Back in College, cash-strapped students could get around the fact that they were running down their reserves of money by signing up for 'Cafe coupons', little bits of yellow paper that were worth 5 bucks each and could be redeemed at the Cafe, with the price of each wad of coupons put onto their term bills for their parents to pay off. I wasn't much of a fan of the concept, mainly because I wasn't all that fond of the limited Cafe fare (and really except for the scrambled eggs and the mince, pretty much everything else you could get better and cheaper at the D-school canteen). Far better, then, to get my hands on some real cash (usually through quiz winnings), and spend it as I wished.
Local currencies, in many ways, remind me of those cafe coupons. To quote from Wikipedia, "a local currency, in its common usage, is a currency not backed by a national government (and not necessarily legal tender), and intended to trade only in a small area." While these currencies may differ from each other on certain characteristics, they all usually have at least one thing in common - there's a fixed exchange rate between a local currency and the national one, manipulated by the issuer of the scrip. Their supporters defend them mainly on the following grounds: that they help to boost local purchasing power and hence aggregate demand in the community, encourage local businesses and, since they restrict the transactions to being within the local community, are, supposedly, environment-friendly.
If you think about it though, these aims are either specious, or can be achieved better through just using the usual currency instead. For starters, consider the cafe coupon economy: while the coupons may have allowed students to spend more at the cafe, it did cause them to substitute away from other places that they could have been frequenting - the D-school canteen or Chhung town, for instance, choices that would be available to them if they had cash instead. Further, since man does not live on bread, or even toast and chai alone, they would be limited in their ability to procure other supplies since stores outside of college would not accept the coupons. Thus while the coupons push up demand for the cafe, they don't really help any other businesses in the area, while restricting the consumers' choice. Of course, this is touted as an advantage of a local currency - the fact that it restricts purchasing power to only a smaller set of establishments.
In the case of cafe coupons, since the students aren't directly paying for the coupons, there's a jump in aggregate demand within the campus economy with their increased expenditure, although it's actually due to a transfer of funds from their parents outside the system rather than an increase in the students wealth through productive enterprise. Similarly, in some cases where the community is facing a recession, the local currency, it s is claimed, may stimulate aggregate demand. The Worgl experiment is touted as one such successful case. However, this too may have been partly because it allowed for an additional infusion of funds through the fractional reserve banking system, which boosted aggregate demand. While getting banks to lend is a crucial element to sustaining demand, it is not predicated on having a local currency.
For most situations, though, rather than an infusion of funds, it is usually a case of people converting their actual currency, which they would have spent anyway, to the local scrip at a given exchange rate and then spending it, which basically seems more like a redistribution of demand rather an actual increase in it. Now, the exchange rate can be set in such a way that using the local scrip would provide the customer with a discount. While this is an improvement for the customer, it's a hit that the merchant establishments have to take, hoping to make up in volumes what they lose in price. But then if you really like a local shop, say because your friends work there, then to encourage their business you should be paying in actual currency rather than the scrip so they get full value for their product, right? On the other hand, if they do want to offer a discount, making it clearer in terms of actual currency might make the benefit clearer to the customer, which might stimulate demand further (which would work better - "5% discount on everything", or "Berkshares accepted"?).
Setting the exchange rate the other way around, though, can make matters better for the merchant while making them worse for their employees and/or consumers. By paying employees in a scrip with an inflated exchange rate and then getting them to spend it only at the company store, employers can easily make super-normal profits at their employees' expense (Look up the concept of company stores/the truck system on Wikipedia for more). Strangely enough, this has been quoted as an advantage of the local scrip model - it helps a struggling company get back on its feet by fleecing its workers! Yay!
The ecological angle is a new one. Apparently by spending at a local store rather than a large departmental store, you cut emissions, since the latter would spend a lot on transporting goods. But that's not necessarily true, since your local store would also most probably have sourced its product or raw materials from elsewhere, and it may well be that their transportation logistics are less efficient than the large retailer. Besides, in cases where the local store is more environmentally efficient, paying them full-price in cash would encourage them more, wouldn't it?
Now such coupons aren't always a waste of time. Sodexho coupons, for example, are a better way for employers to subsidize employees' lunches than subsidized cafeterias alone, since the latter option in effect discriminates against anyone who carries their lunch to office. Of course, offering cash would be even more preferable. Similarly, vouchers may be a good idea if you want to restrict customers' choice - school vouchers may be better than giving cash, for example, if you think that people may end up blowing up the cash on things other than their kids' education.As Tim Harford pointed out in an article a while ago, local currencies work better as community-building measures rather than as economically-sound propositions. Otherwise, straight cash trumps cafe coupons pretty much every time.