DEFINITION of 'Community Currency'

A form of paper scrip issued at the county, town or community level for use at local participating businesses. The theory behind community currencies is to encourage spending at local businesses as opposed to chain or "big box" stores. Local residents can exchange dollars for community currencies at local bank branches that participate in the program, usually at a discount to encourage their use; for example, $0.90 buys $1 of community currency.

Business owners who accept community currencies may have to create separate accounting methods to deal with different taxation guidelines, but this is considered an acceptable tradeoff for increased business from local customers.

BREAKING DOWN 'Community Currency'

Most attempts at creating "local dollars" fall through because they fail to achieve a critical mass of issuance and acceptance by businesses. Their success is generally in their ability to gain widespread use - the towns that have run successful programs have hundreds of small businesses that agree to accept the currency. While business owners may lose money on some purchases due to currency discounts, they find that customers tend to give them more repeat business. The effect has been to save some companies from shutting their doors, and maybe even stall the growth of big box retailers such as Wal-Mart and Best Buy.

Studies have shown that communities who try this program are able to keep more money circulating in the local economy, whereas money spent at big box stores is much more likely to leave the area altogether. Community currencies, if run with strong leadership, can also instill a sense of community pride that further aids in supporting small business efforts.

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