In economics, a local currency, in its common usage, is a  not backed by a national government (and not necessarily legal tender), and intended to trade only in a small area. These currencies are also referred to as community currency. They encompass a wide range of forms, both physically and financially, and often are associated with a particular economic discourse.
Free banking provides the economic prototype of local currencies. In the modern era, the most recognizable local currencies were company scrip issued in certain industries to pay workers, and tokens issued by some businesses to encourage consumer loyalty. In the nineteenth and early twentieth century, the failures of national banks during crises often created acute demands for cash, which were met by businesses creating emergency currencies. These scrips were usually issued with the intention of redemption in national currency at some later date.
A few such currencies, however, developed into monetary systems in their own right. The idea of using free banking to produce an alternative, community-level currency dates back at least as far as the German Credit Unions in the 1800s. The oldest local currencies known to be in continuous use are the WIR in Switzerland, and the Labor Banks in Japan.
Complementary currency is a hypernym to local currency, but the terms are often used as synonyms. As the term is now widely used, it does not refer to currency which is nationally-backed but happens to only be used in a local area.
Advocates, such as Jane Jacobs, argue that this enables an economically cool, yet depressed region to pull itself up, by giving the people living there a medium of exchange that they can use to exchange services and locally-produced goods. In a broader sense, this is the original purpose of all money. Local currencies also tend to operate in relatively small geographic regions and encourage recycling, reducing the amount of carbon emissions from the transportation and manufacture of goods. As a result, they are part of the economic strategy of many green and sustainable living groups such as the Green Party of England and Wales.
Local currencies can also come into being when there is economic turmoil involving the national currency. An example of this is the Argentine economic crisis of 2002 in which small denomination, interest free provincial bond IOUs issued by local governments quickly took on some of the characteristics of local currencies successfully.
Opponents of this concept argue that local currency creates a barrier which can interfere with economies of scale and comparative advantage, and that in some cases they can serve, like traditional national currencies, as a means of tax evasion.
Historical local currencies
The Wörgl experiment that was conducted from July 1932 to November 1933 is a classic example of the potential efficacy of local currencies. Wörgl is a small town in Austria with 4000 inhabitants that introduced a local script during the Great Depression. By 1932 unemployment in Wörgl had risen to 30%. The local government had amassed debts of 1.3 million Austrian Shillings against cash reserves of 40,000 AS. Local construction and civic maintenance had come to a standstill. On the initiative of the town's mayor, Michael Unterguggenberger, the local government printed 32,000 in labor certificates which carried a negative 1% monthly interest rate and could be converted into schillings at 98% of face value. An equivalent amount in schillings was deposited in the local bank as cover for the certificates in case of mass redemption and earned interest for the government. The certificates circulated so rapidly, that only 12,000 were ever actually put into circulation. According to reports by the mayor and economists of the day who studied the experiment, the script was readily accepted by local merchants and the local population. It utilized the script to carry out 100,000 AS in public works projects involving construction and repair of roads, bridges, tanks, drainage systems, factories and buildings. The script was also accepted as legal tender for payment of local taxes. In the one year that the currency was in circulation, it circulated 13 times faster than the official shilling and served as a catalyst to the local economy. The heavy arrears in local tax collection declined dramatically. Local government revenue rose from 2,400 AS in 1931 to 20,400 in 1932. Unemployment was eliminated, while it remained very high throughout the rest of the country. No increase in prices was observed. Based on the dramatic success of the Wörgl experiment, several other communities introduced similar scripts.
In spite of the tangible benefits of the program, it met with stiff opposition from the regional socialist party and from the Austrian central bank, which opposed the local currency as an infringement on its powers over the currency. As a result the program was suspended, unemployment rose and the local economy soon degenerated to the level of other communities in the country. 
Other well-documented historical examples include --
- Emperor Norton's own currency
- Prosperity Certificate
- (Germany,_made_illegal_in_October_1931) WARA (Germany, made illegal in October 1931)
Characteristics & Benefits
The Wörgl experiment dramatically illustrates some of the common characteristics and major benefits of local currencies. 
- Local currencies tend to circulate much more rapidly than national currencies. The same amount of currency in circulation is employed more times and results in far greater overall economic activity. It produces greater benefit per unit. The higher velocity of money is a result of the negative interest rate which encourages people to spend the money more quickly.
- Local currencies enable the community to more fully utilize its existing productive resources, especially unemployed labor, which has a catalystic effect on the rest of the local economy. They are based on the premise that the community is not fully utilizing its productive capacities, because of a lack of local purchasing power. The alternative currency is utilized to increase demand, resulting in a greater exploitation of productive resources. So long as the local economy is functioning at less than full capacity, the introduction of local currency need not be inflationary, even when it results in a significant increase in total money supply and total economic activity.
- Since local currencies are only accepted within the community, their usage encourages the purchase of locally-produced and locally-available goods and services. Thus, for any given level of economic activity, more of the benefit accrues to the local community and less drains out to other parts of the country or the world. For instance, construction work undertaken with local currencies employs local labor and utilizes as far as possible local materials. The enhanced local effect becomes an incentive for the local population to accept and utilize the scripts.
- Some forms of complementary currency can promote fuller utilization of resources over a much wider geographic area and help abridge the barriers imposed by distance. The Fureai kippu system in Japan issues credits in exchange for assistance to senior citizens. Family members living far from their parents can earn credits by offering assistance to the elderly in their local community. The credits can then be transferred to their parents and redeemed by them for local assistance. Airline frequent flyer miles are a form of complementary currency that promotes customer-loyalty in exchange for free travel. The airlines offer most of the coupons for seats on less heavily sold flights where some seats normally go empty, thus providing a benefit to customers at relatively low cost to the airline.
- While most of these currencies are restricted to a small geographic area or a country, through the Internet electronic forms of complementary currency can be used to stimulate transactions on a global basis. In China, Tencent's Q-coins are a virtual form of currency that has gained wide circulation. Q-coins can be purchased for Renimbi and used to purchase virtual products and services such as ringtones and on-line video game time. They are also obtainable through on-line exchange for goods and services at about twice the Renimbi price, by which additional 'money' is being directly created. Though virtual currencies are not 'local' in the tradition sense, they do cater to the specific needs of a particular community, a virtual community. Once in circulation, they add to the total effective purchasing power of the on-line population as in the case of local currencies.
Society utilizes only a small portion of its resources and opportunities. Almost everyone has underutilized knowledge, skills and time that can be engaged productively. Most manufacturers and services have underutilized machinery or capacity. Complementary currencies are a creative means to enhance this untapped social potential.
Modern local currencies
There has been a tremendous surge in the use of local currencies over the past two decades. Today there are over 2500 different local currency systems operating in countries throughout the world. One of the most prominent is LETS, Local Exchange Trading System, a trading network supported by its own internal currency. Originally started in Vancouver, Canada, there are presently more than 30 LETS systems operating in Canada and over 400 in the United Kingdom. Australia, France, New Zealand and Switzerland have similar systems. Time dollars, Ithaca hours and PEN exchange are among the most successful systems in the USA.
- Worldwide Database of Complementary Currency Systems
- Gallery of Images and Samples of Notes from Complementary Currency Systems
- South America
- North America
- (note: Hong Kong dollars are legal tender and are therefore not "local currency" in the sense discussed in this article. The "local currencies" listed here are not legal tender)
- [Yogyakarta System, Indonesia
- Axarco (in Axarquía, Málaga)
- United Kingdom
- Flash Cash
- Green dollar
- Interdependent Occupational Unit
- RGT - Red Global del Trueque
- ROCS - Robust Complementary Community Currency System
- RERS - Réseaux d'Echange Réciproque de Savoirs
- Salta Creditos
- Systèmes d’Echanges Communitares
- Thay Gerh
- Tianguis Tlaloc
- ↑  Wörgl Experiment with Depreciating Money
- ↑  Mckeever Institute of Economic policy Analysis
- ↑ Lietaer, Bernard, The Future of Money, Century, 2002.
- Local Exchange Trading Systems
- Ripple monetary system
- Complementary currency
- List of economics topics
- Private currency
- Time-based currency
- Regional currencies in Germany - local competition for the euro? Deutsche Bundesbank (ed.)
- Community Currency Resources
- Community Currency
- ccPedia(a wiki in related topics)
- Complementary Community Currency Systems
- Alternative Money Systems
- Local Currency Directory for USA & Canada
- ccSyndicator Collaborative IT Committee for Complementary Currencies
- Social Trade Organization, Netherlands
- Margrit Kennedy
- Network of German local currencies
- Parallel Currency Systems in Asia
- Complementary Currency Resource Center
- Transforming Money: From Debt to Empowerment by Susmita Barua from Buddhist perspective
- Yootles A complementary currency being developed at Yahoo!
- Ithaca Hours An example of a local currency system functioning in the US.
- Bank of International Art Money A global alternative money based on currency created by artists.
- REDI-the Regional Economic Development Initiative A local currency system being developed for Colorado.
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