Currency backing is the act of ensuring the value of a currency by providing a guarenteed redemption option in another currency(ies) or commodity(ies). The backed commodity can be either material (e.g. gold, silver, or collateral), a different currency (e.g. Euro, GBP, USD), or, arguably, immaterial (e.g. a promise, government bonds or taxes).
Backing a currnecy may serve to limit the issuance by the availability of the backing asset. In complementary currencies backing typically serves as a way to infuse trust in a currency that does not have the endorsement of the government.
The narrow definition of ‘backing’ means that someone who holds the backed currency has a legally enforceable claim against the operator of the currency for a specific quantity of other currency or commodity. However at the broader sense, backing is ofen referred to as an seperate value or arangement that the currency value refers to (e.g. “backed by services” in some Regiogeld or LETS where there is no contractual obligation to honour the currency or debt in that currency.)
The best known example of currency backing was the ‘gold standard’where the government of certain countries guaranteed a fixed exchange rate between a certain amount of legal tender and gold bullion.
Sometimes the term Fiat currencies is used to refer to currencies without backing in the narrow sense.
Complementary currencies that are backed by, and redeemable for other (conventional) currencies rather than a specific good like gold, are refered to as ‘purchased and redeemable vouchers’, of which Chiemgauer, Bristol Pound and Brixton Pound are examples. 1
Backing possibilities for complementary currencies:
|By commodity||Precious metal currencies; Wära; Energy currency; Commercial vouchers|
|By national currency||Regiogeld; C3; Transition Currencies|
|By collateral||some Barter; WIR Bank|
|By a promise or contract||LETS, Time banks (promise at time parity); Loyalty points, Barter|
|Non-backed (Fiat money/fiduciary money)||National currencies; Ithaca hours; Bitcoin; Terra (note that Terra is referenced to a basket of commodities but not backed by them)|
|Miscellaneous||Cap-and-trade [ETS#4] quotas, determined by market price;|
- Lietaer, B.A., G. Hallsmith, (2006) Community Currency Guide, Global Community Initiatives, accessed on 9 September 2013 at <https://www.community-exchange.org/docs/Community_Currency_Guide.pdf>, p.21 ↩