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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. These currencies are also referred to as community currency, and are a form of alternative currency or complementary currency. They encompass a wide range of forms, both physically and financially, and often are associated with a particular economic discourse.
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Free banking provides the economic prototype of local currencies.[citation needed] In the modern era, the most recognizable local currencies were company scrip issued in certain industries to pay workers, and token coins issued by some businesses to encourage consumer loyalty. In the nineteenth and early twentieth century, the failures of national banks during crises often created acute demands for cash, which were met by businesses creating emergency currency. These scrips were usually issued with the intention of redemption in national currency at some later date.
A few such currencies, however, developed into monetary systems in their own right. The idea of using free banking to produce an alternative, community-level currency dates back at least as far as the German Credit Unions in the 1800s. The oldest local currencies known to be in continuous use are the WIR in Switzerland, and the Labor Banks in Japan.
Complementary currency is a hypernym to local currency, but the terms are often used as synonyms. The term "local currency" does not refer to national currency that happens to be used only in a local area.
Advocates of local currency, such as Jane Jacobs, argue that this enables an economically cool, yet depressed region to pull itself up by giving the people living there a medium of exchange that they can use to exchange services and locally-produced goods. In a broader sense, this is the original purpose of all money. Local currencies also tend to operate in relatively small geographic regions and encourage recycling and reducing the amount of carbon emissions from the transportation and manufacture of goods. As a result, they are part of the economic strategy of many green and sustainable-living groups such as the Green Party of England and Wales.
Local currencies can come into being also when there is economic turmoil involving the national currency. An example of this is the Argentine economic crisis of 2002 in which small denomination, interest-free provincial bond IOUs issued by local governments quickly took on some of the characteristics of local currencies successfully.
Opponents of this concept argue that local currency creates a barrier which can interfere with economies of scale and comparative advantage, and that in some cases they can serve, like traditional national currencies, as a means of tax evasion.
Use of local currencies to boost local economies is strongly advocated by the Netherlands-based Instrodi Institute.
The Wrgl experiment that was conducted from July 1932 to November 1933 is a classic example of the potential efficacy of local currencies. Wrgl, a small town in Austria with 4000 inhabitants, introduced a local scrip during the Great Depression. By 1932 unemployment in Wrgl had risen to 30%. The local government had amassed debts of 1.3 million Austrian schillings (AS) against cash reserves of 40,000 AS. Local construction and civic maintenance had come to a standstill. On the initiative of the town's mayor, Michael Unterguggenberger, the local government printed 32,000 in labor certificates which carried a negative 1% monthly interest rate and could be converted into schillings at 98% of face value. An equivalent amount in schillings was deposited in the local bank as cover for the certificates in case of mass redemption and earned interest for the government. The certificates circulated so rapidly that only 12,000 were ever actually put into circulation. According to reports by the mayor and economists of the day who studied the experiment, the scrip was readily accepted by local merchants and the local population. It utilized the scrip to carry out 100,000 AS in public works projects involving construction and repair of roads, bridges, tanks, drainage systems, factories, and buildings. The scrip was also accepted as legal tender for payment of local taxes. In the one year that the currency was in circulation, it circulated 13 times faster than the official shilling[citation needed] and served as a catalyst to the local economy. The heavy arrears in local tax collection declined dramatically. Local government revenue rose from 2,400 AS in 1931 to 20,400 in 1932. Unemployment was eliminated, while it remained very high throughout the rest of the country. No increase in prices was observed. Based on the dramatic success of the Wrgl experiment, several other communities introduced similar scrips.
In spite of the tangible benefits of the program, it met with stiff opposition from the regional socialist party and from the Austrian central bank, which opposed the local currency as an infringement on its powers over the currency. As a result the program was suspended, unemployment rose, and the local economy soon degenerated to the level of other communities in the country.[1][2]
Other well-documented historical examples include:
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 Wrgl 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 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 Wrgl experiment dramatically illustrates some of the common characteristics and major benefits of local currencies.[4]
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.[6] 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.[7][8]. Successful Local Currencies such as the Wrgl 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.
Since 2002 there has been an upsurge in local currency experiments particularly payment voucher-based systems that are exchangeable with the national currency. 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[9][10] and Big-box trends.
Previously, one of the most prominent systems was LETS, Local Exchange Trading System, a trading network supported by its own internal currency. 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. Time dollars, Ithaca Hours, and PEN exchange are among the most successful systems in the USA.
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