Feature Story: Local Money

Our current economic system, with its paradoxical idea of permanent growth based on limited resources, is approaching difficult times. Yet we can take some steps to prepare ourselves, and one of them is to become familiar with different kinds of money.

The first thing we need to do is to shake off the idea that only governments can create money. Not true. Anybody can create money. Money is just a promise to redeem something, to give the person holding the banknote something of value.

In the past, money was backed by something solid like gold, cowry shells, or even tobacco. But the introduction - and extraordinary spread - of compound interest, debt-based, fractional reserve banking, and the disconnection from the Gold Exchange Standard in 1971, has allowed an explosion in the growth of money supply.

Yet this money is neither stable nor available. It clearly cannot continue to grow forever and when confidence collapses in a major currency, a cascade of defaulting will likely result (called 'systemic risk' in banking circles). The lack of available money to most of the world's people is disputed by almost no-one. In a world where more and more people live in cities, being without money means being without food, shelter, health, and finally life itself.

What if things were different? What if the piece of paper - or data embedded on a smart card - was a local currency used to buy locally made things from local people?

Such currencies already exist. Some 9,000 alternative currencies are currently in circulation all over the world. One of the oldest is the Swiss Wir, introduced in 1934 to fund small businesses through bartering. The Wir has run parallel to its much older sister, the Swiss franc, ever since. Used by architects, undertakers, chimney sweeps and many others, the Wir illustrates one of the great advantages of local currencies: they confine economic activity to a limited area, and help protect people against some of the worst effects of the global market. The Wir has spawned imitators in rural Scotland and Ireland, as well as in Madrid and Amsterdam.

In the Comox Valley of British Columbia, the Local Exchange and Trading System (LETS) has flourished and become the model for similar systems in Europe, Australasia, Africa and the Far East. LETS currency is number money - it is entered in a ledger (either electronic or paper). It is created when members of the system go into debt to one another, and deleted when they go back into the black by providing goods or services.

In some systems, particularly those that focus on caring, money is backed by time. Time banks are now a major way of reviving social capital--the glue that holds social relationships together--in depressed neighborhoods in China, Japan and the United States. Edgar Cahn's Time Dollars are used in many countries. In another example, time put in by working for the community becomes credit toward education. Boulder, Colorado lets people pay certain legal fines with time credits. The London Time Bank has evolved a sophisticated version of this principle.

If this all seems a bit unreal, you can get a sense of how local currencies work by playing this online game.