Sections borrowed from:

CCS: A Cooperative Option for the Developing World? Peter Moers, 1998

An Overview of Parallel, Local and Community Currency Systems, Stephen DeMeulenaere, 1998

A Snapshot of Community Currency Systems in Europe and North America, Menno Salverda and Jeff Powell, 1998

With updates by the Strohalm Foundation, 2003, and contributions by Jérôme Blanc.

If you have read the community analysis, situation analysis and community economic mapping documents, you will see that it is our opinion that a system can be tailored to suit just about any situation.

That being said, we still receive many requests for a list of general factors which may influence the success of a local currency system.  Therefore, in addition to conducting analysis and mapping exercises before starting a project, you may also wish to review the general factors that some feel may increase the chances of success.

There are advantages and disadvantages to all of these factors, and therefore they form part of the multi-dimensional balance that those who are designing a local currency system need to keep in mind.

Contents:

1.      Conditions for Successful Trading

2.      A Sense of Purpose

3.      A Sense of Community

4.      Involvement of Local Businesses

5.      Existing Local Capacity to Manage a Local Currency System

6.      Availability of Technology

7.      Physical Appearance of the Local Currency

8.      The Administrative Complexity of the System

9.      The Ability to Properly Manage the Money Supply

10.  The Ability to Monitor the System Properly

11.  The Ability to Finance the Local Currency System

12.  Support from the Local, Regional and National Government

13.  Individual Responsibility for Upholding the System

1.  Conditions for Successful Trading

The conditions for successful trading are: availability of time, the demand for goods and services, the supply of goods and services, and a sufficient supply of means of exchange.

Availability of Time

Research on these systems in the North suggests that most trading takes place on weekends and evenings, with the unemployed and housewives trading during the day.  This may be the same in the south, with many people working long hours to earn the money they need.  However, for the marginally employed, and for those employed at low wages, the introduction of a community currency (with its potential trade creation benefits) can raise wages and generate more economic activity.

As most trade takes place between individuals, one can assume that it will take more time to complete trades, factoring in transportation and etc., than if one was located at a particular site.  This may change as the system grows in size and importance, but initially one may assume that in this respect, prospectives for growth in Asia, Africa and Latin America may be better than in the North.

The Need to Trade (Demand)

If the conventional economy already provides full employment and a high standard of living, then there may not be a need for people to participate in complementary currency systems.  The theory argues that due to a deliberate scarcity of money, there is an almost permanent need for at least the existence of a complementary currency system to fill this gap between existing monetary resources and actual needed monetary resources.  In times of economic downturn, research shows that these systems boom, displaying a counter-cyclical tendency.  As people's need to trade increases, so does participation in the parallel system. 

It is clear, then, that a great need to trade, to acquire basic needs exists in Asia, Africa and Latin America, as well as in the North.  This hints at a misallocation of resources, a maldistribution of wealth that leaves a majority of the world's population with unmet basic needs, while the human and renewable natural resources with which to meet these needs are in sufficient supply.  Again we may suggest that the prevailing situation in these continents suggest there to be fertile ground for the introduction of complementary currency systems to these places.

Diversity of Available Goods and Services (Supply)

If many people offer the same services, and if the products of the region are severely limited by climate and the existing market situation (such as mono-crop regions) then the possibilities for trade are significantly reduced, creating dependence by one locality or whole country on others.  At the local level, the diversity of goods and services available also depends upon the general level of education, and the vocation or primary skills of the people.

As with the Toctiuco SINTRAL system in which the range of goods and services offered is very small, efforts must be made to encourage trade creation through skills development and capacity building.  This requires a detailed social survey to assess these needs.

This does not mean that areas with limited goods or services to offer are not good candidates for a complementary currency system.  On the contrary, the availability of essential goods such as agricultural produce is important in reaching "critical mass", the point at which the range of goods and services attracts people for that reason, without having to engage in extensive promotional efforts".  Since labour is a significant component of almost all agricultural production, significant potential exists by using complementary currencies to integrate rural and urban economies and improve distribution methods.

Sufficient Supply of Means of Exchange

Any monetary economy needs a sufficient supply of means of exchange to facilitate trading.  If the money supply of a local currency system is limited, trading will be limited as well.  This may not be a problem if the amount of time that people have to trade is limited, but if one of the goals of your system is to encourage people to trade as much as possible, you may wish to consider providing sufficient amounts of local currency to use in trading.

2.  A Sense of Purpose

Many local currency developers agree that having a sense of purpose provides a strong motivation for a project to succeed.  This reason for being provides a way, a strategy, for starting a system by tying in with some other popular effort.  This effort should be a common goal, such as the construction of a community centre, a school, a warehouse, a factory,a marketplace a used or locally-produced goods store, or a social project like a revolving loan circle, cooperative enterprise, environmental cleanup, collective planting or harvesting, etc.  There are literally hundreds of projects that a local currency can play a key role in bringing to reality.

Local currency systems, like an economy, need to have a purpose: they don’t exist as isolated entities in a society. A low sense of purpose for implementing the system can lead to self-serving, opportunistic behaviour among the members that can jeopardize the whole system. On the other hand, a sense of purpose that is too high can cause too many people to become involved in the system in too short a period of time to educate them properly.

3.  A Sense of Community

Community can be defined as an ongoing collection of interactions and continuing relationships between people in a defined geographic area, or within a defined social or ethnic group.  In a well integrated community, people are close, not alienated, which means there are few difficulties with communicating one's needs, and thus few barriers to trade.  Not every geographic unit (neighbourhood, village, city etc.) is automatically a community.  Although it is impossible to generalize in this respect, two important factors seem to be positively correlated with the degree of community sense:

1. stability of the population composition: a highly mobile population, as a result of seasonal or permanent migration, is less likely to engage in continuous interactions;

2. dispersion of the population: in communities with a geographically dispersed population, contacts are less regular. 

Research in Australia confirms that the social and/or economic impact of local economic systems depends on their geographical location.  Systems operating in smaller neighbourhood areas of towns and cities have higher trading levels than spread over a large area, such as in an urban context or more rural systems which may already have existing mutual reciprocity/mutual aid networks.

In larger cities one can observe the concentration of trading in a number of smaller geographic areas with little outside trade.  The reason being that much of the trade in goods and services is most conveniently accessed close to home.

It would be wrong to start by assuming that a local or community currency system is not a good idea for areas that suffer from a low degree of community sense.  On the contrary: the introduction of such a system can make an important contribution towards more and better communication within the community, which is a community-building tool. Starting such a system would necessitate additional social work to break down the barriers of shyness, distrust and alienation that keep people apart.      

4. Involvement of Local Business

The lack of participation by local (endogenous) businesses is noted as one of the most significant shortcomings of most LETS systems in the North.  The acceptance of the complementary currency by business is seen as almost essential to the good functioning of the system, and is certainly a sign of a well-integrated complementary currency.  HOURS systems have less of a problem integrating businesses, perhaps because of the use of printed money which simplifies things at the point of sale immensely. 

The involvement of local businesses provides a number of advantages to the local currency systems:

1.  A wider range of products is made available.

2.  Participation by businesses increases legitimacy of the complementary currency.

3.  Attracts increased business and encourages broader participation.

4.  Increases opportunities for trade creation and substitution for inter-business trade.

5.  Competitive advantages in relation to non-locally owned (exogenous) businesses.

However, the concerns of local businesses have often not been considered, these being tax and legal issues, responsibility for maintaining the value of the currency, responsibility for repaying negative balances, self-financing ability of the organization, proper administration of the system, and a transparent mechanism for internal dispute resolution.

5.  Existing Local Capacity to Manage a Local Currency System

Ideally, complementary systems should be started with minimal outside involvement.  When considering the introduction of a currency, it is essential to have the existing local capacity to manage the local currency system properly and professionally.  This includes having skilled accountants, quality managers, a professional image, and people who understand the function of the local currency system very well to answer any questions or concerns that may arise.

What is needed is a group of people with the potential to introduce, educate, lead, organize, control and assure the continuity of the system.

6. Availability of Technology

The type of system used may be determined by the availability of technology, although it may be argued that there are ways around lacks in technology.  In the North, most complementary currency systems are managed with the aid of computers, fax machines, photocopiers and telephones, items which require skills as well as a stable supply of electricity.  However, these items may be very costly, or impossible to acquire in the context of a developing country.

A thorough consideration of the availability of technological resources is also essential in determining the type of system to implement.

The purpose of technology is to make it easier to use the local currency, to provide consistent and accurate reports, and reduce administrative overhead.

7. The Physical Appearance of the Local Currency  

The acceptance of any new money by the general public, depends highly on the physical appearance of the local currency.  The appearance of the money communicates a geographic or cultural identity, security, value, acceptance and so on.  Paper notes have the advantage of being psychologically very close to the monetary tools people already know; possibly the physical proof of using a bank note gives people the illusion to hold actually something of physical value in their hands. Moreover, the use of paper notes is more anonymous than a cheque system: some participants might not like the idea of every transaction being registered. Finally, as a result of this anonymity, people who are not member of the system are not excluded from trading. This can accelerate the growth of the local currency system, since people who want to try out  the system before joining, can do so without any impediment.     

In the North, where the use of Automated Teller Machines, cheque-books and credit cards, which mean that there is no physical paper currency changing hands, has become a daily routine for many people.   However many people prefer to have a printed note in their hands, and research into some types of local currency systems confirms this.  

Some local currency systems that use an invisible electronic currency, such as LETS, have identified the preference that people have for printed currency and have introduced paper notes, such as the Tianguis Tlaloc community currency system in Mexico and the Bia Kud Chum system in Thailand. These notes are issued by the person who debits his account in exchange for the paper notes and redeemed by the person who deposits them at the local currency administration.  Therefore it is possible to have an open-credit system like LETS, while using a printed currency as the medium of exchange.  

8. The Administrative Complexity of the System  

Some local currency systems are very simple to manage, others are much more complex.  In designing a local currency system for a particular community or area, one needs to be sure that the system is not too complex for people to understand and use, otherwise this will reduce trading and trust in the system, and people will not be able to educate each other about how the system works.  

New technologies may reduce the appearance of administrative complexity, and this can be helped by developing a training course which provides information about the function of the system, starting in a simple way that matches people’s experience, and introducing new elements over time. This strategy may be more effective than overwhelming people with too many new economic concepts at one time.  

A reason for being which ideologically motivates people to participate may also reduce the appearance of administrative complexity.  If people understand and agree that the system must work the way it does in order to achieve shared goals, they will be much more willing to accept a certain amount of admnistrative complexity.  

9. The Ability to Properly Manage the Money Supply  

A local currency system in which there are no methods for managing the money supply, either by increasing or decreasing the money supply as the situation demands, can lead to the collapse of the system.  

The amount of money in circulation should not grow faster than the supply of the good and services available in an economy. This rule applies for a conventional currency system run by a Central Bank as well as for a local currency system run by its members. If the money supply grows faster than the supply of local goods, for example of people begin to leave the system, the currency loses value and prices will rise (inflation). The first indication of an inflationary tendency are a growing number of  wells , i.e. members with a high amount of local currency in their wallets or accounts who have problems spending their local currency.  

In an effort to reduce the administrative complexity of a system, many local currency systems do not have sufficient methods for either increasing the money supply if demand for the local currency increases, or reducing it if the supply of goods and services decreases.  However, any system that does not have a method for controlling the money supply is awaiting a local monetary crisis that it does not have the methods to correct.

Although there are a number of ways to issue and manage a complementary currency, the safest way is to issue the currency through accounts, which is called Mutual Credit. Mutual Credit systems are relatively simple to operate, and offer the most controls over the money supply. A manual for managing a Mutual Credit system can be found by clicking here.

10.  The Ability to Monitor the System Properly  

The objectives of reducing administrative complexity and increasing user-friendliness of the local currency, and gathering the information required to manage the money supply properly may come into conflict with each other.  

Both objectives are extremely important: one the one hand, the user-friendliness determines how fast a new concept becomes accepted; on the other hand, monitoring the system and measuring its effects is of extreme importance in ensuring the integrity of the money supply.  A certain trade off between the two objectives seems inevitable, but it is possible to combine ease-of-use with an ability to take accurate snapshots of the supply, circulation and value of the local currency.  

In achieving this combination, the introduction of technologies can help.  More importantly is the need to issue currency through accounts and to accurately record all withdrawals and deposits of the currency, and then to use measures to estimate the circulation of the currency, if it is not possible to devise a way to record all purchases made within a given period of time.  

11. The Ability to Finance the Local Currency System  

The ability to be entirely self-financing should be the goal of all local currency systems.  This may be best planned for by preparing a Business Plan with a profitability analysis and the number of members and level of trade needed in order to achieve it.  

Many local currency systems keep overhead costs low by seeking voluntary contributions by the members, thus reducing the need for income, either in local currency or national currency. However, this can negatively affect the professionality of the system, and can create a culture which does not attract the participation of local businesses.    

Two types of expenses have to be distinguished: expenses in local currency and expenses in national currency. A substitution of national currency expenses with local currency, by seeking to purchase within the system, contributes further to the independence of the system, reduces the need for unpopular levies in national currency and provides extra income opportunities for certain members. The remaining expenses in national currency have to be covered by contributions from the members.  

A case can be made for subsidies in the starting phase: the initial high investments in (amongst others) promotion can be prohibitive for many communities, although the need for and the viability of a local currency system is beyond doubt. Subsidies for research purposes can also be justified: the results of a research investment will be beneficial to the community as a whole; not only to the members of the local currency system. Local currency systems can use the results of research in their promotion campaigns, not only towards the public, but also towards government and business representatives. On the other hand, subsidies for running costs have to be avoided, since they make the local currency system more dependent and therefore vulnerable, and can give the system an image of a weak institution, while its philosophy is based on independence and self-reliance.  Therefore, subsidies should only be used in the initial phase to help the system reach the levels outlined in its Business Plan.   

Each way of charging has its advantages and disadvantages, as will be analyzed in the next chapter.   The basic forms of cost-recovery mechanisms are:  

a)     Account opening fee
b)     A fixed period charge
c)      A charge on excessive positive balances
d)     A charge on hoarding or non-use of the currency
e)     A charge on transactions  

A.  Account Opening Fee  

Unless subsidies are used for starting up the system, entrance fees are justified by the fact that the initial promoters of the local currency system have invested time and national currency in launching the system. This burden should be carried equally. Late-comers participate in this burden through an entrance fee. The entrance fee that has to be fair and not too high: potential members that expect to make few transactions within the system should not be deterred to enter. If the system grows continuously, the entrance fees form a steady source of income that makes it unnecessary to ask for contribution from the existing members. However, since the growth of the system is generally erratic, this is a highly unreliable source, that has to be complemented by periodical service charges from the users of the system.  

B. Fixed Periodical Fee  

This fee is applied periodically, such as every month, bi-monthly, quarterly or yearly.  This is administratively the simplest method for applying charges, but is also arbitrary and can form an obstacle for people who do little transactions within the system from becoming member.  

C. A Charge on Excessive Positive Balances  

This charge can be used as a way to reduce the money supply if the amount of goods and services in the system is decreasing. If a positive balance limit has been set, any account above that limit has a charge applied to it, of for example 8 – 12% per year, which can be applied periodically. The advantage of using this method, is that people are encouraged to spend their currency as fast as possible as hoarding leads to a loss of purchasing power. Some systems levy charge fees on both positive and negative balances. The possible danger is that members are discouraged to trade, because they always want to stay close to a zero-balance. The Noppes-system in Amsterdam, the Netherlands, has tried to mitigate this disadvantage by defining for each member an interest free balance maximum. If the balance goes beyond that ceiling, this charge, usually called demurrage is levied. The interest free balance maximum is based on the participants trade volume during the past 12 months.       

D. A Charge on Hoarding or Non-Use of the Currency  

This method applies a charge on the non-use of the currency to prevent hoarding and encourage circulation of the currency. It is a user-pay method of charging, and is fairer in the sense that only people who are holding the currency are charged for it. It can be applied to positive balances on accounts, or as a stamp applied to a note.  The normal rate charged is between 8 and 12% per year.  This method is also known as demurrage.  

E. A Charge on Transactions  

This method applies a chare to each transaction made, which works easily with electronic systems, but is impossible to apply to printed currency systems.  Few local currency system developers recommend this option anyway because it discourages participants from making transactions within the system: good behaviour is punished. By giving preferential rates to members who have traded a large volume (e.g. if the accumulated volume of transactions exceeds 1000 units, the members is charged 5% in stead of 10% for every next transactions), good behaviour is encourages again, but administration becomes more complex.   

12. Support from the Local, Regional and National Government  

Political realities are a key factor in the community currency system equation.  Organisers should know how much support to expect from local government.  Experiences in North America and Europe have ranged from Hattersley LETS in Greater Manchester, which encountered opposition from the Department of Social Services (DSS) to Calderdale LETS, where local government has offered funding support in recognition of the role to be played by community currency systems in providing social services.  The majority of governments are indifferent to system development.  

If this transition is managed correctly, community currency systems may come to be accepted as an economic tool worthy of government support.  On the other hand, failure to appreciate the complexities of existing powerbases may mean that they are seen as a threat which should be suppressed.  

As local currency systems are spreading to many countries worldwide, the Strohalm Foundation has been conducting research in to the legality of local currency systems, in order to give strength to presentations made with government officials.  One may also wish to read the section on Arguments Against Local Currency Systems, which provides ways of explaining the system that bureaucrats and economists will understand.

13. Individual Responsibility for Upholding the System

Every member is responsible for upholding the local currency system.  This means being responsible for repaying the credit that one has received, being willing to receive local currency in return for being able to spend it, providing good quality goods or services at a fair price.

Many local currency systems have neglected these facts at their peril, in the desire to make it easy for people to join and use the local currency system.  However, few businesses are interested in offering their goods or services to a system in which people can take but not give in return and get away with it, or leave the system with their negative balance.  The free-rider syndrome can be minimised by having formal legal contracts with new members, and for developing methods for rewarding, and alternatively punishing members who are not upholding the system.