Monday, July 20, 2009

Pros and cons of a "local currency"

A local group, the Greensboro Currency Project, is pushing a local currency. In an op-ed this weekend, Signe Waller Foxworth, a co-chair of the group touted the possible benefits of this idea.
Imagine everyone in Greensboro, particularly those chronically short of money, being able to meet many more of their basic needs.

Imagine a thriving community, with small and medium-sized local businesses supplying many goods and services to city residents and able to employ more workers. This attractive vision represents the real-life potential of a local currency in Greensboro.
The obvious John Lennon allusions are nice. Nicer still would be a cogent explanation of how a local currency might be implemented or how it might achieve the listed benefits.

Let's take a stab at those benefits. A local currency can take several forms, but a common feature is that it serves as a medium of exchange in a particular--usually geographically defined--market. Thus, it has some, but not all, of the features of regular currency.

Because it is only accepted within a defined market, a local currency promotes trade within but not outside that market. You could view the currency as a form of trade barrier. It promotes local goods over goods in the next community over. Local goods effectively become less expensive, leading to greater purchases by local residents. At the same time other communities' goods become relatively more expensive, leading to less external trade. If local currencies are adopted by a few communities, those communities might enjoy positive effects, but they are adopted by all or many communities, they could actually reduce economic activity by hindering trade.

A local currency may stimulate the economy in other ways. Opportunities for financial intermediation are likely to be limited or absent. Because of this, there would be few rewards for using the currency to save or invest. Instead, people would get their primary reward from spending the currency. This would give local currency purchases a bigger multiplier than regular currency purchases. This effect, however, would be offset to the extent that people substitute use of the local currency for local shopping and use of the national currency for other transactions.

Another stimulative effect could come from simply boosting the amount of available currency--that is, increasing the money supply. Increasing the supply too fast, however, will end up devaluing the currency.

Some additional positive effects of the currency are to promote awareness of local producers and merchants and to increase social cohesion.

Unfortunately, as the foregoing discussion suggests there are a number of drawbacks. First, a local currency does not help--and may hinder--trade outside the region. Greensboro boasts a number of "exportable" industries, including logistics and financial services. Second, the goodwill that may be produced locally may be offset by ill will from surrounding communities. The currency sends a message to other communities that our businesses are important while theirs are not. Third, there are overhead costs because new institutions will have to be created to implement and manage the currency. Fourth, there will be inefficiencies from having to exchange currencies to trade externally (electric bills and merchants' payments to suppliers are examples) or make external payments (sales tax bills).

Fifth, there is the whopping question of how the currency is put into circulation in the first place. A local group could "sell" the currency, but this would reduce the stimulative impact by taking regular currency out of circulation. Alternatively, if the currency is distributed it represents a windfall to whomever gets it or uses it first. How will that windfall be distributed?

Finally, do we expect that the currency will circulate forever? If not, how do you address the problems faced by the last people stuck holding the currency? One solution to sell the currency and then maintain reserves of the regular currency to back it up. Again, however, taking regular currency out of circulation defeats some of the purposes of the local currency. Also, maintaining the necessary reserves is a tremendous responsibility.

In their quest for something exotic, the backers of a local currency seem to have overlooked simple alternatives that are used in numerous cities--local merchants' cards and coupon books. The cards or books can be sold, with the proceeds going to local development or advertising/promotion campaigns, or they could be given away. The discounts (price reductions) would encourage shopping. The discounts could also be time limited, giving them a use-it-or-lost-it quality.

It's fun to imagine ways to play games with "monopoly money," it's more practical work to with things that work.


Pino said...

Love the discussion! Interesting case those guys are trying to make. But in the end, i agree; gotta go with things that work.

Bubba said...

Gee, I don't know, Dave.

The plan might work if we seceded from the United States and formed our own nation.
(sarcasm off)

Anonymous said...

Save your Confederate money boys, the South will rise again.

Fred Gregory

Tony Wilkins said...

Dave, is this a complicated process similar to "bartering"?

Dave Ribar said...


Some communities have moved in more of a bartering direction, providing exchanges where people can trade scripts listing specific goods or services.

An active barter system for Greensboro already exists through Craigslist (see So, people who are interested in barter can pursue it without this project.

It looks like the Greensboro Currency Project is discussing something different--a currency that could be used to purchase any good or service. The currency would be much more flexible than a barter system...but with the other disadvantages described in the original post.

Anonymous said...

I don't think Signe's whackadoolery will make it into the
History of US Paper Money

Fred Gregory

Mark Herpel said...

Local currencies don't work in every community, this is 100% true. For more information one currency that has had tremendous success, please see.

A lot of the points you bring up are so tiny in the wider operation of a CC, they are not relevant, a few of the things you mention don't make any sense at all. On paper..."that sounds correct" but in reality it is not.

The bottom line is if the community does not see the benefits and does not want to take part using a local CC alongside the USD, you will quickly fail.

Your comparison of one local town competing with the next town over is incorrect. A CC works because local markets and sellers are competing with big chain corporate stores like Wal-Mart. Would you shop at Wal-Mart to save $1.50 or would you buy your fresh corn and tomatoes from the local farmer's market? This is the question to ask yourself when determining if your town or region could handle its own CC. If participants understand that the competition is a corporate super store and local employment(jobs)is at risk by shopping there...then the rest of the equation can be worked out. If you and your neighbor insist that you NEED to save that $1.50 and drive past the farmer's market to shop at Walmart, well there is no use in attempting a local currency.

Mark Herpel
Community Currency Magazine

Pino said...


A couple things:

Local employment is not putting local jobs at risk. IN the case of Walmart, it actually grows jobs. Jobs, in fact, that offer training, health insurance, 401k and profit sharing. Options which small mom and pop firms can't offer. In fact, an employee, with hard work, can eventually get promoted to store manager; a title not available in mom's grocery.

Walmart already faces competition from the farmer's market on freshness. We don't need CC to help that dynamic along. Personally, I am willing to pay the buck fifty for the corn so that its more fresh. I'm not willing to pay the same amount to buy a 12 pak of coke from the corner market.

People go where they find their value; and that is as it should be. CC only acts to shade that value and prevent the market from providing maximum value.

Dave Ribar said...


Could you define "tremendous success?" Berkshares seems to have brought some press coverage to that particular region, and the area has been able to keep the currency circulating. However, there isn't much evidence of broader impacts.

In a 2007 survey about the program, businesses gave the following answers to an open-ended "other comments" question

- consumers can support the local economy with U.S. dollars as well

- most people don’t use them or think about it, BerkShares aren’t a factor in the economy

- hardest for customers with little money b/c they don’t have the extra to tie up in BerkShares

- bookkeeping nightmare – many unexpected difficulties that people at the Community Center meeting couldn’t answer

- BerkShares does not simplify my life

This doesn't sound like a unqualified success. Besides circulation, the best indicator of success seems to be that the discount on the currency has recently fallen from 10 percent to 5 percent. However, this still means that Berkshares are worth less than regular cash to consumers (put another way, consumers have to be bribed to accept them).

As Greensboro considers this, it also must consider that most of these experiments fail.

One thing that is not described in the Berkshares literature is how reserves are held against the currency. For example, what happens when someone "purchases" a Berkshare from the bank but then holds on to it as a collector's item. Who gets the proceeds from that transaction?

Mark Herpel said...

Pino, thanks. It may be that a CC will not work in your area, a majority of the local residents and merchants must feel like 'local is better' or it's not worth trying. How a CC operates and what benefits it provides NEEDS to be properly explained to the potential users by an experienced person. I understand, if you can save money on your local food bill, medicine or whatnot you go there, every buck counts these days.
DR: "This doesn't sound like a unqualified success."
Fortunately that survey took place almost two years ago (10/07) and ONLY had 34 participants so I would not call that a qualified anything I call Berkshares a success and speak from personal experience, just last week in fact.
DR: Could you define "tremendous success?"
Sure, getting the locals to use the product. I just returned from MA about 4 days ago, I have a small stack of Berkshares here in front of me (here's a pic I just took ) The reason they are helpful for the local economy and job...spend a dollar at Walmart and about $.90 cents of each dollar IMMEDIATELY leaves your state NEVER to return. The money feeds the chain's their out of state headquarters and suppliers many of whom are outside the US.
Susan Witt, who helped create the currency and works with E.F. Schumacher has stated that on average each Berkshare that is purchased from any of the 12 local credit union locations offering them, gets circulated through no less than 5 local transactions before making its way back to the credit union account. Instead of 1$ spent and $.90 cents leaving, that is one Berkshare spent 5 times over--- x 5 or $5 in local transactions for each one. That is the power of shopping locally, Berkshares or not. The Berkshare is just a tool to encourage the process. Is it helpful for local sales? You bet. Take your pick spend one dollar, get $.10 re-circulated from Walmart or one local note and see $5 in additional business, that is a success a Tremendous success.
NOW...take that figure of 5 transactions for each note and multiply it by the fact that over 2.5 Million Berkshares have entered circulation since the fall of 2006 when it started. Ok, that is a large number of additional transactions (business) which has occurred because people used a local currency for some transactions. A study of Grand Rapids, Mich., released last fall by consulting firm Civic Economics, concluded that a 10% shift in market share from chain stores to independents would yield 1,600 new jobs and pump $137 million into the area.
You only need a 10% shift from big chains to local business to see big results and increased local sales.
As shown in that photo I posted, Berkshares provides a 50pg booklet of merchants and businesses accepting the currency. More than 400 merchants are listed.The Berkshares meets and exceeds this margin, however, not all CC's work this way and have this success.
DR: Berkshares are worth less than regular cash to consumers
Yes, they are worth $.95 cents on the greenback. Local currency is NOT "worthless" but it is valued less than USD and should be don't you agree? They do not ever yield interest and there is no benefit to hoarding them in your mattress, spending them is the only way for a retail user to capture that incentive. Local currency is considered by most people(not all) to be no different than a coupon. "shop here and get 5% off your next purchase" it's very simple sometimes. This is close to frequent flyer miles which are used as incentive to fly specific airlines. If I can fly on Eastern and collect points instead of Continental the points are now considered my complementary currency I welcome them. If you are looking at it from a pure retail marketing strategy, these are all tools to bring in and bring back customers. The concept, shop locally for 10% of your stuff and help the economy. What is wrong with that? If as a merchant you want to give me 5% or 10% for shopping at your store I don't see any issue with this incentive.

Dave Ribar said...


How is a stack of Berkshares sitting in front of you helping the economy (there or elsewhere)?

I get how local currencies might be used. However, the relevant questions are 1) whether they increase local economic activity and 2) if they do, whether do so more cost effectively than a simple merchants' card or coupon book.

Suppose that I was already planning to eat a $50 meal at a local restaurant and buy $50 of garden tools at Walmart. I would go and purchase $50 of the local currency for the restaurant meal and use $50 of regular currency at Walmart. In this example, my purchases aren't altered at all, but I used the local currency. Saying that a local currency is used or that it has a bigger multiplier than regular currency isn't the same as saying that it benefits the economy.

The local currency is only locally successful if it causes someone to buy more local goods than they would otherwise. It's only nationally or globally successful if it causes people to buy more than they would otherwise. The discount could do that, but so could any other kind of discount.

It may interest you to know that Walmart likes the complementary currency idea so much that it used something similar to pay its workers in Mexico, that is until the Mexican courts stepped in.

Dave Ribar said...


Some indirect evidence comes from social experiments in which food stamp households were given cash instead of food stamp coupons.

Food stamps can only be used for certain types of food purchases, so they are a form of complementary currency (in this case with very wide acceptance).

In one of the experiments, households receiving cash reduced their food expenditures by 22 percent. In a few other experiments, they reduced their purchases only slightly, and in two experiments, they didn't reduce their food purchases at all.

The evidence is equivocal. At best, however, this type of complementary currency, which is much better supported than any local currency would be, only has modest effects on the behavior that it is supposed to promote. It's not at all clear whether the costs of the extra infrastructure needed for vendors to accept and process food stamp payments is worth the modest increase in food expenditures.

Mark Herpel said...

Aside from widespread news coverage for your area, local currencies do nothing more than look pretty if they just sit in a box. Spending them on local goods where the merchant then re-spends them on more local goods or services (paying employees) ---this is the benefit.

As I explained re-circulating them in the community over and over increases business. This is well known and proven effective. If you can get people to shop locally with a coupon deal like the Wedge card or Chamber bucks this is helpful but NOT nearly as effective as a local cc. Because coupons are one time discounts are not then reused over and over forming a 'circuit' of local spending. More importantly, that one time coupon discount might also be applied at all merchants in the area. Just because the Pizza Hut is two blocks away does not make it a local purchase. Local currency distinguishes for you, by default, the difference in having fried chicken at the corporate KFC store on Battleground Ave. where the profits leave town or a locally owned establishment such as J P Looneys or Brooklyn Fried Chicken (I'm going to assume that both are locally owned and not national chains) So a discount card or a local coupon book will not discriminate for you, a discount book or deal will generally have ALL locally owned businesses, Walgreen, Pizza Hut, 7-11 etc and the money spent with the coupon will NOT re-circulate over and over with other local establishments. A local CC, by design, excludes 100% of the chains. A local note can be re-used...and where? At another local store. A local currency CAN be given in change back to the next shopper. You can't reuse coupons or provide them as change to again circulate. By default the local notes do all of this for you where a coupon or a Chamber Bucks certificate for Local shopping does not. This activity is what boosts local business, can increase jobs and better the local economy. Coupons can do that also but as I've outlined not as effectively as a local currency.
I can truthfully say with plenty of evidence and numbers to back me up that local currency can increase local sales thus benefiting the local economy. You can also truthfully say that a buying local program (coupon or discount card) does the same, I'm not debating that, the coupons as I've outlined are just not nearly as effectively as a local currency. The coupons do not build a long term strength into your local business and do not distinguish between locally owned and operated or just located in the local neighborhood. The re-circulation of local notes does this.

Dave Ribar said...


If it is used at all, a local currency is going to recirculate more locally. The only leakages are people collecting the currency (as you did) and businesses re-exchanging them for regular currency.

Your analysis of the discounts is off. Suppose that merchants offer a 5 percent discount to people who purchase a local merchants' card. The 95 percent of the sales price that the merchant receives gets recirculated, not the coupon.

You mention "evidence" of positive effects. However, all of the evidence that you've described and that I've seen is indirect.

I've looked at unemployment figures for Great Barrington, MA. The unemployment rate there was about 1/2-3/4 of a percentage point below the state average before 2006. It's been about 1/2 of a percentage point below the state average since; there's no readily apparent improvement.

Atli Thor Fanndal said...

Hi Dave, I found your blog while doing research on CC. I find economics interesting which is why I started looking into local currencies. I wanted to make few points and would love for a response from you, critical thinking is always positive.

"The currency sends a message to other communities that our businesses are important while theirs are not." - I was wondering if you could back this up with any research, this seems rather far fetched. Most towns already have range of activities to promote local spending such as loyalty schemes, discount, local newspapers and other forms of "localpride" projects. It seems that all of those should send out the message that our businesses are important while theirs are not.

- "A local group could "sell" the currency, but this would reduce the stimulative impact by taking regular currency out of circulation." Unless the money is simply but into a box this might be true, but most if not all local currencies backed up with legal tender ( Totnes pound, Berkshares, The Plenty ) store the money in a bank or a local credit union. Money in a bank is not at all take out of the economy, it is redistributed through investment and loans. Many local banks put an emphasis on investing at the local level

"In their quest for something exotic, the backers of a local currency seem to have overlooked simple alternatives that are used in numerous cities--local merchants' cards and coupon books." Most local currencies are in effect nothing else than coupons or vouchers on a larger scale. One of the benefits of such schemes is that on average only 95% of vouchers and gift certificates are spent, which leaves small portion of the fund for profit or investment in the local community. Merchant cards that give you points or top-up savings are often criticised because they usually are not efficient in attracting new business, instead they tend to give people benefits that would buy your service anyway. Few irregular customers use them and the regulars come without the card scheme anyway, rather than because of it. ( Studies on both Nectar cards and Tesco Clubcards both in the UK have confirmed this )

- I also think you forget the value of news coverage, the Ithaca hours, Berkshares and Totnes pound have all received press coverage, worth considerable sum of money. Although this does also matter when we talk about local merchant cards since they do tend to receive some press coverage in the local press.

In the comment you talk about the Berkshares, and the fact that they now only offer 5% discount opposed to 10% percent before. This contradicts your earlier criticisms of local currencies, where you criticise or make it out to be a downfall that they have a build in discount ( bribery ). It seems that Berkshares are now more valuable than at the start of the scheme which I would see as a success. Given that it has gone up in value?

Personally I am not convinced on local currencies. I do agree with you that managing the scheme is enormous responsibility. There is the running cost and the fact that many cc's have a build in discount or devaluation that is usually distributed entirely on retailers. But I do appreciate innovative ideas and thinking out of the box. There is also the issue of taxing and accounting for it which I see as a hassle.

Keep up bloging!

Dave Ribar said...


Thanks for the really great comments. Let me try to answer some.

Cross-community antagonism. I don't have figures to determine the importance of this. It does seem like a possibility, however--especially here in NC where we have several large communities in close proximity and where there is already some cross-area antagonism. The problems would seem to be more severe with a currency than a discount card because of the recirculation restrictions on a currency. I just can't imagine my "neighbors" in High Point or Burlington being thrilled about a Greensboro-only currency.

Increased money supply. The increase to the local money supply depends how much is kept as a reserve and how those reserves are kept.

One thing that I had not thought of is that the money supply would suffer a contraction should the currency ever stop circulating.

Merchant cards don't seem to stimulate much additional activity. Most of the points you make also seem to apply to a local currency. Most of the people who use cards or the currency are the same ones who would have made local purchases anyway--you end up subsidizing a lot of people to get at a few people who are on the margin.

News coverage. Is there much value to news coverage outside the region if your goal is to promote market exchanges within the region? Could similar positive news coverage be generated through a traditional marketing campaign?

Discount. I described the reduction in the discount as positive, albeit indirect, evidence.

Of course, the discount is being set by fiat, not through a market. We don't have access to circulation numbers or other figures that we would have with a standard currency.

Bottom line. It would be really interesting to see a study of the economic impacts of the Berkshares experiment. I haven't seen any direct evidence of economic impacts and certainly none that is compared to the costs.

The original op-ed piece that prompted this actually lacked any economic rationale at all.

Morgan Glover said...

I just posted on Green Notes that an existing bartering system for businesses in the Triad area:

Dave Ribar said...


Thanks. It looks like an interesting program, though the membership looks a little low.

It will be interesting to follow the group.

CC Banc said...

A true currency circulates as it represents a “unit of account” that has an intrinsic stored value that is accepted in the marketplace. For example take a look at WIR Bank in Switzerland, an excellent example of a complementary currency.