Local currencies: 'In the U.S. we don't trust'

NEW YORK (CNNMoney) -- It may seem like Monopoly money to outsiders, but a growing number of communities across the U.S. are using homegrown local currencies to stimulate their economies and protect themselves from the nation's broader economic woes.

While there were only about 20 active community currencies in the United States in 2009, there has been a recent resurgence, with at least a dozen communities developing their own currencies in the past couple of years, estimates Loren Gatch, a professor of political science at the University of Central Oklahoma who researches these alternative currencies. In addition, currencies that have been around for years have seen a spike in interest, with membership doubling in some cases.

"Economic instability is on peoples' minds," said Gatch.

Now, even state governments are exploring the option. Lawmakers in more than 10 states, including Virginia, Georgia, South Carolina, Idaho and Tennessee, have been circulating proposals to introduce alternative currencies -- many of which would be issued in the form of gold or silver coins.

The Constitution prohibits individual states from printing and issuing paper money as legal tender, but they are allowed to use coins as currency, said Gatch. Individual communities, however, are able to create their own currencies -- including paper notes. Anyone can do it -- as long as the money is easily distinguishable from U.S. dollars and values are tied to the U.S. dollar so that income remains taxable.

Fear factor: Francis Ayley, the founder of Life Dollars, a currency started in Bellingham, Wash., in 2004, said fear of a shortage of U.S. dollars and frustration with the growing wealth gap in the country are driving more people to his currency. Since a majority of the transactions occur online and funds are directly transferred between members, the supply of Life Dollars is unlimited, he said.

The number of people or businesses signed up to use the currency, or members as Ayley refers to them, had remained relatively stable at 250 to 350 for years. But in the past two years, membership has doubled to more than 700. The currency's use has expanded beyond Bellingham to Seattle, too, where 75 new members have signed on in the past six months. Ayley estimates that more than $1 million worth of transactions have been made so far.

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"Many people are short of cash because they are unemployed or under-employed ... many are questioning what they have been told about the economy and the way the free market supposedly works," said Ayley.

John Poling, a co-founder of Cascadia Hour Exchange in Portland, Ore., which started in 1993, said interest in his currency, called the "CHE," had been dwindling until the past couple years. Now, amid fears that the national economy is crumbling and the U.S. dollar is losing its buying power, old members are starting to become active again and new membership is taking off. The exchange is even expanding to surrounding communities.

While there is a fixed exchange rate for CHE's -- each CHE equals about 10 U.S. dollars -- the currency was launched to encourage individuals and businesses to exchange goods and services locally. There's also a monthly auction where members can buy and sell items for CHE.

"The economy is in trouble and people don't trust the Federal Reserve and they don't trust the government, so this is somewhere they can turn, and somewhere they can still do business if the banks close," said Poling.

Local boost: Many alternative currencies were created in an effort to keep wealth within communities and to support local businesses.

Mo Charbonneau, the administrator of "Bay Bucks," a paper currency started in Traverse City, Mich. in 2006, said the currency is the community's "own local stimulus program."

"With everything happening in the economy and the banking sector, people are paying more attention to their local communities and there's more awareness of keeping money in our community," said Charbonneau.

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About 100 businesses now accept Bay Bucks and several companies have even recently started issuing the currency as part of employees' salaries.

Local Trade Partners, in Fayetteville, Ark., combines a local currency called the "Trade Dollar," which is equal to one U.S. dollar, with old-fashioned bartering.

An owner of an auto repair shop could change the oil in someone's car, for example, and the car's owner could pay them in Trade Dollars. The repairman could then use that money at the local restaurant, or even at the orthodontist. And because the aim is to help local businesses, members must be locally-owned -- no big corporations allowed.

"When you go to Home Depot and buy $100 worth of lumber, some of that profit is leaving your town and going to a different part of the world, never to come back," said Rich Creyer, co-founder of the currency. "By making trade money, we have created a sealed system. It's our own little economy and country in a fishbowl."