Is it time for the rise of local currencies?

It's an almost long forgotten historical fact that most trade was undertaken by local based currencies right upto the 20th Century. Australia had a number of colonial currencies before federation in 1901. The United States of America had a number of currencies issued by private banks before the Federal Reserve Bank was formed in 1913, and individual states of the European Union had their own national currencies before the mega-currency, the Euro was launched in 1999.

However given the trend to larger and "stronger" currencies, the hype of the Euro, the protection of the US Dollar as the major trading currency, a very quiet trend has been going the other way. In contrast, more than 2,000 local currencies, in some form or the other, have been launched in various communities around the world.

Literature on the phenomenon of the local currency almost doesn't exist in contemporary economic literature. Therefore the purpose of this article is to have a look at local currencies, and try and answer the following questions; Why do communities launch them? Do local currencies have any benefit to these communities?, and What is the real potential of these currencies?

A local currency, sometimes referred to as a community currency, is a means of exchange used by members of a community that have some common bonds. Local currencies are usually not backed by a national government, nor is it officially a legal tender within the region it circulates within. A local currency is usually intended for trade within a limited geographical area.

Money is essentially an agreement to use something as a means of exchange. Any local currency can be denominated by the prevailing national currency, or measured in any commodity, or even labor units to determine comparative unit value, so people know how to use it as a medium of exchange. This redemption measure, if realizable, is usually a major factor giving users confidence in its present and future value.

A local currency is a potential tool of monetarism, where it can help to define an economic boundary where certain groups readily accepts it as a medium of exchange.

Local currencies are usually created on the value judgment, supported by E.F. Schumacher's ideas that there should be a focus on the development of local economy. The proponents of local currencies would usually aspire towards developing a diverse local economy full of diverse micro-activities which would promote local production, local self sufficiency, and the maintenance of profits within the local area by local businesses. They would hope that the local currency and the corresponding changing spending habits (use of a local rather than national currency) would promote a preference and loyalty to local products and businesses, rather than goods and businesses from outside.

The proponents of local currencies would also probably aspire towards developing personal relationships in trade and desire to get away from the "McDonalds landscape" where the same restaurants, stores, and service businesses exist in everyplace with an emerging mono-culture. Thus the introduction of a local currency would be seen as a method of encouraging the de-standardization of their local community through promoting the development of vibrant diverse community activities.

The success of any local currency depends upon the assumption that a single country may not be an optimum currency area, where different regions within a country may be better off with different currencies. This would allow the development of local comparative advantage over national comparative advantage. This is very much against the spirit and purpose of macro-economic policy during the development phase of most economies, which has generally promoted centralization, the growth of SMEs into larger corporations so that economies of scale are developed to the point where firms can exercise competitive advantage in the international market.

Even though local currencies worked extremely well in the 19th Century (remember they were most often redeemable in gold then), the track record of the contemporary local currencies hasn't been good. The successful ones like the Berkshare have been proxy currencies with an a generally agreed par value with the national currency. In fact, it is only the Berkshare used in the Berkshire region of Massachusetts, that has been touted as the success story of local currencies. The Berkshire has a large number of users, which manages to keep the currency circulating within the local community. However in the Berkshire case, the community was already pre-disposed to producing local products for the local community. Many others have failed or ceased to exist through low levels of support within communities. While others like the Kelantan Dinar launched in 2006 was effectively sabotaged by the Malaysian Federal Government through repeated statements that the Dinar was not legal tender.

One of the impediments of any successful local currency is developing a critical mass of community support that would keep the circulation velocity high enough to maintain its perceived value.

A more notoriously use of a local currency was in the Cocoas Islands, where the Malay workers once ruled by the Clunies-Ross family were paid in Cocos Rupees, a currency John Clunies-Ross created and which could only be redeemed at the Clunies-Ross owned company store. Large retail corporations have successfully used forms of complementary local currencies as coupons, gift certificates, and point systems, to enlist customer loyalty.