Occasionally, you come across an idea that strikes you as rather odd. Then, after you think about it for a while, considering the possibilities and ramifications, it starts to make more and more sense to you. Such is my reaction to the concept of local currencies.
In case you haven’t heard (and don’t care to follow my link to read for yourself), the basic idea is that local currencies are alternative systems of money issued by a town, city, or county, which serve as legal tender within that area. The goal is to draw more business to local shops and manufacturers; by creating a currency that is only accepted by your neighbors, you can ensure that they will spend it locally, rather than sending their business across the country or the world. All though it might seem odd, it’s legal, provided that the local currency is treated as taxable income when reporting to the IRS and that the currency is in the form of bills, not coins.
How would such a system work? In the case of one of the most successful systems, the BerkShares system in Berkshire County, Massachusetts, you can exchange $95 in greenbacks from the US Treasury to get $100 in BerkShares, which can be spent at a number of participating businesses in the area. As a result of the exchange rate, you get a nice 5% discount on all your spending, Furthermore, since the only place the businesses that take your BerkShares can spend the money is at other businesses who accept BerkShares, the money will continue to circulate through the area, generating more economic activity in the region. It seems like a win-win, situation, right?
Well, not quite; there are a few problems with local currencies like BerkShares. First, while that 5% discount is certainly nice for the consumer who initially exchanges the money, when a currency with a built in discount like that is re-exchanged for dollars, the discount will decrease the amount of the final recipient’s receipts by that same amount. As a result, some businesses choose not to accept local currencies. Which leads to a second flaw: unlike dollars, which are accepted everywhere in the US, local currency use is limited, both by the geographic area in which it is used and by which businesses in that area will actually accept it. Finally, given the time and expense of running a parallel currency system, many of the attempts at creating a local currency crash within a short period of time, potentially complicating the financial situation in the area.
So what should you do if a local currency is proposed in your area? Well, if you’re primarily a consumer, you should probably rejoice; provided there is a discount built into the exchange rate, a local currency is akin to getting a permanent coupon for every business in your area that opts to participate. If you are a business owner, the considerations become more complex. If you can get most of your supplies locally from participating suppliers (and perhaps pay your staff in the local currency, as well), then accepting the local currency will likely have little impact on your bottom line; you’ll pass off the bills (and the adverse exchange rate) to your suppliers and staff. If you have to do a lot of dollar denominated purchases, though, you’ll need to balance the exchange rate from local currency back to US dollar with the possibility of getting increased business. What choice you make will depend on your own situation.
As for me, I think it’s an interesting concept, and if a local currency arises in my area, I’ll be sure to participate and report back the results here. After all, I want to give such a system a fighting chance. (Plus, I wouldn’t mind snagging a nice discount in the process!)
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