I have been fortunate enough never to have had to buy clothes for my children. Between a wonderful mother-in-law who feels it is her life's duty to provide new clothes for her children and lots of mom friends who know our situation and are happy to unload their kids' old clothes on us unasked, we have always had everything we need.
While our method isn't exactly organized, you could easily organize a children's clothing circle with your friends and family. The easiest way for most would be to create a Facebook group, but group emails would also work for those that don't use social networking sites.
Create your group and get anyone in that wants to join. The more people, the easier it will be. The idea is simple: when your kids outgrow their clothes or toys (and GENTLY used shoes), pass them on for free to the next mom in the group with the child that wears that size. Our mom group just keeps passing the clothes around and around, taking good care of them, fixing small problem spots when they get them, and using them again. I have actually received stuff back for a new baby that I've passed on to another mom after my first child. Clothes that get ruined just become play clothes or painting smocks or pajamas. Really bad ones get thrown away.
New clothes are always coming in to the mix either as gifts from friends and family (like my MIL) or whenever a certain mom needs a certain item that she doesn't have enough of. Instead of spending hundreds of dollars on clothes for kids, most of us have had to buy only a couple of items here or there.
These pass-it-round groups can work for all kinds of things including toys, books, cloth diapers and other baby gear such as strollers, high chairs and carriers. Just always be sure not to trade car seats (they are one-time use ONLY and may never be passed on) and always check your item for wear and tear, safety and recalls before handing it off to another mama. If done safely and with respect for the other mamas involved, pass-it-round groups can save each of you hundreds of dollars and is a good example of the "reuse it" mentality so necessary to protect our vital natural resources.