A Local Currency is one that is accepted in a certain geographic region. This is usually in a smaller, finite area. There are regional currencies which covers a wider physical range.
The main idea behind a local currency is to stimulate economic development by providing a resource for local businesses and individuals to use. As the currency circulates through the local economy, more commerce takes place. The idea is for merchants to accept the currency as payment for local goods and services. Obviously, the faster the velocity of money, the greater the economic impact.
These currencies are not legal tender and have no direct path to conversion into the national currency. They are not affiliated with any exchanges meaning they operate in isolation. Currency trading is not the goal nor is it even a characteristic. The aim is to have the currency used for goods and service from local businesses.
We have many instances throughout history where local currencies arise. Often this happens during times of war or extreme economic turmoil. During the Great Depression there were many of these currencies in different regions of the United States.
A local currency is considered a complimentary currency. It is not designed to replace the one at the national level. Instead, it compliments trade at the local level.
Benefits of a Local Currency
There are many reasons why local currencies are created. Whatever the reason, that are certain benefits that are drawn from having one.
- Local currencies tend to have negative interest rates with them. This means there is no benefit to holding onto them. The result is they circulate faster than national currencies, achieving a greater velocity of money. Here we can see how the local impact is enhanced.
- These are often created when a lack of local purchasing power is present, resulting in the underutilization of local economic productivity. A local currency addresses this problem directly, thus stimulating demand. The lack of inflation is not a problem since the increase in economic activity comes from the shortfall in economic capacity.
- Local spending means local benefit, drawing from other parts of the surrounding (even national) areas.
- They can be used to address local issues and democratize different services or organizations. For example, they could be tied to local environmental issues and paid for addressing them.
The digital age makes the idea of local currencies a bit less viable. Since the concept can be taken to the Internet, local currencies can fall under community. Hence, those interested in the environmental concerns can utilize the currency yet do not have to physically be in that area. We can see these currencies show up as virtual.
Local currencies do not fall under the central bank system. By the same token, they are usually not accepted by banks unless a local one decides to provide financial services for the currency.
The money is very limited in its scope and reach.