Could community currencies produce a more sustainable financial system?

Banks and the EU are becoming interested in currencies such as the Bristol and Brixton Pound, but what is the point of them?

Tim Smedley (theguardian.com, Thursday 15 May 2014 15.47 BST)

Community currency has a history that spans Victorian and Depression-era desperation. Essentially voucher systems or "complementary currency" would fill the void left when national currencies collapse or welfare systems fail, only to be outlawed again once the economy recovered. Today from Totnes to Lewes, Brixton to Bristol, local banknotes are now making a come-back. Not as a rival to sterling however, but as a potential driver of sustainable consumption.

Bristol's Pound (£B) has been up and running since 2012, building on the work of Transition Town pioneers in Totnes (2007) and Brixton (2009). There is more than £400,000 of £B in circulation, with circa 1,100 members and 600 businesses signed-up. Stephen Clarke, director of the Bristol Pound Community Interest Company, explains: "We're a complementary currency which means we're not trying to replace sterling, we're trying to coexist with sterling. Our main aim is to encourage local independent businesses ... enhance community engagement, and encourage members to be greener by shortening their supply chains."

Around half of £B – pegged to match sterling at an exchange rate of 1:1 – are in the form of physical banknotes, printed with standard anti-counterfeiting devices. The other half is spent digitally, as business-to-business payments or used to pay business rates (in turn the council's elected mayor George Ferguson draws his salary in the form of £B. Shoppers can also pay by text, an innovation that is faster than credit card and attracting the attention of some of the big banks, says Clarke.

"If I have £B in my wallet and I go out for a coffee somewhere with three coffee shops, and only one of them takes £B, then I'm going to go to the one that takes £B," he says. "It brings in customers that they potentially otherwise might not have had."

Which raises an issue pertinent to all community currency schemes: if you took an ordinary tenner out with you, you could go to any shop you liked. Why would you voluntarily limit your options?

"The answer is if I shop in my local shop with £B I am passing on the commitment to the shop to also spend that locally," responds Clarke. "If I shop locally with sterling I don't know what then happens to the money ... There's loads of academic work done on this: if you shop at one of the big supermarkets, 90p of your pound disappears from the local area. If you spend in £B it goes round the area on average about eight times."

Josh Ryan-Collins, senior researcher, monetary reform, New Economics Foundation (Nef), has spent years researching – and, in the case of the Brixton Pound, actually founding – community currencies. "There's a rigorous economic argument behind this," he argues. "Smaller independent businesses are much more likely to re-spend that money within the local area and have a bigger multiplier effect for every pound. So if you're interested in supporting a vibrant local community with independent shops that looks a bit different from a bland, clone-town high street, you could see these schemes as directly addressing that issue and creating jobs in the local area as well."

Bristol wholefood wholesaler Essential Trading has seen this in action. A £40m turnover business with 110 people on the payroll, it supplies shops and businesses across the UK and Europe, alongside long-established outlets in the South-West. It took £35,000 in the form of £B in the first three months of this year, mainly from small retail shops. "We do see the benefits in terms of local multiplier effects", says its financial director, Richard Crook. "Even something as simple as the £B directory with all the local businesses in it that take £B – if you have a particular service or product that you're after you use that ... of our local customers, about 7%-10% of receipts are now coming in the form of £B." As well as paying its business rates with Bristol Pounds, Essential Trading is now looking into paying a proportion of salary in the local currency too.

There are an estimated 250 community currencies operational internationally, with more in the pipeline. Clarke is currently helping to advise nascent community currency schemes in Sardinia and Catalonia. Nef is also involved in an EU project looking at six further pilot projects, including Nantes' SoNantes currency, a digital-only system of exchange, and Holland-based TradeQoin, which aims to go beyond the hyperlocal and linkup SMEs and independent retailers across regions, making them more resistant to multinational companies and chain stores.

Inter-business lending also circumvents the perennial problem of banks not lending to small business (despite constant cajoling to do so from The Treasury). "Only about 10% of bank new money creation in the last 10 years has been capital investment for businesses", says Ryan-Collins. "The rest is socially useless."

Community currencies should only be seen as complementary not revolutionary. "The GDP of Bristol is billions – we're hoping [to reach] £2m, £5m, £10m, that kind of scale," says Clarke. "It will still be a tiny percentage of the spending but ... we're not just measuring the success of the scheme in the number of members and the amount of £B out there, but also in the awareness we raise about the important issue of high streets becoming the same, of independent retail and supporting the local economy." That may be a local issue. But it has national, or even international, repercussions.