Local currency is a members club mutual credit electronic system. The participants sell to each other on trust, and the organizers keep track of the debt balance. As a result, the mutual trade level grows as well as the income, while ordinary cash flow is not diverted for these purposes.
According to Forbes, there are more than 100 local currencies in Europe. They say that a special resource center has registered 289 local currencies all over the world. There are approximately 1500 money systems of this kind in the world with an annual turnover of 700 million USD. There’s nothing new in the system. It has existed before and was very popular in Europe up to Napoleon Bonaparte times for more than 1000 years and is now referred to as a system of multiple currencies.
How Local Currency System Works
Local money does not perform the savings function (usually) as most of them (except for WIR) don’t imply interest charges. It mainly serves for exchange and payment settlements when one trades some goods or services ordinarily of a low cost. It is easy to use for local small businesses like washing a car, but it’s not suitable for higher cost deals like buying a house. Actually, even paying natives requires some kind of proportion between local and national currencies so that the taxes could also be paid.
The system functions without paper money or generated electronic algorithms (like bitcoins). It doesn’t need loan notes or other written obligation certificates. It is only a mutual credit system. Every company, entering the club, starts with a zero account. On selling to another company, it makes a deposit on its own electronic account. The account may be lead in USD or euro or any other national currency, but the money on the account cannot be converted into the real currency anyway. It can only be spent on buying something from the other members of the same network.
One can buy on trust, but the limit is established by organizers based on what one has to offer oneself to others. Though the remainder does not draw any interest, the debt also does not increase over time – it can be redeemed by selling something to other members with positive balance accounts. The membership costs something on yearly basis, however.
In such a system, money works as a media or information holder on the market. This old financial system may be a good option for crisis times because the debts don’t grow and are not restructured.
Why Local Currencies Are Important
Even if you don’t plan to take part in the club, the mentioned money system influences your life. Some positive or advantageous points:
- Local currencies help to develop economy locally. They stimulate local trade, and the income is left in the region where you buy products or services of your neighbors. Though the amount of sales does not increase, but the transactions remain regional, thus increasing the turnover speed.
- The trust between the participants grows. Strong networking is created.
- Some sales don’t need banks, reducing their costs. The banks don’t receive their portion of income of course, but who cares for them?
- Serve as a means for import substitution. This is especially important for some developing countries in times of crisis. But it only works regionally – the effect is not nation-wide.
The Swiss WIR is perhaps the most famous local currency as well as the most successful one. In the times of Great Depression, several businessmen agreed to create a special system of mutual credit that was aimed to help trading without franc flow. WIR started in 1934 with 16 companies whose owners knew each other very well. Since then, it has grown 4000 times (up to 62000 members) with 6.5 billion francs turn-round. It doesn’t, however, interfere into franc circulation, as people need different currencies for different purposes. The companies involved with WIR mostly work in construction, trade, hospitality, and business services.
There are lots of other local currencies in the world now. If you have a good case for any of them, feel free to share your experience here.