[_m7bj]

Local councils can create some value by allowing people to pay council taxes, fees and fines with the issued currency. Enough to peg it 1:1 with the USD? I'll be honest, I don't know how countries like panama manage that, so hell if I know how a council would do it.

Fundamentally, this is what underwrites the US dollar as well. If you don't pay your taxes you (eventually, provided you aren't connected enough to avoid it) get arrested. You can generate your wealth in corn or software or boat building, but you have to pay your taxes in US dollars. You can't barter your boats for corn and pay your taxes in corn. Thus, (almost) everyone in the US needs some US dollars to avoid being jailed. This is the foundation upon which the value of the US dollar is built.

Of course, making sure it doesn't blow up in the councils face in a few months/years time due to lax issuing controls is a different matter.

[magicsmoke]

I suspect there may be a psychological effect giving these currencies value as well, considering they've only been rolled out in small towns. Imagine living in a 2000 population town like in the article where everyone is socially connected. If you refused local currency because you doubted its future value, your business could very quickly become a local pariah.

Taxation is necessary to maintain the value of currency when dealing with a country of millions of people, but somewhere on the sliding scale as the population numbers we deal with decrease social factors outweigh purely economic factors. One of the biggest impacts modern capitalism has on human society is its ability to strip away all social considerations from financial decisions. In the premodern world your shopkeeper was also your neighbor, and every transaction was filled with social considerations like your relative wealth, recent hardship, or length of acquaintance. In the modern world, everything has a fixed price regardless of whether the buyer is a foreign stranger or childhood friend. Only by stripping away messy individual social connections does trade among 7 billion people operate efficiently.