Local Currency

A form of money other than the national currency, set up and managed locally. The reason for establishing a local currency at present is that it enables local producers, handicapped by high costs, to compete more effectively with efficient national and international producers. The intention is to give them a better chance of making a living, providing a needed local service and staying in business.

In a thriving market economy, such protection is not generally considered a good idea. The discipline of having to be competitive keeps businesses efficient. But there is more that businesses, especially small ones, can do for the local community than simply sell goods at the lowest possible price. They can sell locally-produced goods, services and food, for example; and they can help to supply jobs. They have the advantage of being in easy walking distance, and they can be centres of local conviviality. Many small, less-efficient businesses survive, in spite of the higher price of their goods, because benefits such as these inspire loyalty from their customers, and local currencies have for a long time been discussed and tried out as a means of supporting this survival, in a wider economy which tends to discount such benefits.

Local currencies are also, potentially, a crucial asset for the settled Lean Economy that could eventually become established after the climacteric. But at this stage in the discussion we will focus on local currencies in the context of their present potential role in helping high-cost local producers to cope in a large-scale, delocalised, competitive market economy.

To explain how local currencies can play their part in this, maybe it’s time to get personal. The example is extreme (a caricature) to make the point. The author of Lean Logic always makes his own bread. If, lacking any other means of subsistence, he had to earn his living entirely by making bread, then—given his small kitchen and oven, and the limits to the size of the mixing bowl that would fit on the counter and then into the sink for washing-up—he could realistically manage to make no more than five loaves a day. To earn a tolerable living from this he would have to price his loaves at £20 each. Clearly, that’s not going to work.

But, come to think of it, there might be others in the same situation. Sarah, Fred and Biff could maybe provide some vegetables which are very expensive because they have been reared with individual care and attention. Deidre’s hand-stitched clothes use local materials, far removed from the sweatshops and long-distance transport involved in the production of cheap jeans. Joseph could perhaps supply an occasional pricey leg of lamb, and there is that fellow who shows up from time to time with a side of venison, but only after dark for some reason. Here we have the creative-inefficient sector, which will be central and crucial to the human ecology of the future. And there are no doubt other potential suppliers and buyers around that we haven’t met, whose names we don’t know, so it can’t be done on the basis of reciprocity between friends—at least, not yet. Suppose, then, that all these high-cost producers—no-hopers in the competitive market—agreed to charge each other high prices for our various kinds of produce—in other words, suppose we formed a cartel? Our standard of living would be low, because one day’s work does not produce very much, but at least our inefficient output would not be squeezed out by a competitive market and we would be able to sell what we produced. It’s a promising idea. The alternative would be to go out of business. And starve.

But there is a snag. Next time Sarah goes into town she finds bread costing one tenth of what she pays me as a member of the cartel—just £2 a loaf, and, since it is a hot day and it is the obvious thing to do, she goes into the shop and buys one. And that opportunism is catching: very quickly, our cartel will break down, and its members will all be out of work and out of money again.

So, the question is, how to stop that happening? How to protect the cartel so that it doesn’t break down? There are several possibilities. One is to threaten to shoot anyone who breaks it. Another is to set up a local currency. Call it the Log. Now its members trade with each other in Logs and, next time Sarah goes into town, she can’t buy that cheap bread because she only has Logs in her wallet and the bakery only accepts pounds. Logs stay in the local economy because they can’t go anywhere else; the local economy’s high-cost producers stay in business. Problem solved. Currencies that are explicitly matched to the economies they serve are an extremely powerful instrument. They have the ability to sustain a business life which would otherwise sink into unemployment and exclusion.

But—more snags, and they arise mainly at the point where two currencies interact. They may do so in either of two ways:

First, consider our Logs, operating “in parallel” with pounds, but now all traders in the area—both inside and outside the cartel—decide to accept both currencies. Here, things get difficult. Potential purchasers of those very expensive, inefficiently-produced loaves would not see the need to pay more for them than the £2 that a loaf costs from other bakers. The same goes for everything else the cartel produces. So it goes out of business, taking the Log with it.

So the only thing protecting the cartel from oblivion is the unwillingness of other producers to accept Logs. That’s not a very stable basis for continued existence, and that’s a shame, because the Log was a “good” currency. A lot of hard work went into it: you would have to work for ten days to earn the Logs equivalent to just one day’s earnings in pounds. But the market is flooded with pounds, which are so much easier to get hold of, so hardly anyone bothered with Logs. As Gresham’s Law tells us, “Bad money drives out good money.”L202

The pounds in this story are not really bad money: they are just easier to get hold of because productivity advances have enabled people to get their stuff onto the market easily—and to get pounds into their pockets when they sell them. To get Logs into their pocket by producing in the creative and inefficient way that the Logs market specialises in is much harder work for no greater reward. Kiss goodbye to Logs.

It may not be quite as drastic as that. It may yet be possible for an inefficient parallel economy to use its own currency to sustain a degree of stability, but the expensive cartel economy will never be more than an impoverished subset of the wider economy it belongs to. If one of its producers does improve its efficiency—if I, for instance, decided to invest in a proper baker’s oven and a large mixer—then my prices would tumble and I would drop out of the cartel. Other members would have one less customer for their goods. There would also now be some cheap bread around, and the rational response, even for cartel members (in their role as consumers), would be to buy everything they could at the lowest possible price—that is, to put themselves (in their role as producers) out of business. There might be some marginal purchases for which Logs would be used, but they would not rise above being a small “alternative” economy.


Now consider the second possible format. Imagine that there are two distinct currency areas: one is rich, endowed with efficient, low-cost technology; the other is poor, with an inefficient, high-cost technology. And imagine, too that the rich area has a thoroughly competitive (cartel-free) currency—the Pound—while the poor area has a currency of its own—the Log. In this case there is a clear definition of currencies, with each currency being legal tender in its own area and not in the other, without any overlap. Now put yourself in the position of a person living in the rich area who makes a trip to the poor area to buy a loaf of their famous hand-made bread, and some other goodies at the same time. Since the rich area’s currency (the Pound) is not accepted here, the tourist has to change his pounds into Logs.

At what exchange rate? Well, the normal guideline for exchange is “purchasing power parity”—that is, the tourist can buy roughly as much with the currency he purchases as he could have bought with his national currency if he had stayed at home. It is an equilibrium condition, and there are in practice enormous exceptions to it but, for present purposes, we can suppose that it holds good. Our tourist wants to spend a whole day in the poor area, so he decides to convert one day’s salary from pounds into Logs. A day’s wages would buy him as much as fifty loaves if he wanted, so he goes into the poor area with his wallet stuffed with Logs, and the traders in the poor area do well from his visit.L203

But when a person from the poor area visits the rich area, it is another matter. Sarah spends the whole of one day’s income on buying pounds—but what can she get for that? Just five loaves, since one day’s income for a person living in the poor area buys much less than one day’s income for a person living in the rich area. So, on her visit to the rich area, she can buy hardly anything. That’s unfortunate from the point of view of a day out, but it is good for her local economy. It means it is strongly placed to export its goods, and can import hardly anything, so it is on course to get richer and to be able to invest enough to make its industry more efficient. Or, it can just hold things as they are: its people earn enough to live on, and are not importing much. That is, they are self-reliant and may be happy to stay that way, for they are much better off than they would be if—without the benefit of their separate currency—they remained unemployed. The local economy is using its local currency to underwrite an invaluable stability. Subject to the detail and to troubles which fall outside the range of this story, that poor locality really has solved its problem.L204


So, to sustain a stable slack economy it would be necessary to maintain a single local currency, protected by an exchange rate with the different currencies of neighbours. The alternative, or additional, way of doing it is to make the revolutionary shift in thinking required to move on from the whole culture of competitive pricing.

This latter course would involve looking towards a small-scale economy that builds in inefficiencies, space and slack from the beginning, and underwrites them with a strongly-developed social capital and culture. And it doesn’t think in terms of money. It is about community and reciprocity. This is the essence of lean economics. Local currencies may be part of it.

Local currencies alone, however, rarely succeed in providing the decisive protection needed by small-scale, inefficient producers. But they come in many forms, each with their value. Here are some of them:

1. Transition banknotes

These are banknotes issued by local communities, such as Transition communities. They are issued at parity with the national currency so that, for example, the local “pounds” issued by Transition Totnes, Lewes and Brixton exchange 1:1 with sterling. The publicity value is excellent, but their declared aim of keeping money in the local economy is less robust. People who buy them have to spend them in local shops, which in turn have to spend them on local goods or wages, but the effect is marginal, because anyone who buys a local “pound” is likely already to have the intention of spending that money in local shops. If it does anything for the creative-inefficient sector in the locality, the benefits are indirect: people are made more aware of local producers, but it does not provide any genuine value-advantage in doing so. That is, it may nudge gently, but it has no “forcing function”—no material incentive to support creative inefficiency, to enable it to survive.

And yet, the banknotes are beautiful, and there is a sense of local celebration about them.L205

2. Local Exchange Trading Schemes (LETS)

LETS are local networks of people who supply services amongst each other in return for credits held in an account in a central computer managed by the scheme’s volunteer accountant. In a sense, this is “multiple barter”: buyers and sellers don’t have to find someone to swap with—that is, if you want a haircut and all you have to offer is bread, you don’t need to find someone looking for precisely that trade. Instead, members of a LETS scheme provide their goods and services and get a credit which they can then trade with any other member.

LETS have a genuine function in protecting the creative-inefficient. They really do succeed in making a little separate economy for some goods and services and, within that narrow range, there are no exchange rate problems to make things difficult. And they make constructive, if limited, use of credit: you can start with nothing. Their membership tends to be small. They are cumbersome, requiring a cheque and a telephone call or email to the accountant for every transaction, and they tend to focus on things which the solitary trader can provide—things like aromatherapy, child minding, bread, cakes and home-grown vegetables in modest quantities. The Camden LETS scheme in north London summarises,

We have over 50 members, doing gardening, giving massages, making bread, giving lifts to the shops, DIY, typing and more.L206

LETS schemes are in essence relevant to the task, finding a market for goods and services which would otherwise have little chance of a sale. And they have the potential to mature—that is, to omit the stage of accounting for each transaction and, instead, turn the relationships they have formed into the direct reciprocities and cooperation on which the local lean economies of the future will substantially depend. A sign that they could be at least moving in this direction is that LETS schemes tend to last.L207

3. Time banking

This is a means of recording exchange without money, and it works on the same principle as LETS. The time you spend—which is measured in hours, whatever level of skill you bring to it—is logged by a time-broker, and earns you a credit, in the form of the right to receive a service in return. The time-broker in this case is the central link which (on the principle of a dating agency) joins up service providers with service-users. A variant is the exchange of credits between people and agencies, which works well because the agency is well-informed about local needs, and able to organise time bank members to work together as a group and to sustain a regular service. A farmer who wants a team to clear away undergrowth can arrange it through an agency more easily than having to identify individuals. The agency is also able to provide training and advice, and to sustain and improve standards of work (see “Paid to Learn” sidebar). Another variant is agency-to-agency time banking, allowing spare resources (meeting rooms, transport, some labour) to be shared.L208

Time banks are an asset in places with a comparatively high rate of unemployment and only a modest inventory of skills, and which are not well enough connected to provide a natural source of information about their needs, skills, and availabilities. This is the kind of local knowledge which was formerly supplied by the hubs of social capital, such as church, chapel, pubs, working men’s clubs, local shops, schools, festivals and events. In a sense, the laborious brokerage of time banking which requires time to be recorded and credited can be seen as the scaffolding of a heroic attempt to rebuild community with information flows and a culture of reciprocal obligation. It brings in people who would otherwise be socially excluded. Communities whose inheritance of social capital remains intact do not need that scaffolding; the informal links of awareness and obligation are already in place. But where that rare ideal is not present, time banks meet a need.L209


When skills are not completely intuitive

The time bank in Louth in Lincolnshire is a case study in benign unintended consequences. Jean Vernon explains: “He came to do a couple of hours’ weeding. Well, I spent a couple of hours teaching him how to do it, with special emphasis on knowing how to recognise a weed. He got his credits but perhaps I should have claimed some for myself for all the teaching.”L210

The main benign consequence of time banking is that, once people have established a good working relationship, and know what they are doing, they forget about the credits. They just do it. But that’s the point.

4. Hours

Hours—often known as “Ithaca Hours” after the original and best-known scheme, started by Paul Glover in Ithaca, New York, in 1991—are a form of local currency that has overcome many of the limitations of the others. They are in the convenient form of notes, denominated in hours’ work (2, 1, 1⁄2, 1⁄4, 1⁄8 and 1⁄10), so there is no central computer register to update. Each Hour is considered to be worth about $10, but that would change if, for instance, inflation reduced the value of the dollar, for the Hour is firmly based on one hour’s work, whatever the value of the dollar.

And they differ from Transition banknotes in another vital way. New arrivals in the scheme receive a gift of two Hours; and every eight months they receive another gift of two Hours. This is crucial, for the following reason. It makes the goods and services in the schemes just that little bit cheaper, since you get the first $20-worth free, and that means that those expensive—creative yet inefficient—goods and services discussed at the start of this entry have their moment of being distinctly more affordable. Lean Logic’s in-house baker actually succeeds in selling some of his outrageously expensive loaves! And since he is in the scheme, he can go off and, at a more reasonable cost, buy some of the other creative-inefficient goods that locals produce. And that in turn brings a lot of people into a network; the advantage of those free two hours wears off in due course, but by then people have been brought into the magic circle of goodwill. A person who is good at altering clothes to fit growing children, or making fruit cake, and who would not normally think of selling these goods and services, finds herself already in a circle of informal local contact and solidarity. This means that, when she thinks that she might as well sell some in a small way, she is in touch with people who are ready and listening. She has access to a local directory in which other potential providers are listed, and which providers and buyers alike are motivated to consult.

This is a system that has been thought through. The brilliance is in the detail.L211

5. Argentina’s barter currencies

All of the above schemes have something to offer as possible ingredients in the currency of the future. And the network of local currencies that developed in Argentina in the mid-1990s may be the most significant of all, because it was formed and tested in conditions having something in common with those that lie ahead. In the previous five years, inflation had hit 5,000 percent, so the government pegged the peso to the dollar to stop it. Unemployment then started to rise towards 25 percent, and the dollar—the only trusted currency—became increasingly scarce, so it was hard to pay for anything, and the government was on its way to going bust, defaulting on its public debt.

When money is short, clearly barter has advantages, and Argentina’s famous love affair with local currencies started in the barter arrangements at a garage sale in Buenos Aires organised by three ecologists, members of the Regional Self-Sufficiency Programme. They developed into a wide variety of currencies that were recognised at the time as the only non-toxic currency in Argentina.L212

The possibility of a solution to the crisis began when in 2002 the Argentine government decided to de-link the peso from the dollar. The collapse in the value of the peso that followed was catastrophic, but it opened the way to recovery and relative stability. And in the meantime, the experience of local resourcefulness has changed the culture. Well-developed local markets and currencies remain in Argentina, along with a sense that the judgment of individuals and localities can be trusted, in contrast with the judgment of central government, which proved itself to be so flawed.L213

This last example is where local currencies come into their own. When the national currency fails, the balance of advantage changes fundamentally. It is the local currencies that—if any—are to be trusted. Under conditions of hyperinflation or hyperdeflation, local currencies shift up a gear to being a necessity. And if the wider economy is not functioning, there is no alternative to buying local produce and services, even though they look expensive, relative to what you can earn in a day. When the market economy fails, living standards will fall hard and fast. If some inefficiently-produced, high-cost local goods are available, supported and protected by local currency, then, as in Argentina, it will be a life-saver.

Here is a local market that matters. Nationally-traded goods will be scarce, like nationally-traded currency. So locally-produced goods are likely to be bought, with locally-produced currency, because both will be within the range of local competence.

To make this point as plain as possible: the Logs discussed at the beginning of this entry failed when they interacted with pounds because there were plenty of pounds and plenty of the goods that pounds could buy. There was no real point to the local currency—or, if giving a chance to our inefficient minority of producers was a “point”—then there was certainly no serious weight behind it. People don’t pay substantially higher prices for essentially similar goods for fun, or on principle—or not often, anyway. The Pound-economy was doing just fine and the Log-economy was marginal, and had to struggle to survive.

But in the future, when energy and other goods in the wider economy get scarce, pounds will get scarce too. There is a famous formula in economics which goes:

Money × Velocity = Price × Quantity (often shortened to MV= PQ)

So, think about it: the coming shock will have the effect (for any number of reasons, but let’s suppose for a moment that the reason is energy-famine) of reducing the quantity of goods available to close to zero. What will that do? Well, quantity (Q) falls. Prices (P) may rise, but they may not, because in the depression that follows, purchasers will have minimal incomes if any. From that, as the equation shows, either (or both) money (M) and the velocity of its circulation (V) must fall, too. Bank lending will be called in; bank balances will fall, and that will force the banks to call in even more of their lending. Result: money is seriously scarce. Paralysis.

Solution: Logs. Now the local currency doesn’t have to fight its corner: it is the currency of choice. In fact, it is the currency. Localities take into their hands not only the production of the goods they need, but the currency needed to buy them. When we use local currencies at present, we are essentially going to a lot of trouble to solve a problem we don’t have. Yes, there may be some value in them in present conditions, as we have seen. But the reason it is hard to make local currencies work is that the conditions for which they are required don’t yet exist. But then everything changes. The spare wheel that people carry around in their cars is a complete waste of space—and you could, if you came from Mars, spend a lot of time experimenting with ways to find a use for it. Then the car has a puncture. And the penny drops.

The time will come when the strengths of local currencies, and the reasons for their existence, will become all too clear.


Related entries:

Nation > Currency, False Analogy, Lean Economics, Localisation, New Domestication, Usury.

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David Fleming
Dr David Fleming (2 January 1940 – 29 November 2010) was an economist, historian and writer, based in London. He was among the first to reveal the possibility of peak oil's approach and invented the influential TEQs scheme, designed to address this and climate change. He was also a significant figure in the development of the UK Green Party, the Transition Towns movement and the New Economics Foundation, as well as a Chairman of the Soil Association. His wide-ranging independent analysis culminated in two critically acclaimed books, Lean Logic and Surviving the Future. A film about his perspective and legacy - The Sequel: What Will Follow Our Troubled Civilisation? - was released in 2019, directed by BAFTA-winning director Peter Armstrong. For more information, including on Lean Logic, click the little globe below!

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