What are complementary currencies?

It would seem that one of the first things a new country would want to get squared away is a standardized currency. But that was not the case with the United States. For most of the early years of the Republic local banks issued their own currency. There were literally thousands of banknotes in circulation around the country. Travelers moving across state lines had to continually stop and exchange money and merchants were forced to subscribe to thick monthly publications that updated descriptions of currencies, their issuing banks and their value. Only then could businessmen decide to accept the offered currency as payment for goods or services.

It was not until the Civil War in the 1860s that the federal government set up a system of national banks and issued a national currency, known as the greenback. Even then the greenback was established only as a way to fund the war; it was always expected to be mothballed when hostilities concluded. But the single currency backed by the government proved popular with the people and the dollar soon became the single standard of exchange in the United States.

But localized currency did not disappear with the arrival of the American dollar. They are still with us today and are called complementary currencies. These exchange systems operate in the shadow of the national currency to promote local economic development and weld ties among social groups. While complementary currencies are not legal tender like the dollar, they are readily accepted as a medium of exchange among members of the community where they are used.

One of the best examples of a complementary currency are local barter groups where members perform tasks, trading the work for other, often dissimilar services. Since two hours of yardwork may not equate one-to-one for six hours of bookkeeping barter clubs often assign value to the tasks and issue barter dollars for their completion. These dollars can then be exchanged freely among club members for services although they are worthless outside the club.

In the United States, Ithaca Hours in the upstate New York college town of Ithaca claims to be the oldest such local currency system in the country, started in 1991. The organizers have pegged the value of an hour of labor at $10.00 and the hours are paid in paper currency. The currency can not only be used in exchange for goods and services with participating businesses and individuals around town but can be the foundation for zero-interest business loans.

Frequent flier miles are another familiar complementary currency. These rewards can function as currency when they are redeemed to cover travel-related expenses such as other flights, hotels and car rentals. Depending on the program they can even be traded like currency. But like all complementary currencies rules regarding their use are dictated by the issuing organization.

And that is often the rub with complementary currencies. Unlike dollars backed by a national government which is unlikely to disappear, dollars in a complementary currency can become worthless if the issuing organization breaks up or goes out of business. Complementary currencies thus serve useful functions in their specialized communities but are not fertile fishing grounds for investment opportunities.