Alternative Currencies Grow in Popularity

Most of us take for granted that those rectangular green slips of paper we keep in our wallets are inviolable: the physical embodiment of value. But alternative forms of money have a long history, and appear to be growing in popularity. It's not merely barter, or primitive means of exchange like, say, seashells or beads. Beneath the financial radar, in hip U.S. towns or South African townships, in shops, markets, and even banks, throughout the world people are exchanging goods and services via thousands of currency types that look nothing like official tender.

Alternative means of trade often surface during tough economic times. "When money gets dried up and there are still needs to be met in society, people come up with creative ways to meet those needs," says Peter North, a senior lecturer in geography at the University of Liverpool, author of two books on the subject. He refers to the "scrips" issued in the U.S. and Europe during the Great Depression that kept money flowing, and the massive barter exchanges involving millions of people that emerged amidst runaway inflation in Argentina in 2000. "People were kept from starving [this way]," he says. (Find out 10 things to do with your money.)

Closer to home, "Ithaca Hours," with a livable hourly wage as the standard, were launched during the 1991 recession to sustain Ithaca, New York's local economy and stem the loss of jobs. "Hours," which are legal and taxable, circulate within the community, moving from local shop to local artisan and back, rather than "leaking" out into the larger monetary system. The logo on the Hour reads: "In Ithaca We Trust".

Alternative (or "complementary") currencies range from quaint to robust, simple to high-tech. There are "greens" from the Lettuce Patch Bank at the Dancing Rabbit Ecovillage in rural Northeastern Missouri. In Western Massachusetts one finds fine-artist-designed BerkShares, which are convertible to U.S. dollars. According to Susan Witt, Executive Director of the E.F. Schumacher Society (the nonprofit behind the currency) more than $2 million in BerkShares "have been issued through the 12 branches of five [local] banks." And in South Africa, proprietary software keeps track of Community Exchange System (CES) "Talents"; one ambitious plan is to make Khayelitsha, a vast, desolate township of perhaps a million inhabitants near Cape Town, a self-sustaining community.

The currencies are generally used in conjunction with conventional money, as in using local currency at the farmer's market and regular greenbacks at the supermarket. "It doesn't try in any way to replace cash," says Christoph Hensch, a Swiss national and former banker now living in Christchurch, New Zealand. Rather, it offers a way "for people to share and redeem value they have in the community." He says the currencies are most useful in geographical areas or social sectors where money doesn't flow sufficiently, citing for example New Zealand's Golden Bay, which is so remote that it sometimes nearly functions as its own economy.

Advocates of alternative currencies say that they are a means of empowerment for those languishing on the margins of fiscal life, granting economic agency to people like the elderly, disabled, or under-employed who have little opportunity to earn money. For example, in some systems one can "bank" Time Dollars for tasks like childcare and changing motor oil. It's not whether you're employed or what financial assets you have that matter, says Les Squires, a consultant on social networking software who has been working with groups developing alternative currencies. Each person has "value" which is "exchangeable" based on time spent or a given task.

Alternative currency comes in many forms. In addition to time banking, there are Local Exchange Trading Systems (LETS), systems of mutual credit that vary by location. This model was developed by Michael Linton in Canada, though it seems mostly to have taken off in the British Isles; an estimated 40,000 people in the U.K. use these for at least some transactions. (See TIME's top 10 everything of 2008.)

Similarly, the Community Exchange System (CES) is an online money and banking system and trading marketplace that tracks credits and debits. While LETS's function as clubs that set their own guidelines, CES is administered through an online program that connects local groups to create a global network. The CES website points to more than 100 exchanges in fifteen countries. According to Squires, the Internet has made alternative forms of exchange more viable, as databases can keep account of credits. In the rarified world of monetary theory, think-tanks are abuzz with ideas about future forms of money. One visionary, Jean-Francois Noubel, the co-founder of AOL-France, foresees "millions of free currencies circulating on the Net and through our cell phones" as money follows the distribution path that media has over the last decade. Bernard Lietaer, a Belgian economist and author who helped develop the Euro, has proposed the "Terra," a transnational currency backed by established commodities that would co-exist with conventional notes, the monetary equivalent of Esperanto.

In recent years, the impetus for alternative currencies in established economies has stemmed in part from localization movements. Periodically ditching the dollar (or the pound, or the yen) in favor of homegrown currency doesn't merely fortify the local economy, it also builds community: people have a stake in their neighbor's well-being because that neighbor represents both market and supply chain. Some argue that such transactions are more secure than others because knowing the person you're dealing with (and his family and friends) serves as a kind of social collateral.

The use of Berkshares has helped to solidify local ties, says Susan Witt. "It's cash, so you have to pay your bills by walking into the store or dentist's office," she says. Local pride does have its challenges. In September, the town of Lewes in Sussex, England, issued the Lewes Pound — complete with a special edition beer from Harvey's, a local brewery, to celebrate the introduction. There was an immediate run on the currency, limiting its circulation; Lewes Pounds were going for 35 pounds sterling on eBay. The organizers quickly went back to press and dealt with the situation. As Susan Witt is the first to say, "local currencies are not easy."

Some are moved to create currencies for environmental reasons — minimizing the use of energy. With diminishing oil supplies "we will not be able to move goods around the world as cheaply," says Peter North. One strategy, he says, is to produce more locally, and one way to facilitate that is through local currency. This was one inspiration for the Lewes Pound, and for the Totnes Pound in Devon, England. Both towns are part of the Transition Town movement, which seeks creative, upbeat community-based approaches to dealing with climate change and diminished oil reserves.

Paper-money currencies, like Berkshares or the Lewes or Totnes Pound, slip fairly seamlessly into the national economy; their use is taxed like ordinary money. More abstract exchanges are a bit more complicated to deal with. But the tax concern is not insurmountable. "If you use local currency for your main income-generating activity, you must pay income tax," says Hensch, who consults in complementary currencies. Likewise, if you have a business, you'll pay sales tax on any local currency — in New Zealand, that would be Green Dollars, a LETS system — you bring in. But if you trade in "neighborhood help", like lawn-mowing, that would not be taxed.

The rules vary country to country. In the U.S. any business transaction must be recorded and reported to the IRS; tax levies apply as if the trade were made in cash. As Les Squires puts it, professional services are subject to income tax but for noncommercial transactions barter rules hold. "If I bake a cake for you, that's not a taxable event," he says.

Andrew K. Rose, Bernard T. Rocca Professor of International Trade at U.C. Berkeley's Haas School of Business, sees local currencies as limited by their unwieldiness. "Money is primarily just a convenience for enabling exchanges between two parties. The more widely accepted, the more convenient it is," he says. If you need to use different currencies in different locations, the money then becomes less convenient.

Do large financial institutions have anything to fear from the use of alternative currencies? Not at all, says Rose. "It's got to be so tiny. It has no effect at all," he says. Besides, he notes, the Fed doesn't care about currency, or even the number of bills circulating in the economy. "The Fed cares about monetary policy and [it] deal[s] with that in different ways."

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