The idea that our money system is wrong is becoming more visible every day, but creating money systems designed for grassroots adoption (without government involvement) is quite a challenge.
At the unMoney convergence event last spring, Michael Linton, a pioneer of alternative community currencies, gave a presentation of a money system that I found very convincing (Part 1, Part 2, Part 3, Part 4).
The basic premise is that an alternative money system designed for grassroots adoption should not require long, philosophical explanations, but should simply make economic sense for all participants.
Michael identifies three kinds of participants:
- businesses
- non-profits
- people like you and me
The system works as follows:
- businesses issues promises in their “own currency”, i.e. in the goods/services their business provides. Could be movie tickets for a movie theater or bread coupons for a baker. They issue them to the non-profits of their choice, for instance a church or school or hospital. Note that this does not cost them anything as long as they don’t issue more than their business can deliver. For practical purposes these promises are issued in the same unit as the legal tender currency, say the US dollar.
- non-profits take theses local currency notes and sell them to people like you and me for real cash, which they can use to pay for their operating expenses. Again, here, people like you can me buy them from the non-profits of their choice.
- people like you and me work for hard cash at businesses and volunteer/work at non-profits. We earn both real cash and local currency notes. Local currency notes can be spent at local businesses who accept them according to their policy. For instance a restaurant might accept to be paid 50% in real cash and 50% in local currency, while a grocery store might accept to be paid 90% in real cash and 10% in local currency. This will depends essentially on how much real cash they need to support expenses that can’t be covered with local currency.
As the quantity of local currency increases, both in terms of absolute quantity issued and velocity, the benefits for each participants is that real wealth is created (better education, better service for old people, better roads, better health, etc.) but unlike real cash, it cannot be extracted from one community and spent in another one. In other words, the wealth of neighbors is captive and no one but the neighbors capitalize on it.
So, wealth increases, but it’s also shared:
- businesses get more revenue in local currency that they can use to hire more people they pay in local currency, buy from other businesses in local currency, etc.
- people like you and me get more real wealth via the non-profits and get more money in terms of things that are truly valued: local businesses and local free services.
My comment
This model follows some of my own ideas that promises from businesses are probably a better backing mechanism to a local currency then thin air or hours of people like you and me, or a commodity, especially if these promises are in their own currency, i.e. what they produce. I think borrowing in your own currency is a privilege everyone should have (not just the US government) to the extent that they can deliver on their promises.
This model is a sort of Scrip 2.0, which is great since it builds on an existing well established practice of using coupons issued by merchants to non-profit for fundraising (with the major disctinction that in Michael’s model case, there is no impact on the profit margin of the business: $1 of local currency is $1 of real cash vs. $1 of local currency is issued at say $0.9 real cash and sold at face value – $1 – to you and me in the case of scrip).
I think one issue might be that the distinction between businesses and non-profit is pretty vague in the current description I’ve watched (but I’ve probably missed some content). An improvement in that direction would simply be to say that may not discriminate who they provide their services/goods, in particular on the basis of who gave and who didn’t buy local currency from them. I think a local “shaming” or abuse reporting system might be enough for a local currency.
I think it’s important that the notes issued carry the brand of the business who issued it (either in paper or electronically). This would prevent businesses to print too much local currency which may ruin the system via inflation, which is essentially paper wealth or fictitious wealth):
- Businesses could easily be forbidden to use local currency they’ve issued for paying other businesses or their employees: business would have to recycle money they’ve issued and got back via the non-profits.
- People/Non-profits would quickly notice if the business has a hard time redeeming the local currency they’ve issued. Again here a local shaming/reputation system would put pressure on the business to limit their issuance.
I think Michael’s model is very exciting and I am planning to talk about it with people in my neighborhood. Feel free to comment here on the pitfalls/improvements you see. What I’d like to do as a next step is a more detailed analysis of the model with hard numbers.
Great idea. I thought of doing this in my community 6 months ago and thought I was original. Well, I guess it is a good thought if a bunch of people are coming up with it all at once. Love your blog would love to hear some of your thoughs on mine
I'm following currently rather parallel paths of thoughts concerning sweat investment in pre-financing startups. I think that in this context having some medium of exchange to solve some assymetry problems when transacting over shares of the company (I know I'm good and can help your company, but how can I be sure to get something if you're successful. And conversely, you have an impressive resume, but how do I know you'll bring something to my company if I issue you shares) could eventually create wealth.
But in both cases, I see a potential pitfall in the management of exchange rates, which is loosely connected to your point on the differential of inflation rate between the two currencies – the hard one and the local one. While having a pegged exchange rate (e.g. 1 to 1) simplifies considerably the understanding, it could lead to major imbalances that could break the system when it's taking off.
Seems an idea that it is in the interests of local chambers of commerce, rotary clubs and municipal authorities to promote
Thanks Oleg, just added your blog to my reader.
I was at the UnMoney Convergence as well, but was involved in parallel tracks to Michael's.
I've been involved in the LETS world for some time, and indeed am still on the board of Letslink London, which has been tending the LETS flame for a good few years now.
In the past year or three I've been developing my thinking in the use of unconventional “Enterprise Models” or legal and financial structures, based upon early work documented on my site here
http://www.opencapital.net
I think there are widespread misconceptions about money.
The money we use is for the most part – except for <3% of notes and coin – interest-bearing credit created by banks and supported by an amount of “regulatory capital” set by the Bank of International Settlements in Basel.
LETS, and the community currencies advocated by Michael that you refer to above, is non interest-bearing credit issued by individuals or enterprises.
Because credit costs nothing to create, many people (as I used to) consider that banks have no right to charge interest in respect of it.
I now think that this is mistaken, and have come to the view that the true economic function of a bank is essentially a guarantee function: banks actually provide an implicit guarantee that the borrowers to whom they make the loans they create with a click of a mouse can actually repay them, so that they in turn may pay the depositors who are giving credit to the banks.
So banks receive interest from borrowers, pay out interest to depositors, and hope that the profit margin will cover their costs of operation and defaults – which it normally does, leaving handsome profits for the shareholders whose capital supports the banks' implicit guarantee.
Comrade Stalin it was who said: “Trust. But Validate.”
And unfortunately, all too often, community currencies which are supported only by the good faith of the participants do not survive contact with the “commercial” world.
But what I have come to realise – and it was Tom Greco whom I have to thank for pointing me to the writings of E C Riegel on the subject – that while credit (or time to pay) is necessary for a monetary system, it need not necessarily BE money. Which of course is entirely at odds with conventional Economics which is underpinned by an assumpion that Money is Credit.
In order to grasp this key point we must appreciate that there is a difference between “money” and “money's worth”. Or as John Law put it:
“Money is not the Value FOR which Goods are exchanged, but the Value BY which they are Exchanged” (my emphasis)
Wherever a barter system incorporates credit or “time to pay” then the result is a monetary system.
The most sustainable example to date has been the multi billion Swiss Franc turnover WIR Business to Business barter exchange in Switzerland. It appears clear that one of the key factors in the WIR's success has been the fact that participants must give security over their property against any defaults in a respect of a debit balance. In other words, the WIR is “property-backed”.
Many other proprietary barter systems exist, and most fail, sooner rather than later. But in all cases, participants are exchanging “money's worth” typically of goods and services not FOR (say) Dollars but BY REFERENCE to Dollars, using (say) “Trade Dollars” which spend (and are taxed) one for one with conventional dollars.
The key to the creation of a viable and scalable “complementary monetary system” requires the extension of a B2B barter system to individuals ie for it to become a B2C system as well as B2B.
The mechanism I advocate for this is a partnership-based framework agreement I call the “Guarantee Society”.
Any group of individuals and enterprises with a “Common Bond” (whether geographic; a community of interest; or both) would agree to guarantee credit extended bilaterally or “Peer to Peer” within their number.
No “interest” is paid, but instead an amount is paid (to a Service-Provider-Formerly-Known-As-A -Bank) to cover the costs of the service of risk management, system operation, handling defaults etc. And a provision is also paid into a “Default Pool” by BOTH seller and buyer for the period of the guarantee.
Settlement of obligations may be made in conventional money; by the transfer of other obligations (eg factoring – see also RipplePay) ; or in “Money's Worth” of value, in particular units redeemable in energy and land rental value, but it could be anything the buyer and seller agree is acceptable.
It will be seen that the outcome is a “Peer to Peer” system of mutualised credit – banking without the bank as a credit intermediary – but with the pool of capital which supports the credit in circulation being in community hands, rather than in proprietary hands of bank share-holders.
So much for the unsecured Credit which constitutes the lifeblood of economies.
But in fact it is secured credit eg mortgage loans – which constitutes most of the money ever created. Over 70% of money created in the US and UK is property backed credit created by banks.
My proposal to solve the Credit Crunch -and to stem the haemorrhage of defaults bleeding the system into an inevitable Depression – is to replace conventional secured debt with a novel breed of “Equity” in a new generation of Real Estate Investment Trusts within partnership-based frameworks.
in other words. a process of Unitisation which gives rise to a “Debt/Equity Swap” on a grand scale.
This was the subject of my recent FEASTA Annual Lecture in Ireland.
http://www.slideshare.net/ChrisJCook/equity-sha…
Best Regards
Chris Cook
Great Idea!
Great Idea!