Design and Strategy Principles for Local Currency

Our society is fraught with a contradiction: on the one hand, we have vast needs that go unmet; on the other hand, we have vast amounts of labor, wasted resources, and productive capacity that could in principle meet those needs. Money is supposed to bring them together, but it is failing to do so. We can see a local complementary currency as a way to bridge the gap.

Unfortunately, with the notable exception of time banks, the practical results of local currency initiatives in the United States have been disappointing. A common pattern is that the currency is launched with much enthusiasm and continues to circulate as long as the founders promote it. But eventually they get burned out, the novelty factor wears off, and people stop using it. According to one study, as of 2005 some 80 percent of all local currencies launched since 1991 were defunct. Another common pattern is that local money accumulates in the hands of a few idealistic local retailers that are willing to accept it and who cannot find ways to spend it. Finally, even the most well-established currencies such as Ithica Hours and BerkShares account for a tiny proportion of economic activity in their regions.

While I haven’t identified one single culprit for the disappointing results of local currencies, I have noticed a number of contributing factors. One is that most local currencies are in effect US dollar proxy currencies. With BerkShares, for example, people buy the currency at 95 US cents to one BerkShare and spend it at a local merchant, who then exchanges it back for US dollars at the same ratio. Essentially, the system amounts to a general 5% coupon for local stores, almost a sales promotion. It doesn’t increase the money supply or put money in the hands of people who are left out. The BerkShares are backed fully by US dollars, and derive their value from their association with the dollar.

A second problem with all local currencies that I know of in North America is that they do not have the recognition or support of local government. Historically, it is rare for money to circulate widely if it cannot be used for the payment of taxes or other government services, or absent that, it must at least have the backing of a dominant economic entity (such as the coal mine that issued Germany’s wara). On the other hand, currencies that do have local government support, such as those issued by Argentinean provinces in 2001-2, are quickly accepted as a medium of exchange.

This is a problem in the U.S., because local and state governments do not have the constitutional authority to issue currency, nor are they likely to be bold enough to dabble in something as radical as alternative money even if this legal hurdle can be overcome.

These and other considerations lead me to propose an alternative model for local currency. Its design features include:

– Unlike US$ proxy currencies, it actually increases the local money supply
– Its value is based on local production and can float in relation to the US dollar
– It is issued in a way that gives access to people who are partially shut out of the dollar economy
– It presents legal opportunities to bring in local government participation
– It offers ways to circulate goods and services that are unsellable (for US dollars) and employ people who are otherwise unemployable (for US dollars)
– It is framed in a way to be non-threatening to civic and financial powers-that-be

Currency Issue and Mechanics

The basic principle is to back the currency with local goods and services. It originates with an issuing entity, which could be a non-profit organization, a community association, or (in a different legal context) a local government. For convenience (and humor’s) sake, let’s call the currency the loca. The issuer can create it in two ways: it can lend it into existence, or it can spend it into existence. The first corresponds to how central banks create money; the second to how governments create money.

To spend money into existence, the issuer simply buys coupons or gift certificates for local goods and services from a local merchant. For example, the issuer might approach a barbershop and buy 50 free haircut certificates for a total of 1,000 locas. This is the moment that money comes into existence. It is created electronical or as paper notes, and backed by the haircut certificates, which simply go into the issuer’s vault. Now the barber has 1,000 locas that he would like to spend. Meanwhile, the issuer has also bought certificates for ten bushels of apples from a local farmer (perhaps specifying October redeemability) for 600 locas, certificates of ten hours of plumbing service for 500 locas, and so on, ensuring that each issue corresponds to goods or services of rough equivalency. (In the above example, each loca is used to buy one dollar’s worth of goods, but this will change over time.)

The backing of the currency consists of these certificates. Anyone can redeem their locas for any of them at any time, giving users an assurance of the currency’s value. However, because it is this perception of value that makes something into money, in practice few of the certificates would actually be redeemed for loca. Just knowing you could redeem them is enough to make the currency valuable, to induce merchants to accept them as payment for goods and services. And the more widely accepted the currency is, the more compelling is the perception of value. The backing just gives this process a little boost. Merchants can accept locas in full confidence that even if they can’t use them to meet payroll, pay utilities, or hire contractors, that they are still redeemable for something of value. But because other people are subject to the same encouragement, they will be able to use locas to meet a portion of their concrete business expenses.

Once a merchant has been bought into the system, she will have another incentive to accept locas as payment: if she does not, people with locas who want those services can redeem them for the backing certificates and get the haircuts, or whatever it is, for “free”. Rather than have to redeem free haircut coupons that it cannot use as money, the barbershop would much rather receive locas that it can use as money. By the same token, the barber will want to sell haircuts for no more than 20 locas, otherwise, people would want to use the coupons instead. In practice, therefore, most of the certificates will never be redeemed unless for some reason the barber wants to exit the system, in which case she will likely end up having to make good on the 50 haircuts. The initial currency issue, then, operates as a zero-interest loan that need only be repaid if someone exits the system.

By backing the currency with the promise of future goods and services, the money supply (of dollars plus locas) can increase without the danger of increasing the money supply beyond the real economic base.

Backing with local goods and services rather than US dollars creates price stability. If the dollar experiences inflation and the dollar price of a haircut rises from $20 to $40, and the price of a bushel of apples rises from $60 to $120, their price in locas remains the same, because the currency is backed by these items and not by dollars. In this scenario, the exchange rate would rise to two dollars to the loca.

Over time, the relative value of the backing goods and services might change. The system allows for this in an elegant ways, which I will describe in another paper.

The issuer can also lend locas into existence by extending loans to institutional startups that are not secured by a pledge of goods and services – an after-school community center in a low-income neighborhood, for example. The organization or business could repay the loan by accepting locas for its services. Alternatively, the loan could take the form described above: the issuer could simply buy coupons for services to be rendered after such-and-such a date. As you can see, the boundary between a loan, a grant, and a claim on future goods or services is blurry.

Involving Local Government

Municipal governments can enjoy the benefits of this sort of currency without having to issue it themselves. The issuer could issue locas to the city government for public transport tokens, tax vouchers, parking vouchers, or various services provided by the city. Of course, it is unlikely that a city government in America will accept local currency for payment of taxes any time soon, but any endorsement at all from local government vastly enhances the perception of value that makes money money.

What would government spend the locas on? Well, today cities everywhere are cutting back on basic services because there is no money to pay for them. Parks, libraries, police and fire forces are being cut back. Some of these might be replaced by grass-roots managed institutions as part of an alternative economy. They could go to

– Volunteers staffing semi-official “people’s libraries”
– Safety patrols composed of retired police officers, ex-gang members, and mediation specialists who act as a complementary police force in areas where cutbacks have left residents with insufficient police protection (or where the residents don’t trust police to begin with.)
– Renovation of derelict properties
– Volunteer-run day camps, big brother/big sister programs, and tutoring programs
– Park maintenance and patrol volunteers
– Homeless shelter and soup kitchen volunteers

Initially at least, in most cases the locas would be given not in lieu of salaries, but as tokens of appreciation for volunteers, a way to get them involved in the local economy and meet some of their needs even if they lack the professional skills or opportunities to find paid work. It provides a way for city government to get things done in an era of vanishing budgets and to strengthen the fabric of civic society. It would also reinforce a positive image of locas – everyone would know that many of them come from people being of service to society.

Occupation for the Unemployable, Utilization of the Unsellable

Many of the above municipal government uses of locas do more than convert existing dollar transactions into a reliable local currency. That is a worthwhile goal in itself, but the system I describe also has the potential to deploy economic resources – labor, land, materials, and so forth – that would otherwise be idle.

Any idle resource is an opportunity to give value and utility to the loca currency. For example, vast amounts of food in our society go to waste (even as millions go hungry) because it is unsellable and lacks non-monetary avenues of distribution. Such food items include “seconds” from the farm, unsold supermarket food that goes into dumpsters or trash compactors, unsold restaurant food, and so on. Unsellable in ordinary markets, it still has value. A market could be arranged to make it available for locas, further contributing to the currency’s utility.

Another example of an idle resource is real estate. Most cities have thousands, even tens of thousands, of abandoned buildings and vacant lots. Unsellable for dollars, they could be incorporated in a local currency in various ways: sold by the city for locas, renovated through combined dollar/loca loans, used as shelters or halfway houses, rented out for locas, etc. Properties that would otherwise be uneconomic to renovate might be economic if part of the renovation cost could be replaced by loca-compensated labor and materials, the locas lent into existence backed by future rental vouchers.

How to Spin It

The considerations outlined herein distinguish the loca from normal currency and allow a narrative in which it does not compete with US dollars. I have called it a currency, but for political purposes it should probably be called something else: “community coupons” or “civic coupons”. The story line should be something like, “The loca civic coupon circulates as a token of appreciation to reward contributions to the community, to foster urban renewal, and to build loyalty to local businesses.” In presenting it to local authorities, there is no need to point out that it is actually a form of money. Rather than fearing the opposition of existing economic powers, we could aspire to their support, appealing on non-ideological grounds of “helping needy communities” and “giving opportunities to the disadvantaged.” Another point of appeal is that it allows the city to provide needed services without requiring new taxes or revenue. It is a lot to expect government officials to swallow to request their support for an alternative money system, so we should be careful in how we present the idea.

Associating the loca with contributions to society will also help create a positive image for those who use it. Unlike food stamps, which carry stigma, people will be proud to use currency that arises from local business and civic contribution.

Another advantage of not calling locas “currency” is that it might offer tax advantages. The IRS has ruled that transaction in complementary currencies – even barter – are subject to income tax. Presumably, they are subject to sales taxes as well. But what if the things being exchanged have no (dollar) economic value? In fact, the IRS has also ruled that non-professional services are not taxable. If I am a doctor and accept $100 worth of apples for my doctoring services, it is taxable, but if I help my neighbor mow her lawn in exchange for apples from her tree, it is not. Notice, now, that many of the example I have given of how locas might circulate involve things of no dollar economic value or reduced dollar economic value. My suggestion is to create a complementary system of circulation to go where dollars do not touch. Of course, there will be some overlap with the dollar economy – practically speaking, locas will end up having a value measurable in dollars. But by sticking to the language of community, voluntarism, and so forth, it will be possible to make a strong case that loca transactions should be tax-free. In the beginning it won’t be an issue – it can slide under the radar – but it might become important as the system scales up.

Someday, maybe not too far off, the dollar-based financial system will experience another crisis more severe than that of 2008. Cities could go bankrupt en masse and, as in the 1930s, will have a strong need for alternative means to provide services. When that happens, the loca will be there, waiting in the wings.

Some Variations

I have so far described a local currency system not pegged to the US dollar. There are also advantages to starting with a guaranteed dollar equivalency, as with BerkShares. In that case, the barber would back the currency not with 50 haircuts, but with $1000 worth of haircuts. Locas could be issued that way, or people could simply buy them for dollars from the issuer. Merchants could also redeem them for dollars, thus assuring them that they have nothing to lose by accepting locas.

 This makes the loca similar to any proxy currency like BerkShares, except that the local money supply expands when new locas are issued in return for merchant coupons/certificates. Furthermore, the dollars accumulated when people buy into the system by purchasing locas could also be lent out within the community as microloans or to fund projects that require US dollars.

 There are several disadvantages to this variation. For one, if too many people try to redeem their locas for dollars, there won’t be enough dollars. The issuer will have to redeem them for the barber’s certificates instead. This problem exists even if no US dollar loans are made, but worsens if they are.

Another disadvantage is that, pegged to the dollar, the loca would suffer from its inflation or deflation, providing no insulation from external economic fluctuation. Another variation to look into, then, might be to offer locas at a floating exchange rate determined by the market, similar to what banks do today. So for example, initially the issuer might sell locas for one dollar and buy them for 98 cents; after a few years of dollar inflation, it might sell at $1.50 and buy for $1.48. In this case, loca issue would still be backed by pledges of actual goods and services, and not dollar values of goods and services. It would behave much like a sovereign currency. The only disadvantage here would be the loss of the tax and image benefits of having it dissociated from the dollar.

We are entering a time of major flux in the world’s money system, a time when we need to experiment with alternatives and figure out what does and does not work. Nothing created out of whole cloth in front of someone’s computer (such as this proposal) is likely to work without going through a long process of trial-and-error, evolution, and the integration of real-life experience. What I have described must be adapted to conditions on the ground that are unique for each locality. In all likelihood, it will be a step toward something unimaginable today. At the very least, this and all the other local currencies circulating today puncture the belief-bubble that was oblivious to any alternative. The money system as we know it is not the only possibility. Let the experiments proceed!


About Charles Eisenstein

I am the author of The Ascent of Humanity and Sacred Economics. I am also a public speaker and member of the faculty of Goddard College.
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20 Responses to Design and Strategy Principles for Local Currency

  1. benjamin says:

    On a practical level, my concern would be about debt destruction. What happens if a service provider gets ill or dies after issuing coupons for loca? What happens if a business goes bust before the coupons are redeemed? In these cases the additional credit (loca) remains in circulation, but the value of debt (redeemable coupons) decreases over time. This could be compounded if the US debt collapse picks up speed.

    • I’m glad you mention this! This is a valid concern, and is part of a larger topic that I didn’t get into in this short article, which is basically how to regulate the money supply. There are several aspects to it, but the part that most directly relates to this concern is that the currency should be subject to demurrage to reflect the natural “decay” of whatever backs the currency. Part of the problem with money today is that (unlike anything in nature) it does not decay over time. The currency should be subject to a decay rate of a few percent annually to compensate for service providers going out of business, etc. Of course, new providers will be coming on line all the time, so in the early growth stage this will not be a problem. But unless we predicate the success of the system on endless growth (as with the dominant system today) there has to be some built-in decay mechanism like demurrage.

  2. Zay says:

    Love it, Charles! Reminds me of a local, more visceral & relevant, version of backing a currency with a “basket of commodities.” What steps does the issuing institution take if the barber goes out of business though?

    • Jay Bazuzi says:

      @Zay: To put it another way, what happens when the thing we use to back a currency fails? I don’t know the answers, but I suspect that if the barbershop looks like he’s going to go out of business, the community is motivated to take steps to help the barber through tough times. If he’s just retiring, he could sell his “debt” to another barbershop.

  3. Charles Eisenstein:The IRS has ruled that transaction in complementary currencies – even barter – are subject to income tax.
    Jct: Actually, if you read Edgar Cahn’s Timedollars book, he reports that several states got the IRS not to tax complementary currency trades that are not part of one’s profession. Othewise, there would be no benefit for a young man to mow an old lady’s grass for a pie, both would owe tax, so it wouldn’t get done. The states argued that since their helping each other would reduce demand on the states to provide those services, the IRS should not deter such trading. And the IRS agreed! Hope it hasn’t changed.

    • That’s right, transactions are only subject to income tax if they are for professional services. I think that is true even for US$ currency too. Small transactions that aren’t part of a business or profession are not subject to income tax — I don’t think. That’s what I was told once by an attorney, but don’t quote me on that!

  4. matslats says:

    This is called ‘self-issued’ credit. It has been shown to work for corporations like railways and isolated small businesses. Running a whole currency ecosystem with many businesses issuing their own credit creates some complications, because the locas will vary in value according to who issued them. So to make the currency useful, each issuer needs to be regulated and all credit needs to be equally guaranteed accross the whole system. This is what Bernal Bucks is doing, behind its plastic sheen.

    • What I’m trying to describe here is slightly different from multiple issuers. There is only one issuer, who makes the decisions you refer to. The issuer creates (by fiat) new currency and gives it to the businesses that it wants to include as currency backers. Of course, businesses could also petition to be included. In practice it is very much like a zero-interest loan issued on the security of the goods and services that the borrow produces. Read the article again — it isn’t multiple issuers.

  5. Stephanie Rearick says:

    I really like this! We’re about to start experimenting with something like it here in Madison, Wisconsin – the Dane County TimeBank and Madison Hours local currency (which has a price-based mutual credit system) are about to collectively experiment with how to refine/revamp/make actively complementary the various tools we’re already working with here. And we’ll be doing it in a platform of simultaneous experimentation in lots of different geographic locations and interest areas, much like the kinds of projects you’ve referred to (community justice, energy efficiency, urban gardening, food and housing distribution, wellness services etc). You can read more about our plans at We’ll be launching the experimentation/sharing/learning platform, Build For the World, very soon. I’ve been planning to contact you (C.E.) about it anyway so here’s a start. Anyone reading this and interested in participating in or following the project, go add your contact info at the site.

  6. Eduard says:

    Charles, I like your idea. The mutual credit systems work like your proposals, thought. They are not currency proxys and fully backed by products and services of the networks. Probably works better in a commercial credit circuit but we can improve it in our communities.
    Sorry for my english. Your article is very useful to me.

  7. Humaniterrian says:

    Really like the idea of measuring in local basket of goods, using gift certificates. Measuring in hours for many services is a natural fit, and there are lots of others like haircuts or oil changes that can be sold in this way. But what about for other goods and services, like the local hardware store, a restaurant or a dentist when you don’t have a clear, easily definable product or service, or one that varies based on the purchaser at the point of sale. Doesn’t using dollars make sense for some sectors, ending up perhaps with a mixed basket of goods and services with some valued in UNITS and some in DOLLARS, despite the fact that you’d lose the advantages of constant pricing for those items measured in DOLLARS, but overall the currency would have greater protection from inflation than one entirely valued in national dollars.

    • People could set any price they want in dollars or units. The set equivalences are only to establish the value of the currency, so for that purpose you would want to use things easy to quantify and of universal value, or near-universal. It is up to the merchant to decide how many UNITS or dollars to accept.

  8. benjamin says:

    One other concern that you might have already addressed in a longer writing of this subject: What if some one issues coupons for something no one actually wants, and therefore will never be redeemed? Could be for a highly specialized service (rocketship cleaning) or for something that they are really not good at (a horrible dancer offering dance lessons). I assume it would be up to the issuer to determine whether the coupons were likely to be redeemed before issuing the currency. I also assume the business selling coupons would have to have a track record of having customers that actually want what they are offering and that the value of the coupons must be less than or equal to the value that they would already be charging for the service in $USD. Who then becomes the final regulator to decide a) whether the business is selling coupons in good faith that will actually be redeemed, and b) what the loca value of the coupons should be?

    • That’s right, it would be up to the issuer to decide what to include among the currency backing. In principle, it should prefer business that are the bedrock of the community, and use a general, representative basket of local goods and services. But in the beginning, enthusiasm is the main qualifier!

  9. Michael says:

    Another important issue worth addressing in the establishment of a community currency system is the organizational structural. As you correctly point out, Charles, at the start of your article that after the founders “burn out” CC’s begin their fade into obscurity. Because most CC’s are formed as non-profit entities, the founders typically are volunteer Board members, and usually there is little money to hire staff. One innovative group on Vancouver Island, British Columbia have opted to set themselves up as a an ad hoc “development group”, with businesses being asked to additionally contribute $100 per employee as a donation to the group, who then split it up according to a self and peer evaluate of contribution and needs. While on the one hand they may not have the same level of credibility as an established community organization, on the other hand they do at least have a ready group of people who are able and available to promote the concept. They can then in turn use the local money at participating businesses, or sell it for cash as they like. There is a bit of chicken and egg here. If CC’s aren’t financial sustainable themselves, how can they be expected to proliferate, at a time when the game has been rigged to force people to work and pay or starve?

  10. christroutner says:

    Hey Charles,

    Are you familiar with BitCoins? I’d be very interested to hear your idea on how this money system could be adapted to your example of a ‘loca’ currency. Where are the incompatibilities (if any)?


    Chris Troutner

  11. אסף says:

    Hi Charles,
    Do you know of any attempt to implement the model you describe here? Are there any other resources i can find? We are in the research phase of starting such local currency in Tel Aviv and we find this model very exciting.
    Keep the amazing work you do!

  12. The rises and falls of so many local currencies, like so many bubbles on a massive economic piss pot, and the fact that even the most successful among them account for only a tiny proportion of economic activity in their regions, is not a puzzle at all. And there really is a single culprit.

    A constantly debased USD is based on fiat and trust, while most complementary currencies are based on Fiat Trust On Crack! Whether they are lent or spent into existence makes no substantial difference. All currencies are evidences of expectation and ENTITLEMENT. And there’s nothing wrong with that. But you can’t say “backed” by goods and services if there is no direct, reliable private entitlement to the currency holder. That is akin to the bizarre absurdity among some economists who will declare that USD is somehow “backed” by GDP. There is ZERO connection between the crumpled dollar in a waitress’ coffee can and the mortgages on houses in a nearby gated community, the assets and beneficial ownership to which she has ZERO access. The only connection is that the value of her crumpled dollar was DILUTED so that all those mortgages could be made possible by a banking system that created dollars out of the thin air to compete with hers.

    You wrote: “The issuer can create it in two ways: it can lend it into existence, or it can spend it into existence. The first corresponds to how central banks create money; the second to how governments create money.”

    That is a false choice, and NOT the only way an issuer can “create” currency. You left out the most historically significant and fundamental creation mechanism of them all, and that is that an issuer can receive a TANGIBLE ASSET (already in existence) and issue a receipt to the owner of that asset, the TITLE of which can circulates as money. That does NOT have to be gold or silver either. It can be aluminum cans, copper wiring and other scrap metal. As long as title (ACTUAL PRIVATE ENTITLEMENT) is issued, and not to more than one person at a time, the subsequent receivers of that receipt have all the assurances they need, because if all else fails–if all other promises are broken–that currency holder is not left holding anyone Broken Promises Bag. S/he can at least lay claim to that scrap metal…assuming THAT promise was not broken.

    If there is not a 1:1 entitlement, with no counterparty or contradictory claims, we can preach and extol the virtues of “In We We Trust” all we want. The underlying fundamentals are going to dictate the Very Predictable Results, because the hard truth — the fact that many just cannot swallow, let alone embrace — is that only a portion of the population is trustworthy to begin with, and there is NO WAY to sort them out in advance. And out of those who are trustworthy, only a portion of them have the good fortune to speak for tomorrow (best laid plans and all). So your trust-based, promise-based currency is only as good as its thousands upon thousands of weakest links…which is why it is no surprise at all that an idealist merchant (the strongest link, as she is THE ONLY ONE SELLING TANGIBLE GOODS, NOT PROMISES) ends up with a stack of scrip she can’t sell…until finally even she has to give up, and the entire system goes predictably defunct.

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