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

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.