Sometimes it is easy to think of a currency in terms of its power on the international stage and how well it is doing it in comparison to other currencies.
The dollar is weak and the euro is strong, these are the kind of things we tend to think about, when we think about currency. But they are not the end of the story.
There is another way to think about currency and that is to consider a local currency.
Local currency is basically a currency that does not have the backing of a national government and, it is not usually legal tender, but it is only for use within a small geographical area. Another name for local currency is community currency.
Thousands of different types of local currencies exist throughout the world, some are quite big, with literally thousands of members, but some are very small.
Some may trade in over a billion of the local currency, (yes that is right!) others are lucky if they trade in thousands. But they do exist and they can help financial markets to recover in areas where there is some decline. So what are they all about and where did they come from?
History of local currencies
Local currencies have actually been around for quite a long time. At first they were issued in the form of company scrips. These were little coins that were issued by companies, who would give them to their workers instead of money. Very often these could only be exchanged in the company's store, which often sold goods at very high prices, basically exploiting the worker. Company scrips were often handed out in the logging and mining camps of the early days of the United States. The company involved would not only own the mine or be in charge of the logging operation, it would also own the store at the camp and this is where people would have to use their scrips.
Local currencies seem to have been around from the 1800’s in Europe, with the formation of the German Credit Unions, which issued their own currencies.
The oldest local currency that is still in operation is operated by the WIR Bank in Switzerland. This is a currency system that exists only as a book keeping exercise. It started in 1934 when Switzerland was in the grip of a currency shortage. It has around 62,000 members and is responsible for around 1.65 billion worth of trade in Swiss francs, every year.
So just because a currency is local, at it does not necessarily have to be exceptionally small.
So what exactly is a local currency?
Local currency is a currency that is designed to be used only within in a small area. It is usually used to retain money in a local area, rather than money going to large, international chains, it is a way of keeping money within a particular area and to encourage people to use local shops and facilities.
Some of the local currencies in use are used within a particular town. If you have say $100 worth of ‘local’ cash, then instead of visiting a supermarket, where you will not be able to use it, you will shop locally and help your local businesses and services to survive. Shoppers are therefore encouraged to think local and act local, so that the little shops and businesses will be used more and as a result they will be more likely to survive, rather than just being swallowed up by the big supermarkets.
A good example of a local currency is the Ithaca HOUR, which is a local currency used in New York. It has been running since 1991, after local residents got together because they were tired of money flowing in to the local economy and then flowing right back out again. So they decided to do something about it. And they printed their own money. Every Ithaka HOUR it is actually worth $10.00.
It is quite a successful scheme and lots of people have taken the concept very seriously. There are various services on offer from knitting lessons to reflexology. You can access a plumber or a chiropractor or even some pottery.
Some people even pay the rent using this system, so it really does keep money locally and it also encourages people to think about not just using local services, but also what they can offer in order to get an HOUR. So people who may think that they do not have many skills may find that there are able to teach other people about gardening, knitting, carpentry or even babysitting. Thus a LETS scheme can be quite empowering for people and can really help them to meet other people in their locality and to discover skills that they did not even know they had.
Many businesses in the locality will also accept the HOURS and so it is a great way of keeping money just that little bit more local. The HOURS scheme is quite similar to a LETS scheme.
The LETS system is also a form of local currency. Whilst most people think of a LETS scheme as being one that uses barter, most LETS schemes also use some kind of money.
Originally many LETS schemes were based on barter, which is where this image of LETS comes from, but now they use some sort of money. LETS stands for Local Exchange Trading System. Hence why it has been shortened to LETS.
LETS systems are owned and run by people in relatively small areas and they issue the money and then ensure that the money continues to circulate. They act like a bank, but there is no interest aid on a LETS scheme, this is seen as much too like a traditional bank.
Usually a LETS scheme will be run by a community group and it will be on a democratic basis, so that everyone can have an input and help to make decisions.
Problems local currencies face
The concept of local currency is certainly a very good one and it can be quite empowering. However, to some extent people who run a local currency have to be aware that it is basically a microcosm of any financial system and as such can actually be subject to the same difficulties that any currency faces.
For example if you print too much money, then you will find that you get inflation. If you print too little, then that the scheme will not be successful and people will soon leave the scheme because they're not happy with it.
Sometimes local currencies can find it difficult to be taken seriously within the first few months and people may be negative about the concept, particularly in areas that are quite run-down. The people responsible for the currency, have to counter the negativity experienced and try to change people's views of the currency, since it has to be used in order to be successful.
Local currencies can also face the problem of being run by a committee, with every decision taking a long time and people generally not being able to reach a consensus on even the smallest of issues. There may be personality clashes on the committee, which can seriously hamper the progress of the currency and so it is not without its difficulties.
As with any democracy there can also be power struggles and people who simply cannot work together, because they cannot get on.
So setting up any local currency, is actually a very difficult thing to do and it is for this reason that many currencies simply implode and do not survive for longer than a few months.
General picture for local currencies
Although each is single currency is possibly not worth a significant amount of money, when they are added up collectively then they could actually make a difference.
No one knows the exact number of local currencies that are in operation. Many of them are a success and carry on for a long time, but some of them do not take off and as a result, may very quickly fold.
However, in the United States alone, there are literally hundreds of local currencies and LETS’ schemes in operation. This situation is replicated in Canada, the United Kingdom and throughout Europe. Estimates are and there are around 4000 communities in the world that have started their own local currency. It is likely that this figure will increase, as people want to start to take action against the ever increasing price of oil and food and the difficulties experienced in the real estate sector.
Even if some of the schemes only operate with say, $10,000 dollars (equivalent) then collectively, they will be worth a lot of money. Perhaps not enough to suddenly topple global financial markets, but enough to make a small difference to peoples lives, in their local community.
Banks and local currencies
Any local currency will obviously not be able to be used within a bank. However, banks as a whole are usually quite in favour of a local currency because it can help to revitalise an area and to stop, or even reverse, a decline. Since a local currency can help keep businesses buoyant, then there is no reason for a bank to have any objections to them.
A local currency can even help keep small businesses alive and for this reason, it tends to be viewed very favourably by financial institutions as a whole.
21st century answer?
So if every town and every city in the land had its own currency, would this strengthen the economy or simply mean that the mainstream economy, languishes and does not perform well?
Theoretically if every town and city had its own LETS scheme, or local currency, then there would be a very buoyant economy for that particular country, because money would be retained within the locality, where it was generated and thus would not be sinking into the hands of trans-national companies. This is one of the main arguments in favour of the local currency: it is a way of taking control and stopping the globalisation of absolutely everything.
However, local currencies cannot be used within supermarkets that have owners who are not from that particular locality. So money will always go outside the area, this is inevitable. People need to do their weekly shop somewhere and the supermarket offers choice and convenience as well as very good prices.
Smaller stores are not able to offer the competitive costs that the supermarkets do, so they cannot compete on the same level.
So the success of any scheme is reliant not just on being run efficiently, but there needs to be enough local shops and businesses or things on offer, for people to be able to spend their currency, otherwise, the whole system will break down.
In many places, there are simply not enough locally owned shops and businesses to be able to offer this kind of system. The big, national firms have taken over and shoved the smaller, independent stores into a very tight corner indeed. The success of the scheme is also reliant on local businesses accepting the local currency. It may be theoretically true that you would expect all local businesses to support it, as means of getting or keeping businesses, but this may not be the case in practice!
However, an alternative way of looking at local currency is to think about how they can offer alternatives ways of generating at least a little money and keeping it within the locality.
Currently the economic outlook is quite grim and people are faced with the continued gloom and doom about the state of the $ or how much food prices have gone up (or how much they will go up) and people wringing their hands over the credit crunch and the price of oil. Things are certainly starting to look quite bleak indeed.
But could a local currency actually help? If people have to use their existing skills set in order to participate, then some people will be turning a hobby or an interest into something that they can effectively ‘sell’ and then use the money they earn to buy things locally in the shops.
So they will be using their knowledge of gardening, cooking, jam making, how to put up shelves or how to train a dog and putting this to good use. Not only have they passed their skills onto someone else, but they have also made some ‘money’ from doing so.
This added generation of money, away from the standard economy, can only help get people through the tight period of the credit crunch and all that it ensues. It will not be the answer to all their problems.
One other aspect to a local currency is that items for sale locally are often more expensive than those that can be bought from other stores. So you are asking participants to be prepared to spend a little more overall. This can pose problems when things are pretty tight economically.
Ok, they are not a perfect system and they are subject to the same vagaries that standard monetary systems are, but the point is that they do at least generate a little more money and they help people to think about their skills and what they can do on an informal basis.
Local currencies also help people to have appreciation of money and the value of money and what they can do to earn it, so in that way it is a beneficial scheme as well.
However, local currencies are not a panacea for the global financial problems that the world faces. They can be a powerful tool and certainly have a use within many local communities, but operationally there are some difficulties, with these schemes on a national basis.
People who live in a small town that is in close proximity to a number of other towns, will find that they will only use one local currency, because otherwise it would be too difficult to carry round various types of currency depending on where you were going.
The schemes are also dependent on a
high level of co-operation between individuals running the scheme and
those who participate within it. In neighborhoods where neighbors
simply don’t know each other, or may actually not want to know each
other, the scheme will never be a success.
There are also occasions
where the schemes may find that some people are less honest than
others, at which point, there is a real risk of the scheme folding.
Advocates of local currencies state that they are the perfect response to the globalisation of everything we do and how we live, shop, consume etc. This may well be true, but they are only a partial solution, since they cannot be used in banks, standard financial institutions or even supermarkets, not owned locally (and which of them are).
So, they do have a place and they do have a good use, but their importance should not be overplayed. They can help people develop their skills, become more aware ad responsible around money, but that is almost the limit of their effectiveness.