Backing

The narrow definition of ‘backing’ means that those holding the backed currency have a legally enforceable claim against the operator of the currency for a specific quantity of another currency or commodity.

The usage of the term in community currencies often diverts from this (e.g. ’backed by services’ in some Regiogeld or ‘backed by the community’ in some LETS), so it is more generally understood as the way of ensuring a minimal purchasing power (value) of a currency long-term by providing some sort of guarantee.

In this way, the backing can be material (e.g. gold, silver or collateral), a different currency (e.g. euro, GBP, USD), or immaterial (e.g. a promise, collective consent, enforceable contract, government bonds or taxes).

Whatever the specifics, the principle is the same: the currency is guaranteed to be exchangeable for a specific quantity of some other currency, commodity or service, and this guarantee gives it value in the eyes of the community of users.

Particularly when the backing comes in the form of a scarce resource, like national currencies or precious metals, the availability of that asset might limit the issuance of the currency. In community currencies, backing typically serves as a way to infuse trust in a scheme that does not have the endorsement of the government.

The best known example of currency backing was the gold standard, whereby the governments of certain countries guaranteed a fixed exchange rate between a set amount of legal tender and gold bullion.

Community currencies that are backed by, and redeemable for other (conventional) currencies rather than a specific good like gold, are referred to as ‘purchased and redeemable vouchers’, of which Chiemgauer, Bristol Pound and Brixton Pound are examples. Table 3 shows the backing methods of a range of different community currencies.