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Local Currencies

posted by Bob Lawless

Schrute_buckOne moment that everyone seems to remember from The Office television show is the creation of Schrute Bucks, a motivational tool created by Dwight Schrute in his few moments of power as office manager. Any worker who accumulated 1,000 Schrute Bucks was entitled to five extra minutes of lunch break.

In the most recent issue of American Banker, Sara Lepro has a fascinating article on the growth of local currencies. Hardly worthless Schrute bucks, these currencies generally allow local residents to purchase them at a discount and then redeem them for full face value at local merchants. The idea is that local currencies promote local commerce, but Lepro points out their use has been growing in today's climate of mistrust against large financial institutions. The article will interest many Credit Slips visitors.

A question probably occurs to most everyone: is this legal? Yep, in most circumstances, a local currency would be legal. It is a crime to make, utter, or pass "any coins of gold or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of the United States or of foreign countries, or of original design." (18 U.S.C. § 486). The statute only mentions coins, making one wonder whether it could be applied to paper currency, but the statute's vintage suggests it is intended to reach any sort of substitute money. Rather, the key question would seem to be whether the currency is intended for use as "current money."

Obviously, the phrase "current money" does not readily admit of a definition, but consider two extremes. At one extreme, a charity sells coupons redeemable for twice face value at a local restaurant. At the other extreme might be an organization that creates a separate currency system intended to compete with and be a substitute nationally for U.S. currency (readers may know the liberty dollar controversy). The coupon is clearly not intended as "current money," while the latter example most likely is. In between these two extreme situations is a vast gray area, but the extremes help us understand how the statute might apply to a local currency. A local currency intended only to circulate among local merchants is the nature of scrip, much more like the clearly lawful coupons than a national currency substitute.

This statutory analysis also suggests a limit to local currencies. If a particular local currency became very popular and widespread, then it would be more likely to be intended for use as "current money," that is as a full substitute for U.S. currency. In these circumstances, it might attract the attention of law enforcement and Treasury officials. But, that analysis is very hypothetical. The local currencies described in the American Banker fall far short of the sort of widespread use that would raise legal concerns under the current statute.


It could be interesting to review the Chinese government concerns of late around Tencent's QQ and regulations in the 3rd party payment space. QQ started to compete a bit too much with the CNY and therefore had its convertibility limited. It poses an interesting question as well for virtual currencies in general -- how easily could they become local currencies?

There is another statute. 12 USC 378(a)(2) makes it illegal:

(2) For any person, firm, corporation, association, business trust, or other similar organization to engage, to any extent whatever with others than his or its officers, agents or employees, in the business of receiving deposits subject to check or to repayment upon presentation of a pass book, certificate of deposit, or other evidence of debt, or upon request of the depositor, unless such person, firm, corporation, association, business trust, or other similar organization (A) shall be incorporated under, and authorized to engage in such business by, the laws of the United States or of any State, Territory, or District, and subjected, by the laws of the United States, or of the State, Territory, or District wherein located, to examination and regulation, or (B) shall be permitted by the United States, any State, territory, or district to engage in such business and shall be subjected by the laws of the United States, or such State, territory, or district to examination and regulations or, (C) shall submit to periodic examination by the banking authority of the State, Territory, or District where such business is carried on and shall make and publish periodic reports of its condition, exhibiting in detail its resources and liabilities, such examination and reports to be made and published at the same times and in the same manner and under the same conditions as required by the law of such State, Territory, or District in the case of incorporated banking institutions engaged in such business in the same locality. (b) Whoever shall willfully violate any of the provisions of this section shall upon conviction be fined not more than $5,000 or imprisoned not more than five years, or both, and any officer, director, employee, or agent of any person, firm, corporation, association, business trust, or other similar organization who knowingly participates in any such violation shall be punished by a like fine or imprisonment or both.

"Other evidence of debt" should include these local currencies. This causes problems for any credit-based parallel money system, unless issued by a bank. Ithaca dollars are backed by labor, not credit. They thus do not fall afoul of this language. Nor would local currencies for which banks are the redemption authority.

At one point in Depression, Princeton issued its own scrip. Anna Gelpern (a Princeton alum) has a footnote about this somewhere.

Is this really so different from stored value cards that many universities issue? Indeed, what makes a Schrutebuck different from using a credit card or wampum or a dollar? They are all just proxies for mutually accepted value.

Yep, exactly, Adam. Once one appreciates that there are many ways to create money substitutes, then the regulatory issue is complex. Monetary substitutes can have salutary effects, but substitutes for the entire monetary system probably do not. The difference is one of degree not kind.

There is a big difference between a university issued stored value card and scrip. One is a bilateral unit of account (like subway tokens); the other can be money. "Money" requires an exchange or series of exchanges involving at least three persons: an issuer and two users. It therefore has lots of embedded sociology and externalities which bilateral units of account do not.

It's not a money substitute. It is money. I don't have any conceptual problem with private moneys. Hayek did a pretty good job of showing how they could work (The Denationalisation of Money). They don't necessarily require small geographical communities: look at the Linden Dollars of Second Life. But I'd still rather deal in frog pelts, thank you very much.

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