Another essential property of money is that it can be used as a medium of exchange. The problem with the Farinet and Leman is that not everyone accepts them and consumers cannot exchange them back into Swiss francs – businesses can though.
There are ways to make parallel currencies work however. One example in the now defunct Chinese Foreign Exchange Certificate (FEC). Until 1994, foreign visitors were forced to buy this special currency at a far higher price that its local equivalent, a kind of tax on visitors. Fortunately, they could also be used to buy certain things in special shops that could not be bought with their local currency equivalent. Because the locals really wanted the things in those shops they traded at a multiple to the local money on the black market.
If the Farinet and leman were restyled so that they were the exclusive medium of exchange for some highly sought after products then there might be some real demand for them. The downside of course is the flip side of the current problem: these vendors would not be able to sell to customers with no Farinets or Lemans.
Because either buyers or sellers have to decide to bear additional costs and risks, these currencies either need to be imposed or come with some form of compensation for the parties involved.
One night in 1994 Chinese FEC were deemed local currency and tourists and many back-street Chinese money changers were left wishing they’d spent all their FEC in the special shops the day before.
The only thing to do with Farinets and Lemans it seems is to spend them. But only in special shops. And they might not buy as much tomorrow.
Can anyone break a 13 Farinet note?