Local currency, also called community or complementary currency, is money that’s not backed by a national government and is traded only in a small geographic area. Over 2,500 local currency systems currently operate in the world, including in American communities like:
- Ithaca, New York (Ithaca Hours)
- Portland, Maine (Hour Exchange Portland)
- The Berkshires, Massachusetts (Berkshares)
- Corvallis, Oregon (The Hour Exchange)
The trend is likely to escalate in response to the 2008 global economic crisis.
How can local currencies help in hard economic times?
During recessions, people hoard money. Banks halt lending. Businesses shut their doors. And workers are laid off. The result? Cash becomes more and more scarce.
It’s hard to generalize about local currency systems, because they vary so widely. But almost all of them are designed to combat a scarcity of cash by matching unmet needs in a community with under-used resources, i.e. unemployed people. They are not meant to replace a national currency, but to complement it. Some are based on a unit of time, usually an hour. Others are based on the national currency.
How might the introduction of a local currency look?
Let’s say I’m saving every dollar I have, because I’m afraid I could lose my job. On Sunday, everyone in my town is given fifty “local bucks”. They are distinctive, easy to carry, difficult to counterfeit, and about half of the businesses in town have agreed to accept them. My inclination is to stash them away like my dollars. But they’ll lose 1% of their value on Saturday if I don’t spend them in the next six days. (Economists call this type of depreciation demurrage.)
- So on Monday, I use my 50 bucks to pay my unemployed neighbor to create a website for me.
- On Tuesday, my neighbor buys groceries at our local health food store.
- On Wednesday, the store owner buys produce from a local farmer.
- On Thursday, the farmer buys seeds from a local company.
- On Friday, the seed company owner buys a shirt from a local tailor.
In one week, 50 bucks, has, in effect, become 250. The faster transactions happen (the currency’s velocity), the more economic activity each buck generates during the week. “Economic activity” is not some abstract concept. It is a website, food, produce, seeds, a shirt, etc.
The tailor doesn’t spend his 50 bucks by Saturday, so he has to buy a stamp for $.50 to stick on the back of the 50 buck bill to keep it worth its face value. There are 52 spaces on the back of the bill, one for each week of the year. Without the current stamp, the bill is worthless. (This type of currency is called a stamp scrip.) The tailor is out $.50, but he sold a shirt that he otherwise wouldn’t have.
Can the introduction of a local currency really pull a town out of a global recession?
Maybe. Consider what happened in Woergl, Austria during the Great Depression. Woergl was suffering badly. By some accounts, 1,500 of its 4,500 residents were unemployed. The mayor, Michael Unterguggenberger, had a long list of needed public improvements but little money. He had about 40,000 schillings, but instead of spending them, he decided to use them to back a local currency. Anyone could trade in local bucks at 98% of their value for schillings. Like the example above, the Woergl currency was a stamp scrip.
The project ran for 13 months. The bills changed hands very quickly. The Woergl citizens could pay their city taxes with them, so the council was able to carry out all its intended works projects. They built a reservoir, a ski jump, new houses, and a bridge. The community also replanted forests, anticipating future cash flow from the trees. Woergl was the only Austrian town to achieve full employment during the Depression until the Central Bank intervened and shut down the local currency system.
What are the possible downsides of a local currency?
Local currency systems are complicated. A group of townspeople needs to create, organize, and administer them. Businesses and citizens must be on board. They only work if enough people accept and use the currency.
Hoarding is also a hard thing to stop. It was a problem even in Woergl, because many people wanted to hold onto the currency as souvenirs.
Demurrage (a currency depreciating every week or month) can also encourage hasty spending. Even though the spending is local, more consumption can mean greater use of finite resources, such as oil, lumber, coal or water.
If you liked this article, you may enjoy these related posts: