Will the Backbone of the Economy be the Backbone of the Recovery?

The headline was clear and to the point: Economy Shrinks at 3.8% Pace in 4Q. Now the good news was that this wasn’t as bad as all the economists were predicting. The bad news is that all of them see that pace increasing to as much as 5% shrinkage by summer.

According to  Mark Zandi, chief economist at Moody's Economy.com, “The downturn is intensifying. The fourth quarter is worse than it looks.”

Sounds ominous. Throw in growing unemployment, tighter credit, states and even whole countries on the verge of bankruptcy and you can see why things are predicted to get worse before they get any better.

Small Banks and Small Business

On the other hand, we have this headline as well: Community Banks Increase Small Business Loans

Here we see that small, community banks are stepping into the gap left by the Wall Street lending giants. According to Christine Barry, the Aite Group’s Research Director:

Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks. They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers.

So what we have is the smaller banks taking advantage of the weakness of their larger competition, acting locally to answer the needs of local small business.

Local Money

The venerable greenback is not the only form of currency in the United States. Surprised? Don’t be. There are thousands of local currencies already in use throughout the world, right alongside national currencies and, in some cases, they are doing better than the official money. The trick—and in some places it’s not so much of a trick—is to find shops and other businesses willing to accept them.

One of the arguments for a national bank, some two hundred years ago, was to establish a single American currency and discourage all of the various local currencies then in use. It did that, and the cash, or paper money, issued by the bank was linked to the gold it had in its vaults. When the US left the gold standard and developed a fiat currency, backed by the full faith and credit of the US government, it opened up new economic opportunities, but it also brought about fluctuating value. Since trust in banking and bankers was never a sure thing in American culture, it was only a matter of time before some people, with a distinctly local point of view, began to experiment with other forms of currency.

The movement here in the United States was started in 1991 by Paul Glover in IthacaNew York. Glover invented what he called “Ithaca Hours,” a currency tied to hours of labor. The response he received was good, all things considered, as he found local farms, professionals such as doctors, and businesses of all sorts that were very accepting of the new, work-based currency.

In December of last year, the same thing was happening in Milwaukee, Wisconsin. According to Sura Faraj, a community organizer helping to spearhead the plan:

You have all these people who have local currency, and they're going to spend it at local stores. They can't spend it at the Wal-Mart or the Home Depot, but they can spend it at their local hardware store or their local grocery store.

Ithaca and the Milwaukee communities of Riverwest and East Side are not alone, but they do demonstrate—like the community banks mentioned above—that local communities can and do find local solutions to problems foisted upon them from Washington and Wall Street.

Local Business

It is all about local people working with local people to encourage the creation of wealth and security to weather hard times. Author Michael H. Shuman discussed this need in his book Going Local. In it, he identified the four primary reasons—some fairly compelling points—about why we need to focus on local economies.

First, a locally owned business is likely to produce income, jobs, tax receipts, and charitable donations for a community over several generations. Whenever ownership

coincides with the location of a business, all these transactions reinforce one another and

pump up the local economic multiplier, the basic building block for community

prosperity.

Second, local ownership minimizes the chance of calamity. Across the country,

cities have seen their best local companies sell their interests to outsiders and then their

hometown plants shutdown. Tragic consequences always follow. Taxpayers thrown out

of work become tax-drainers through welfare and unemployment payments. When the

tax base contracts, vital services like education, police, and fire must be cut. Property

values plummet and, like so many steel and auto towns in the 1970s and 1980s, the

community descends into an economic death spiral. Local stores have no plans to move

to Malaysia.

A third advantage of local ownership is that once a company agrees to stay

indefinitely, the community can better shape its laws and regulations to serve the local

quality of life. Today, most communities are held hostage to their largest companies.

Near where I live, on the Eastern Shore of Maryland, for example, Tyson and Perdue

have successfully fought all legislative efforts to raise wages of their workers and to clean

up the billions of pounds of chicken manure they dump into the Chesapeake Bay

ecosystem. They deploy one powerful argument: Regulate us and we’ll move to more

lax jurisdictions like Georgia or Arkansas.

Locally owned companies never practice this kind of extortion. In the National

Football League, all but one of the franchises are owned by a single individual, and more

than a half dozen have threatened to leave town if their demands for hundreds of millions

of dollars for new stadiums and other booty are not met. When Cleveland refused, Art

Modell took the Browns to Baltimore. The exception is the Green Bay Packers, a

nonprofit owned primarily by the citizens of Wisconsin. Local ownership effectively

prevents the Packers from ever threatening to leave town. There will never be Baltimore

Packers.

Finally, locally owned businesses are, in fact, more likely to succeed than those

with absentee shareholders. In 1975 the Sperry Rand Co. decided to shut down any

subsidiaries that were not achieving a 22 percent rate of return. One of its companies

slated to get the axe was the Library Bureau, the principal employer of Herkimer, New

York . The workers, residents, and local banks decided to execute a buyout. In its first

year of operation under new management, the newly independent Library Bureau earned

a 17 percent rate of return – inadequate for Sperry Rand, but more than enough for

Herkimer. It continued to perform profitably for more than a decade.

The Bottom Line

Dare I say it, as government gets bigger, there is more and more focus on localism. Community banks doing the work of their big national brethren, local currencies springing up, and it does not end there. If things continue along these lines, we will soon see and increase in local production for local use, including local manufacturing.

Are we going back to the days when communities across the nation took care of their own needs, their own problems and their own people? To an extent we are seeing the beginning of that today. How far it continues, how deep it goes, depends on decisions made in Washington and how the economy reacts. One thing is certain, though, that the worse this gets, the more localism we will see.