What Is Community Currency?

Community currency is a form of paper scrip issued at the county, town, or community level for use at local participating businesses. Its main goal is to encourage spending at local businesses as opposed to chain or "big box" stores, thereby ensuring that capital remains in the community. Community currency is sometimes also referred to as local currency.

Key Takeaways

  • Community currency is a form of paper scrip issued at the county, town or community level for use at local participating businesses.
  • Its principal goal is to keep capital circulating within the local community.
  • Residents can exchange dollars for community currencies at local bank branches, often at a discount.
  • Business owners who accept community currencies may have to create separate accounting methods to deal with different taxation guidelines.

How Community Currency Works

Residents can exchange dollars for community currencies at local bank branches that participate in the program. To encourage their use, community currencies are usually offered at a discount. For example, $1 worth of community currency could be bought for $0.90 U.S dollars (USD).

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

Example of Community Currency

One of the most talked about community currencies in circulation in the United States is BerkShares, launched September 2006 in the Berkshires region of Massachusetts. Federal currency can be exchanged for BerkShares at sixteen branch offices of four local banks. Today, over 400 local businesses accept the currency.

BerkShares are offered at a slight discount to incentivize usage. In shops, $1 equals one BerkShare, yet 100 of them can be bought for $95 of federal currency.

Businesses that accept BerkShares can use them to purchase goods and services from other participating firms, pay salaries and support local non-profits. In the case that they have too many, it is possible to exchange them back at the same rate they were acquired with, without paying a fee.

BerkShares are also used to pay out change to customers. However, because there are no BerkShare coins in circulation—the currency is only available in 1, 5, 10, 20, and 50 denominations—it is often necessary to give change in dollars.

For now, the currency is pegged to the USD exchange rate. However, some in the community have discussed the possibility of pegging its value to a basket of local goods, arguing that this would help to protect locals from the volatility of the U.S. economy.

Advantages and Disadvantages of Community Currency

BerkShares is one of a select few success stories. 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 Walmart Inc. (WMT) and Best Buy Co. Inc. (BBY).

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.

Regional and local policymakers often find themselves toeing the line, encouraging small business and a community atmosphere while doing their best not to alienate and frustrate national retailers. Common big box stores such as Walmart, Home Depot Inc. (HD) and the like often offer much-needed employment options and sales tax revenues. So it becomes difficult to balance economic growth initiatives that promote small business-friendly policies with tax incentives for national chains.