In economics, a local currency, in its common usage, is a currency not backed by a national government (and not necessarily legal tender), and intended to trade only in a small area. As a tool of fiscal localism, local moneys can raise awareness of the state of the local economy, especially among those who may be unfamiliar or uncomfortable with traditional bartering.
They encompass a wide range of forms, both physically and financially, and often are associated with a particular economic discourse.
Complementary currency - currencies that exists as a supplement to our conventional (national) money. “A complementary currency (…) is an agreement to use something other than legal tender (i.e. national money) as a medium of exchange, with the purpose to link unmet needs with otherwise unused resources” (Lietaer & Hallsmith 2006: 2).
Local currency - is a Community Currency used in a locality.
Private currency - emphasizes that the currency is issued by individuals, businesses or NGOs as opposed to ordinary currency issued under the authority of the government.
Local currency is based on a local form of monetarism and mercantilism: it establishes an internal trade barrier, as the local currency cannot be used externally, and allows the area to have a different (presumably lower) interest rate than the national currency's — in the Wörgl experiment, a negative interest rate, known as demurrage. Advocacy and criticism of local currencies is based partly on general attitudes towards monetarism and mercantilism, and partly on opinions of the desirability of having internal variations in currency and trade.
Advocates[who?] of local currency in effect argue that, in certain circumstances, an entire country is not an optimum currency area, and that various regions should have different currencies. Compare with the Eurozone in Europe.
The Wörgl experiment dramatically illustrates some of the common characteristics and major benefits of local currencies.
Local currencies with negative interest rate tend to circulate much more rapidly than national currencies. The same amount of currency in circulation is employed more times and results in far greater overall economic activity. It produces greater benefit per unit. The higher velocity of money is a result of the negative interest rate which encourages people to spend the money more quickly.
Local currencies enable the community to more fully utilize its existing productive resources, especially unemployed labor, which has a catalytic effect on the rest of the local economy. They are based on the premise that the community is not fully utilizing its productive capacities, because of a lack of local purchasing power. The alternative currency is utilized to increase demand, resulting in a greater exploitation of productive resources. So long as the local economy is functioning at less than full capacity, the introduction of local currency need not be inflationary, even when it results in a significant increase in total money supply and total economic activity.
Since local currencies are only accepted within the community, their usage encourages the purchase of locally-produced and locally-available goods and services. Thus, for any given level of economic activity, more of the benefit accrues to the local community and less drains out to other parts of the country or the world. For instance, construction work undertaken with local currencies employs local labor and utilizes as far as possible local materials. The enhanced local effect becomes an incentive for the local population to accept and utilize the scrips.
Some forms of complementary currency can promote fuller utilization of resources over a much wider geographic area and help bridge the barriers imposed by distance. The Fureai kippu system in Japan issues credits in exchange for assistance to senior citizens. Family members living far from their parents can earn credits by offering assistance to the elderly in their local community. The credits can then be transferred to their parents and redeemed by them for local assistance. Airline frequent flyer miles are a form of complementary currency that promotes customer-loyalty in exchange for free travel. The airlines offer most of the coupons for seats on less heavily sold flights where some seats normally go empty, thus providing a benefit to customers at relatively low cost to the airline.
While most of these currencies are restricted to a small geographic area or a country, through the Internet electronic forms of complementary currency can be used to stimulate transactions on a global basis. In China, Tencent's QQ coins are a virtual form of currency that has gained wide circulation. QQ coins can be purchased for Renminbi and used to purchase virtual products and services such as ringtones and on-line video game time. They are also obtainable through on-line exchange for goods and services at about twice the Renminbi price, by which additional 'money' is being directly created. Though virtual currencies are not 'local' in the tradition sense, they do cater to the specific needs of a particular community, a virtual community. Once in circulation, they add to the total effective purchasing power of the on-line population as in the case of local currencies. The Chinese government has begun to tax the coins as they are exchanged from virtual currency to actual hard currency.
Difficulties and criticisms
Local currencies and the Transition Towns movement in the UK have received criticism for a failure to address the needs of the wider population, especially lower socio-economic groups. Such local currency initiatives have been more widely criticized in light of limited success stimulating new spending in local economies and as an unrealistic strategy to reduce carbon emissions.
Modern local currencies
Today there are over 2,500 different local currency systems operating in countries throughout the world. Modern local currencies can be classified into the following distinct types:
1. Transition currency based on the local currencies used by the Transition Towns movement in the UK. They include Brixton Pound and Bristol Pound in the UK, Berkshares in the USA, and Salt Spring Dollars in Canada.
Salt Spring Dollars are a community currency issued by the Salt Spring Island Monetary Foundation. The currency is used by both tourists and local residents of Salt Spring Island.
Transition currencies are payment voucher-based systems that are exchangeable with the national currency. Between 2002-2014 many experiments in local currency took this form. Such currencies aim to raise the resilience of local economies by encouraging re-localisation of buying and food production. The drive for this change has arisen from a range of community-based initiatives and social movements. The Transition Towns movement originating in the UK has utilised local currencies for re-localisation in the face of energy descent from peak oil and climate change. Other drives include movements against Clone town and Big-box trends.
2. Rewards currency based on the frequent flyer model. Consumer spends cash with participating businesses who issue rewards points in a local currency. These rewards points can be used to offset cash prices in future purchases. An example is Oakland Grown in Oakland, CA.
3. Mutual Credit currency based on the mutual credit system. This can be further sub-divided into two:
a. Time-based currency also known as Time Banks that use time as a measure of value. An example is Dane County Time Bank.
b. Trade exchanges and LETS (local exchange trading system) that use price as a measure of value. An example of local currency implemented as a trade exchange is Bay Bucks in the Bay Area of California, USA. LETS were originally started in Vancouver, Canada, there are presently more than 30 LETS systems operating in Canada and over 400 in the United Kingdom. Australia, France, New Zealand, and Switzerland have similar systems.