Will you soon be able to buy groceries and other goods using currency that is only good in your state or local community? Why are communities and legislators looking to create new types of currency inside the United States? What is driving the growing interest in alternative currencies? There are a handful of reasons that most alternative currency seekers share.
The Alternative Currency Revolution
The Instability of the US Dollar
Many people ranging from individuals to small business groups are worried about the stability of the US Dollar. The mounting Federal debt, virtual 0% interest rates from the Federal Reserve, and fluctuating currency price have attributed to a fear that the US Dollar will soon be worth a lot less than it is worth today. If the majority of your money is not invested in hard assets (that can be traded or bartered for), but instead is sitting in a bank account, currency devaluation can destroy your finances. The local business owner in a small community has absolutely no control over the direction of the dollar, and must simply accept whatever happens on a national and global economic scale.
Keeping Spending and Profits Local
A second main driver is the want for communities to keep the spending and associated profits and taxes within the local community. A common example given is if you go to a big box retailer to buy something, a very tiny portion of the purchase stays within the community. The company is headquartered elsewhere for tax benefit purposes, so the revenue hits the income statement in another state and income tax is paid in that state rather than the local community. Some of the only benefits the local community receives are the wages (and local taxes) of the employees in the store, any healthcare benefit paid to the employee that is spent locally, and the costs paid to the local utilities for electricity, water, and so on. The rest of the money is sucked out of the community and given to another state across the country.
With a local alternative currency the profits are practically required to stay in the local community. If your community business group accepts CommunityBucks, you can accept payment and in turn pay for services in CommunityBucks, but only in the local community. If you drive to the next state over they aren’t going to accept the alternative currency.
What Alternative Currency Options are Available?
Your alternative currency options will be completely dependent upon your local or state community. There are different regulations for states than for local communities when it comes to alternative currencies. Here are the options:
States Rules for Alternative Currency
Many state legislators across the United States are pursuing the idea of alternative currencies for their states. However, the Constitution specifically prohibits state governments from issuing alternative paper currency. Despite the ban on alternative paper currency, states are allowed to make gold and silver coins a form of payment.
Does this mean your state is going to have a new mint built just to produce a set of state coins? Not necessarily. Some states are considering new rules that would value gold and silver coins at their weighted value rather than the face value. For example, a coin that weighs 1 oz. in gold might have a face value of $50. But in pure weight, an ounce of gold is around $1,700. The new rules would let individuals and businesses pay for value based on the weight of the coin than the face value.
Local Community Rules for Alternative Currency
The rules for alternative currencies in local communities are vastly different than for states. Local communities can rally together to create new currencies that utilize both coins and paper bills as long as the bills look significantly different than US dollars (to avoid confusion by retailers that accept both forms of payment). Many small communities have done just that with currencies like BerkShares in Southern Berkshire, MA.
|Image of Berkshares from Alternative Currencies Grow in Popularity article by Time, dated December 14, 2008.|
Other communities have currency based on hours rather than dollars. Hours based currencies are designed to encourage bartering amongst citizens: you pay your barber with a 1/2 hour bill which he then turns around and pays a landscaper to mow his yard.
|Image of Ithaca Hours from Alternative Currency: Design Gets Its Own Hundred Dollar Bill article by Fast Company, dated August 26, 2009.|
What Risks are Associated with Alternative Currencies?
Alternative currencies are an interesting phenomena. Although they have recently attracted more interest, some alternative currencies have been around for years. However, there are some serious risks to weigh if you are considering switching to alternative currencies.
The first major problem with alternative currency is the same one the Federal government faces every day: counterfeiting. While US paper dollars have many unique anti-counterfeiting elements, the local community that prints its own paper currency may not have the same security. Fake bills can drastically change the value of the money and allow scammers to freeload on the goodwill of the community.
Some alternative currencies have set valuations tied to the value of the US dollar. One CommunityDollar might cost you one US dollar. If the idea is to hedge against the fluctuation of the greenback, tying your alternative currency to its value doesn’t make sense.
For states that pass laws to accept gold and silver coins in weighted form, a serious problem occurs where retailers are now reliant on their own staff to determine the validity of a coin that a customer hands over. Is it truly a 1 oz. gold coin? Or is it some other cheap metal that has a coating of gold? Obviously there is a significant difference in the value of one ounce of gold versus 9/10th of an ounce of steel plus 1/10th of an ounce in gold. Making a mistake when processing payment could destroy a business in just a few transactions.
Precious Metal Price Fluctuations
Additionally, relying on the price of gold or silver to determine a business transaction means any fluctuation in the price of the underlying commodity can drastically impact the business (or customer, for that matter). Yes, gold is at approximately $1,700 per ounce currently, but only 17 years ago the price was closer to $400 per ounce. In currency terms 17 years is really not that long. Basing your day to day transactions on a precious metal commodity can be risky.
Do you think alternative currencies will take off? Do you think the fall of the US Dollar is near?
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.