> Posted by Jeffrey Riecke and Sarah Samuels, Communications Associate and Operations Specialist, CFI

Did you know that there are over 100 local currencies in the United States alone? We didn’t either until we came across the Guardian article “Could community currencies produce a more sustainable financial system?,” which identifies how local currencies could help boost SME growth and lead to more economically and environmentally sustainable communities.

Local currencies are fun. They help convey a sense of community. Trying to support sustainable local economies is great, of course, but how impactful are these systems actually?

First, some background on these currencies, using a close-to-home example. Both of us are staunch proponents of supporting local businesses and community development, so we were quite surprised to learn that our very own city of Washington, D.C. has a local currency called Potomacs. Our local currency began in 2009 through the efforts of a community development organization called Ecolocity. The notes depict historical natives of DC, Maryland, and Virginia. The one-note has a picture of singer/songwriter Marvin Gaye, one of DC’s best-known artists. Bestowing local flair to community currencies by incorporating history and culture is common.

If we were so inclined, we could take our dollars to the Greater Washington Exchange and convert them to Potomacs at their designated rate, which is 95 cents on the dollar. One might ask why on earth would any sane individual trade a one dollar bill for 95 cents only to be left with limited options on where to actually spend the money. The short answer is that businesses who accept the Potomac offer a 5 percent discount to customers who purchase goods using the local money. So technically, by opting in, you wouldn’t be losing anything, except convenience.

The concept is that as a customer, you spend your money at local businesses or businesses that are willing to spend their money locally. And as a business, you spend your money at other businesses that are either local or spending locally. Together, local businesses are supported, which is good for communities, and supply chains are shortened, which is good for the environment. Not too complicated.

As for actual impact? First off, that depends on uptake. In the case of the Potomacs, there hasn’t been much. So little so that it’s tough to find any information on them. As of a few years ago there were reportedly only ten businesses that accepted them and about 1,400 notes in circulation.

However, there is substantial evidence that community currency with enough scale can generate enthusiasm for community development. With the Brixton Pound in the U.K., for example, there are over 250 businesses that accept the currency and about B£ 100,000 in circulation. The local mayor’s salary is paid in Brixton Pounds. Research from the New Economics Foundation indicates that money spent with independent businesses circulates within the local economy three times longer than when spent at a chain store. In theory, local currency can also help protect communities from national fiscal fluctuations and offer small businesses a marketing advantage over the Walmarts of the world.

Along with physical notes that reflect their unique cultures, local currencies are also exploring digital finance platforms. One can send Brixton Pounds using mobile text messaging, which operates like SMS mobile money services and has been adopted by about 1,300 people.

How could all this apply to the work we do at the Center for Financial inclusion? Could community currency play a part in getting us closer to a financially inclusive world, or is it just another developed world trend being used to block multinational corporations and promote local coffee shops and boutiques? This remains to be seen.

Since this topic is new to us we decided to ask Beth Rhyne, the Managing Director of CFI how she thought local currency could advance financial inclusion. She too was interested in the topic and not completely aware of the intricacies, but supported this idea in saying, “Local currency is basically a gimmick, but it’s a fun gimmick that reminds people to value their communities more actively. In that sense, it’s a good example of behavioral economics at work.”

Image credit: Charlie Waterhouse

Have you read?

Cryptocurrencies and Financial Inclusion – Why I Am a Skeptic… For Now at Least

Behavioral Approaches to Product Innovation at the Base of the Pyramid

Kate McKee: On the Behavioral Economics of Poverty and Implications for Financial Inclusion