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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. All are currencies that have different designs and serve different purposes than conventional money.
Local currencies are sometimes referred to as a community currency. They are often forms of alternative currency, complementary currency and or auxiliary currencies. The debate is not easy to solve, since the words have different meanings to different people. In summary:
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.
Society utilizes only a small portion of its resources and opportunities. Almost everyone has underutilized knowledge, skills and time that can be engaged productively. Most manufacturers and services have underutilized machinery or capacity. Complementary currencies are a creative means to enhance this untapped social potential.
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. Successful Local Currencies such as the Wörgl experiment attract hostility from the Central Governments, as they reduce the bureaucracy's control over an important power centre.
There has been a tremendous surge in the use of local currencies over the past two decades. 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.
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.