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PART III
COMMUNITY EMPOWERMENT
AND MONETARY TRANSFORMATION



Chapter 11
Basic Factors in the Creation
of Democratic Exchange Media


"Every piece of money is essentially a credit instrument."

-- Hugo Bilgram and L. E. Levy




Bilgram and Levy remind us that "every piece of money is essentially a credit instrument, an acknowledgement of debt, accepted in the market as a medium of exchange, and that its value depends solely on the value of the credit on which it is based." [85] This may not be true of full valued commodity monies like gold and silver coins, but it is certainly true of the common types of paper and "checkbook" money we have become accustomed to using in this modern era. Likewise, the contemporary local exchange examples described in the previous chapter and the democratic exchange media which we advocate and describe herein are also credit instruments. Keeping that fact in mind, it becomes clear that the first requisite in evaluating any exchange system is to assess "the value of the credit upon which it (the money) is based." Monetary theory speaks of several essential factors which must be appropriately dealt with in order to have a sound monetary system. The most essential of these factors can be highlighted in the following questions:

  1. What should be the basis upon which money is issued into circulation?
  2. What factors should be used to determine the amount of money to be issued?
  3. Who should have the power to issue money?
  4. How should the power to issue be allocated among those empowered to issue, and what should be the limits?

As we shall see, the answer to the second question follows naturally from the first, while the answer to the fourth question is implied by the criteria selected in answering the third.



Basis of Issue

The most important factor in the creation of an exchange medium is the BASIS OF ISSUE. It is my strong belief that the creation and issuance into circulation of a unit of currency or credit should be coincident with the transfer of value. It should also give rise to a "commitment" on the part of the original issuer to redeem the currency, in the market, by providing equivalent value in exchange for the currency, i.e. the issuer should be obligated to accept his currency at par or face value from those wishing to buy his/her goods or services. The form of the redemption need not necessarily be limited to a particular commodity, but may be in the form of any desired goods or services. This is the way a mutual credit system operates. The "credits" which the seller receives are, in effect, money, created by the buyer who is "committed" to redeem credits later by providing goods or services to someone in the system. [86]



Regulation of the Amount of Exchange Media Supplied

It is crucial that the quantity of the exchange medium be balanced with the flow of goods and services coming into the market, and that it be self-adjusting. Much is made of the "quantity (or volume) theory of the value of money," and it is generally accepted as valid. But as we have already shown, it is not the quantity of money per se which determines its value, so it is not the quantity which needs to be controlled. [87] If money is properly issued, there will never be any problem of under-supply or over-supply. The quantity of money will always be just the right amount to purchase the goods and services which it represents. Capital goods, land, purchases by consumers, and ever-expanding government debt should therefore all be excluded as allowable bases of issue. It is only the politicization of money and the monopolization of its issuance and control which have caused the focus of attention to be shifted away from its true value foundation onto its mere volume. The proper basis of issue is the transfer of value, as it is being exchanged, from a producer to another (potential) producer.

In a mutual credit system, credits are created as needed to mediate an exchange, and there is no interest burden on debits. The total amount of credits is always balanced with an equal amount of total debits, so there can never be an artificial shortage or surplus as there is in the official monetary system.



Power to Issue

The third important factor is the POWER TO ISSUE. In a truly free society, power of all kinds, including economic power, should be widely dispersed. Thus, the association of issuers should be open to anyone willing and able to abide by its agreements and rules, which should be minimal, and there should be no restriction on the formation of competing associations. Just as we have competing credit card companies, the issuance of exchange media should be open to competing associations of issuing groups. This will tend to insure that proper procedures are followed, and contribute to the innovative development of the exchange process.

So, everyone should be empowered to issue exchange media based upon their ability and willingness to contribute valuable goods and services to the community. This means that an issuer should, in the normal course of business, be able to liquidate his/her issue within a reasonable period of time. The guiding principle which seems most appropriate, based on past monetary experience, is that a participant is qualified to put into circulation an amount of "money" up to the amount of his/her sales over a 2 or 3 month period.



Some Theoretical Considerations for Contemporary Systems

As we have seen, the soundness of currency in circulation derives from the basis upon which it is issued, and the ultimate "backing" for it is the commitment of the issuers to redeem it by the sale of goods and services.



Authority

There has been considerable debate about whether or not an issuing authority is needed for a local currency or mutual exchange system, and, if so, what the power of that authority should be. As we have pointed out, the basis of any exchange system is the agreement, either formal or tacit, among the participants. It is the agreement that constitutes the authority under which the system operates; not the administrator or board of directors, which, if they exist at all, are empowered only to make certain specified decisions or take limited actions, as stated in the agreement.

Those agreements, of whatever type, which seem to be most workable, are those which define clearly and precisely the rights and responsibilities of each of the parties to the agreement. In the case of a mutual credit system, someone has to sign-up new participants, keep the membership list, record transactions, and keep track of account balances. These functions must all be included in the agreement. Each participant is given the right to issue credits, and each participant has the obligation of redeeming the credits which s/he issues.

It is important that the participant feel this commitment strongly. This works more easily in a system in which there is formal "membership" and a written agreement. This agreement might require members to "settle" their accounts if and when they terminate their membership. Thus, in a mutual credit system, a member with a debit balance would be obligated to earn enough credits to bring his/her balance to zero, or, perhaps, pay an equivalent amount in cash. Similarly, if currency notes are used, a member to whom notes have been transferred would agree to return a like amount of notes, or cash.

A periodic renewal of membership provides an opportunity for each member to confirm his/her commitment. If a person fails to renew his/her membership, then the management could "call" his/her commitment. The obvious question though is, how shall the agreement be enforced? I believe that a community-based exchange system, in contrast to the dominant system with which we are all familiar, should not depend upon legal enforcement of contracts. As with any voluntary association, there should be no penalties for failure to honor one's commitment, except for that of expulsion from the association. In a limited, local, more personal system, we can probably do without a formal enforcement mechanism of coercion and penalties, trusting instead the good faith of the members, and the subtle social pressures which regulate behavior in any community.

Though neither the nominal LETS system nor Ithaca HOURS strictly follow all the theoretical direction suggested above, they seem to be working well. This is probably due to the intensive educational efforts mounted by their proponents and the strong community spirit in the areas where they have prospered. In the case of Ithaca HOURS, it is probably also due to the rapid growth in the number of participants and close control over the amount of HOURS placed in circulation. With only about 5 to 6 HOURS per participant issued, there should be little risk of HOURS being discounted in the market.

As the system grows, however, the need for more formal protocols will likely become apparent.



The Unit of Account

Since the Ithaca notes are denominated in "HOURS" rather than dollars, they seem to have acquired a market value which is somewhat independent of that of the ever-declining value of Federal Reserve currency. Even though the "HOUR," as a distinctive unit of account, is not precisely defined, it is still possible for people to make a mental distinction between "hours" and "dollars." It appears that people have largely accepted Glover's assessment of the HOUR as being worth about $10. This amount might be considered to be some kind of local average wage. If the further debasement of the dollar should cause wages to rise significantly, say to $14 on the average, the HOUR notes might then pass for goods or services worth $14 instead of $10, provided, of course, that HOUR notes have been properly issued and not themselves debased.

In a LETS system, the unit of account is the "green dollar," or whatever the local group wishes to call it (e.g. cowries, credits, oaks etc.). People naturally equate the value of a "green dollar" to that of an official dollar since, unlike the Ithaca situation, they have no other referent. Green dollars would undoubtedly depreciate along with the official dollar as inflation proceeds. This is one more reason to circulate them rapidly and avoid holding them as a savings medium.

Eventually, local currency and exchange systems will need to define a different unit of account. I would prefer something more precise than labor time, like the unit of account based on a composite commodity standard, as I proposed in my book, Money and Debt: A Solution to the Global Crisis[88] Such a standard, based on a "market basket" of commodities, would tend to be both stable and apolitical.

Alternatively, some single commodity which has special importance for the local economy could be used as a standard of value for a local currency. This could be a cord of wood, a bushel of corn, a bale of cotton, or some other commodity which is widely traded in local commerce. However, a unit of account based on a single commodity has certain drawbacks. Its value is more influenced by transitory conditions like weather, and the market for a single commodity can be more easily manipulated by governments and large volume traders.



What About Backing and Redeemability?

Many present day monetary reformers lament the passing of the redemption feature of paper currency and bank credit. They yearn for a return to the "gold standard," by which they mean, not only the definition of the dollar in terms of a particular weight of gold, but also the redeemability of paper currency into gold. In the past, paper money was redeemable, at the option of the holder, for silver or gold coins. This option of exchanging one kind of money for another did indeed play a major role in keeping political paper money honest by limiting the amount of paper which could be issued. The reinstitution of redeemability would certainly be one way of restoring discipline upon the issuing authorities, but it would have negative side-effects and is far from the ideal approach.

The desire for redeemability in a currency is an anachronistic bit of psychology left over from the days when money had substance. Paper bills and bank credit began as "claim checks" against specie, or real money, i.e. gold and silver. Thus, there were actually two kinds of money, paper and specie (gold or silver). The "real" money was, of course, the metal, and the paper was only a symbolic representation of it.

Under such a system redeemability was absolutely necessary to prevent the banks and/or other issuing authorities from issuing too much paper. With expanding economic activity, however, there was a chronic shortage of metallic money. This led to the expedient of what is known as "fractional reserve banking," in which banks were allowed to issue paper money in amounts that were several times the value of their gold holdings. The paper was still redeemable for gold but there was not enough gold to redeem all the paper. The potential problem with such a system is obvious, and indeed, bank runs and panics were recurrent and common. The issuance of paper was often unsound (and, therefore, excessive), and whenever the public got a sense of this they exercised their option to redeem paper for gold, depleting bank reserves.

Unfortunately, rather than ending the abuses and developing a sound system, the monetary authorities addressed the problem of bank runs by centralizing control of the banking system and putting an end to redeemability. Thus they eliminated the only effective means of imposing discipline upon the issuers and opened the way for abuse on a grand scale. Discipline is certainly necessary in a monetary system, especially when the issuer has a monopoly and competing currencies may be excluded from the marketplace. In a free environment, however, there are better ways to impose discipline. The ultimate test of a currency is its acceptability in the marketplace and its "redeemability" for goods and services there. When traders have the freedom to refuse to accept a currency, or to accept it at a discount from its face value, then they can protect themselves from the effects of improper and excessive issuance of a currency. In the words of Friedrich von Hayek:

"There could be no more effective check against the abuse of money by government [or any other issuer] than if people were free to refuse any money they distrusted and to prefer money in which they had confidence." [89]

In any event, computers and communications technologies have long since obviated the need for "claim check" kinds of money. Rather than revert to this anachronistic form of discipline, it is now necessary to move away from monopolized, political, and coercive monetary systems toward free, non-governmental, democratic exchange media.

What then will provide the "backing" for a democratic, privately issued, credit type of money which we are considering? This question was answered very well by E. C. Riegel:

"`Reserves' and metal hoards are but window dressing. Only that which is purchasable is back of money. (p.109).

"...like any money unit, until something has been exchanged for it, nothing is back of it. When it has been exchanged for something, that something is back of it. Money's material backing is that which the seller surrenders in exchange for it; its moral backing is the buyer's promise to back it with an equivalent value when in turn he becomes the seller." [90]



Implementation

Whether it involves a mutual credit system, a circulating paper currency, or both, any alternative exchange system, in order to be easily implemented and readily accepted, should, as much as possible, use familiar devices and procedures. People are accustomed to using paper notes (bills), checks, bank accounts, debit cards and credit cards, and these inventions have demonstrated their effectiveness in handling the processes of trade. These are the mechanical aspects of money and banking and there is no reason why the new, democratic, local exchange systems should not use similar devices.

It might be wise, however, for local exchange systems to use different terminology and completely avoid the use of words like "money," and "dollar" to preclude confusion with, and any suggestion of competition with existing monetary and financial structures. Local exchange media are complementary to official media and might be referred to as "coupons," "credits," or "scrip." They will develop in parallel with official monetary systems, and, over time, assume a larger and larger portion of the burden of mediating exchange. As people gain experience with them, they will come to understand the simple essence of exchange media, and sense the economic empowerment which community control provides.




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