For more than 200 years, private money systems have operated in the United States, solving problems similar to those confronting innovative electronic money systems. The high-tech newcomers may be able to benefit from the experience of the low-tech veterans.Money

Barbara A. Good

English

Research Papers in Economics

It’s hard to pick up a newsmagazine or
financial paper these days without read-
ing about one of the new forms of elec-
tronic money. Although the business
case for stored-value cards and cyber-
money has not been proven in this coun-
try, media coverage has been lavish.
Nearly all the stories, however, neglect
one important fact: High-tech payments
systems are best defined as a form of pri-
vate money, something that has existed
for centuries.
Private money—currency that is not
issued or backed by any government
entity—can have all of the characteris-
tics of money, being a medium of ex-
change, a store of value, and a unit of
account. Since Colonial times, this coun-
try has seen many examples of private
money systems. In fact, Americans
today regularly use many types of pri-
vately issued stored-value systems—
like traveler’s checks—on a regular
basis without even thinking about it.
Private money is not prohibited if it
complies with certain government regu-
lations. It must be smaller in size than
U.S. currency and issued in denomina-
tions valued at a minimum of $1; any
income received in private money must
be reported to the IRS.1
This Economic Commentary discusses
the operation and characteristics of two
types of private money currently in use
in the United States: local currencies and
local electronic trading systems (LETS) .
Local currencies are low-tech, while
LETS require a more sophisticated level
of technology, but both have dealt with
the very questions that emerging high-
tech payments systems now must face:
What induces people to accept the
money in exchange for goods and ser-
vices? What or who determines how
much money is issued? How is counter-
feiting prevented? And what stabilizes
the purchasing power of money? The
answers provide important lessons for
the developers of the new electronic
forms of money.
n n   Local Currency Systems
Today, local currency systems are used
in more than 30 U.S. communities,
including Tacoma Park, Maryland,
Madison, Wisconsin, Waldo County,
Maine, and Montpelier, Vermont. The
most publicized one—“Ithaca Hours”
—is in Ithaca, New York (see figure 1
for a sample).
Ithaca Hours were established in 1991
by town resident Paul Glover, an outspo-
ken proponent of local currency. Each
Hour is equivalent to $10, the average
hourly wage of workers in Tompkins
County, where Ithaca (population
30,000) is located. Glover, a writer who
describes himself as a “community
economist,” notes that the motive for
establishing a local currency was social
as well as economic: “We printed our
own money to level the playing field and
to keep Ithaca money from leaking out
of the local economy.”2
Since 1991, $63,000 worth of Ithaca
Hours (6,300 Hours valued at $10 each)
have been issued in five denominations,
from one-eighth to two Hours. An esti-
mated 1,600 participants, including 300
businesses, have both earned and spent
Hours. Glover notes that the value of
trade in Hours has now reached about 
$2 million,3 a good indication of the
April 1, 1998
Federal Reserve Bank of Cleveland
Private Money: Everything Old 
is New Again
by Barbara A. Good
Private money systems have existed 
in this country for 200 years or more.
Wherever they are used, they must
solve problems similar to those con-
fronting innovative electronic money
systems. This Economic Commentary
suggests that the high-tech newcomers
could benefit from the experience of
the low-tech veterans.
ISSN 0428-1276currency’s popularity within the commu-
nity, although the amount is small com-
pared with other payments methods. 
In keeping with the social agenda, com-
memorative Hours are issued to honor
local people and the environment. One of
these commemoratives is the first paper
money in the United States to honor an
African–American. Furthermore, 10 per-
cent of all Hours issued are awarded as
grants to community organizations.
n n    How Ithaca Hours Work
Hours are printed locally, then stored
under lock and key at a nearby credit
union until they are stamped with serial
numbers. The bills incorporate several
(apparently successful) anticounterfeiting
measures, including unique paper and
specially developed inks. Multicolored
Hours, some printed on locally made,
watermarked cattail (marsh reed) paper
and some with thermal ink, are probably
harder to counterfeit than U.S. dollars.
Printing services are paid for with Hours,
and many other services are provided by
volunteers, including promotions and
recruiting merchant participants.
There are two methods of getting Hours
into circulation. Businesses and individ-
uals who have agreed to accept them are
paid two Hours for signing up, and their
names are printed in a free bimonthly
newsletter, Ithaca Money, which cur-
rently lists 1,300 participants. Although
some will accept only partial payment in
Hours, the system is well known and
used regularly. (Stores also receive a dis-
play decal announcing that they accept
the alternative currency.) The second
method is to let people purchase Hours
with U.S. currency at an exchange rate
of $10 for one Hour.4  Those who want
to support the system without providing
goods and services themselves can buy
Hours at the credit union or at any par-
ticipating business.
Each participant is paid two Hours every
eight months as a reward for continued
participation. In this way, the supply of
Hours circulating within the community
is increased on a controlled basis.
Ithaca’s equivalent of the Federal Open
Market Committee (the policymaking
arm of the Federal Reserve System) is
the Barter Potluck, a community-wide
governing body that meets once a month
and votes on whether to continue this
Hours supply policy or to award any
grants. Since Hours were introduced in
1991, there has been no increase in the
exchange rate. However, this may in fact
represent a form of inflation.
The reason is that merchants can accept a
combination of Hours and other payment
methods in exchange for goods and serv-
ices. If they believe they have accumu-
lated too many Hours, they can change
their terms for accepting them.5  This
could serve to lower the exchange rate
(in effect raising prices) until their sup-
ply returns to the level they think is
appropriate.
n n    Are Local Currencies
Sustainable?
In the end, a local currency is only as
good as its “spendability.” Ithaca Hours’
adoption by many types of local mer-
chants and businesses has helped keep
the system robust. Indeed, wide accep-
tance is a key indicator of the sustain-
ability of any local currency system.
Holders of a local currency must be able
to use it for obtaining the goods and
services they want. Communities that
are smaller than Ithaca or that have a less
progressive social philosophy may find
it more difficult to develop and maintain
a local currency system. 
n n    LETS
The local electronic trading system
(LETS)6 is a network supported by its
own internal currency. It is usually a
computer-based membership organiza-
tion in which transactions generate cred-
its to be spent within the group. The first
modern LETS was developed in 1983 on
Vancouver Island, British Columbia.
Although there are only about 10 LETS
each in the United States and Canada,
Australia has 200, New Zealand has 90,
and Great Britain has 170.7
n n    How LETS Work
Typically, new members pay an initia-
tion fee and provide a list of the goods
and services they are offering, which is
printed and distributed to all members.
Thus, a LETS functions as a clearing-
house and information system as well as
an account network.
A member starts off with a computer-
based account and a zero balance, to be
credited or debited when a good or ser-
vice is traded. The buyer and seller
negotiate prices individually, but there is
no exchange of paper currency. When
the deal is made, the information is
reported by mail or phone to the local
LETS’ central office, where the accounts
are debited and credited. A member
need not have the appropriate amount of
computer credits on hand when the
exchange is made, but his account is
debited to reflect this negative condition.
There is no interest on a debit balance
and no repayment schedule, but mem-
bers are expected to bring their account
balances back to zero. Excluding any
service fees assessed by the LETS to
cover the costs of running the computers
and paying data-entry clerks, debits and
credits (which sum to the total value of
currency in the system) always equal
zero. LETS’ biggest advantage to mem-
bers is that no limit is placed on the size
of a transaction, but this is also their
largest potential drawback, threatening
their very existence. LETS are based on
mutual trust and the expectation that
each member will repay any debt
incurred. If one member fails to repay,
the others must absorb the obligation.8
A LETS extends the barter system and
addresses some of its limitations. Its phi-
losophy involves both freedoms and
responsibilities. Members must consent
to join the system and offer their services
and products, which guarantees the
acceptability of the currency. They know
that interest will not be charged or paid
on account balances, or earned by lend-
ing balances to other participants. Com-
mon ownership results in a cost-of-
service provision for support functions,
keeping transaction costs affordable.
Because information disclosure is com-
plete, the provider of a product or serv-
ice can determine the account position of
the purchaser. This transparency of oper-
ations provides a form of self-regulation
which helps ensure that no one can
increase or decrease his balance in an
unauthorized manner.There are two ways to value LETS units,
one based on the rate for a standard hour
of work (similar to Ithaca Hours), the
other pegged to the national currency.
Pegging makes the system more practi-
cal, yet still maintains its basic philoso-
phy—that LETS are independent of a
country’s standard monetary system.
LETS units can be spent only in the sys-
tem in which they have been issued.
They are merely information about an
individual’s position within the trading
community and represent promises
made by those who issue them. As such,
they cannot be “called in” as if they were
a debt, nor can they be redeemed for
national currency. Although the prices
negotiated between members can change
relative to one another, these shifts have
no inflationary impact.
n n    LETS Registries
Each LETS has a registry, where new
members sign up. It coordinates the
recording of transactions and sends out
statements, and can also be linked with
other registries, allowing several sys-
tems to trade together. Each LETS has a
steward who is responsible for its
integrity and answerable to account
holders (although his/her powers are
strictly limited). A steward’s duties
include instructing registries not to
record transactions that are considered
inappropriate; acting as liaison to other
registries; and advising the trading com-
munity about actions that could endan-
ger the integrity of the LETS.
A LETS is a network of people who
agree to trade in a particular way. Prob-
lems arise if members do not receive the
services or products they have purchased
or do not adhere to a set of binding
agreements, some of which are subject
to contract law. LETS earnings must be
reported as income for tax purposes, but
as for all business earnings, expenses of
doing business can also be considered.
Registries themselves generally choose a
not-for-profit status, although some
small systems are set up as partnerships.
n n    Are LETS Sustainable?
Trust is an essential ingredient for any
monetary system. Unlike local curren-
cies, a LETS allows its members to
maintain a negative balance and thus is
subject to credit risk. Confidence in a
LETS depends mainly on two factors:
the balance of offers and requests and
the efficiency and accuracy of the
account-recording process. If a LETS
were to cease operations, those holding
positive balances could lose (a situation
analogous to hyperinflation, where sav-
ings become worthless). Under the struc-
ture and agreements currently governing
LETS, there could be no legal redress
against those holding negative balances,
except through individual civil suits.
This makes a LETS a somewhat risky
proposition for members, especially as
the system expands. The simplest way to
address its default risk is to limit the
debit balance that any member can incur. 
n n    Implications for Other Private
Money Systems
The similarities—and differences—
between private money and more high-
tech systems (card-based and network-
based) are good indicators of what will
be involved in achieving widespread use
of the new stored-value systems. The
three characteristics required to sustain a
local currencies or a LETS—trust that
the currency will be acceptable today
and in the future, monetary value that
remains constant, and security against
counterfeiting—are the primary require-
ments for widespread acceptance and
use of any form of payment, including
the emerging high-tech systems.9
People must have faith in a currency’s
monetary value and in their ability to
exchange that value at a fair, acceptable
rate, now and in years to come. If the
value is not “spendable” on the goods
and services people want, or if the cur-
rency is not a reliable store of value, it is
not very usable and thus will not be
widely accepted. Security against coun-
terfeiting is also essential. No form of
money, however convenient, will be ac-
ceptable if users must worry about coun-
terfeit bills when receiving payment or
change from a purchase.
The lower-tech forms of private money
discussed here have been dealing with
these issues for years. This means that
local currency systems and LETS,
although limited in geographic scope,
offer interesting parallels to the high-
tech payment technologies that are in
the news today and may be in our pock-
ets tomorrow.
FIGURE 1n n    Footnotes
1.  See Ellen Graham, “Community Groups
Print Local (and Legal) Currencies,” The Wall
Street Journal, June 27, 1996.
2. Interview with the author, August 7, 1996.
3. Ibid.
4.  Although the exchange rate for purchasing
Ithaca Hours is fixed at $10/Hour, there is no
similar exchange rate or market for exchang-
ing Hours for dollars. A discount for trades
could conceivably exist if a user had more
Hours than could easily be spent and wanted
to exchange them for dollars. Only a few
Hours are purchased with U.S. currency, so
little seigniorage results.
5. Ithaca Money tells participants not only
where, but also under what conditions, Hours
are accepted.
6. The acronym can also stand for “local
employment and trading systems.”
7.  For a closer look at these systems, see
Lewis D. Solomon, Rethinking Our Central-
ized Monetary System: The Case for a Sys-
tem of Local Currencies, Westport, Conn.:
Praeger, 1996, p. 41.
8.  Ibid, pp. 38–9.
9.  The acceptability of U.S. dollars abroad
provides a good example of this concept. See
John B. Carlson and Benjamin D. Keen,
“Where Is All the U.S. Currency Hiding?”
Federal Reserve Bank of Cleveland, Eco-
nomic Commentary, April 15, 1996.
Barbara Good is a payments systems special-
ist at the Federal Reserve Bank of Cleveland.
The views stated herein are those of the
author and not necessarily those of the Fed-
eral Reserve Bank of Cleveland or of the
Board of Governors of the Federal Reserve
System.
Economic Commentary is available elec-
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Private money: everything old is new again

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Private money: everything old is new again

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