What Is Community Currency?

Community currency is a form of paper scrip issued by private entities or community organizations 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 promoting local ownership of businesses and capital. Community currency is sometimes also referred to as local currency.

Key Takeaways

  • Community currency is a form of paper scrip issued by community organizations or other private entities for use at local participating businesses.
  • Its principal goal is to keep money circulating within the local community.
  • Residents can exchange dollars for community currencies at local exchanges and sometimes bank branches at a discount.
  • Business owners who accept community currencies may have to create separate accounting methods to deal with different taxation guidelines.

Understanding Community Currency

Community currencies consist of physical scrip, tokens, or sometimes just as accounting entries which can be used a money substitutes for transactions among those who agree to accept and use the community currency. The currency is usually issued by a local organization, nonprofit, or similar private entity.

Residents and businesses exchange legal tender for community currencies at the issuing organization or at a local bank that chooses to participate. Because the scrip's use is limited compared to regular cash, these currencies are usually offered at a discount. For example, $1 worth of community currency might be bought for 90 cents.

Business owners who accept community currencies may have to create separate accounting methods to deal with different taxation guidelines. While this adds extra work, they may do so expecting increased business as a result of showing commitment to their community.

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 nine branch offices of three 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 scrip 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 among the rare success stories. Most attempts at creating "local dollars" fall through because they fail to achieve a critical mass of issuance and acceptance by businesses. They succeed when they gain widespread use—the towns that have run successful programs have hundreds of small businesses that agree to accept the currency. The main disadvantage of community currencies is the challenge that achieving this acceptance presents.

The key characteristic of any money is that it functions as a generally accepted medium of exchange. Community currencies that don't win general acceptance locally won't function well as money. By their nature, community currencies face a major impediment to wide acceptance because they are intended to be used locally. Allowing them to leave the community and circulate in the larger economy would defeat their purpose. In a modern, interconnected economy where people commonly travel and do business with a diverse array of businesses inside and outside their local area, community currencies can't take on the full function of money.

The advantage and goal of community currencies is to keep ownership of local capital goods, fixed investment, and businesses in the hands of local residents, helping them instead of outsiders, foreigners, and large, impersonal corporations.

While business owners may lose money on some purchases due to currency discounts, they gain with repeat business. The effect has been to save some companies from closing, and perhaps even stall the growth of big-box retailers like Walmart Inc. (WMT) and Best Buy Co. Inc. (BBY).

However, there is little to no measurable evidence that community currencies actually have much impact on regional economic performance or development patterns. One study showed that in regions that are heavily dependent on seasonal economic activity and seasonal credit, and are thus liquidity constrained in the off-season, community currencies may have the beneficial effect of smoothing out the local supply of money and credit for general commerce in the local area.

Regional and local policymakers find promoting community currencies a convenient way to show their support for their constituents, while encouraging small business and a community atmosphere. At the same time, they don't want to alienate big box stores like Walmart and Home Depot Inc. (HD) which may employment options and sales tax revenues. Balancing economic growth initiatives that promote small business-friendly policies with tax incentives for national chains may be tough. Because community currencies usually fail to gain much acceptance or have a substantial economic impact, policy makers can promote them in order to "score points" with local voters without actually threatening the interests of large corporate retailers or their political backers.

Are community currencies really money?

In general, no. Though they may be treated as money substitutes on a limited basis in their communities, they don't fulfill the economic function of money as a generally accepted medium of exchange. For legal and tax purposes they aren't legal tender and may be treated as a kind of barter or in some cases possibly as a security.

Do community currencies have a large economic impact?

No. The measurable economic impact of community currencies is minimal to nonexistent, even for those that do gain a measure of local acceptance. However, they are documented to be somewhat effective at promoting social goals such as a sense of community and an us-versus-them attitude toward outside economic interests.

Should I use a community currency for my shopping or business?

While community currencies have few documented economic advantages, and significant, inherent disadvantages, they may be an effective away for you to signal your solidarity with the local community or enmity toward outside economic interests. If these goals are compatible with how you wish to be seen or how you want to brand your business, then you should consider adopting a community currency.