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Chapter 13
Currency Alternatives for Impersonal Markets

An effective community is a process, an ongoing collection of interactions and continuing relationships.

-- Michael Linton

Up to this point, our consideration of exchange alternatives, specifically, local currencies and mutual credit systems, has emphasized the importance of personal commitment within relatively small, limited communities of cooperators. The social dynamics which exist within such groups are a very important element in assuring the workability of these approaches. The social and economic interrelationships within a community are mutually reinforcing and evolve simultaneously.

The formation of mutual credit systems such as LETS is one approach to building community while mobilizing the productive potential of labor which has been undervalued by the market or marginalized by the dominant national and global systems. The building of community is not just a by-product, but an essential requirement if human needs are to be adequately satisfied. But there may be other ways "to get from here to there." There may be some places and circumstances in which a less direct approach might be more workable, at least as an intermediate step.

As Michael Linton expresses it, "Most regions are communities only in name rather than reality. An effective community is a process, an ongoing collection of interactions and continuing relationships.[95] Where these ongoing interactions and continuing relationships are lacking, it might be more effective to approach the problem of exchange by implementing a currency system involving commitments which are more formal and conventional. One such approach would be a commodity-based currency.

A Commodity-based Currency

In an impersonal environment, one may know little or nothing about his/her potential trading partners. In that instance it becomes expedient to have a currency which represents a claim to valuable property. Such a currency would tend toward the "hard," impersonal pole of the spectrum, but the system for issuing and regulating it could, nonetheless, be very democratic. The value of such a currency can be assured by some kind of "cover," i.e. it would be a "funded" currency.

Funded vs. Non-funded Currencies and Exchange Systems

The local currency and mutual exchange systems discussed thus far have been non-funded. Non-funded currencies are characterized as follows:

  1. A non-funded currency is one which is issued on the basis of some exchange transaction or agreement. No assets are held by the issuing agency and the currency is therefore not redeemable, except, of course, in the market, for goods and services.

  2. The currency may be issued on the basis of the transfer of value between two parties, one of which (the buyer) is authorized to issue such currency under an agreement with others willing to accept it in payment. [96]

  3. The "backing" for a non-funded currency is simply the formal or implied commitment of the buyer to deliver equal value to someone at some future time in return for the local currency which s/he has created and issued. Thus, s/he "redeems" it by making a sale.

  4. As we have already pointed out, there must be a limit to the amount of currency which each individual party to the agreement can issue. This limit should be determined by his/her ability to produce. Experience indicates that the limit should not exceed the value equivalent to his/her normal sales volume within a 2 or 3 month period.

The essential features of a funded currency or credit system are as follows:

  1. A funded currency is one which is issued on the basis of the transfer to the issuing agency of some valuable assets which are held as "reserves."

  2. These assets are held by the issuing agency against future redemption of the currency. The currency may be redeemable on demand of the holder, or it's redemption may be restricted in some way. It may be redeemable only at certain times, or under certain specified conditions, and/or only by certain specified individuals or groups.

  3. The assets which are accepted can be in most any form, however, some assets serve the purpose better than others. Historically, gold and silver have often served this purpose, along with government bonds and other securities, or even other currencies. Some "third world" countries use U.S. dollars as reserves for their national currencies.

  4. It is best to use assets which represent value on the way to market or assets which can be easily liquidated in fractional amounts. Thus, the use of real estate or capital equipment is not recommended, unless the rate of redemption is restricted to conform to the productivity or rate of liquidation of such assets in the normal course of business.

  5. One of the usual errors which banks and governments have made is to issue more currency notes than the value of the assets held. This is known as "fractional reserve banking."

  6. To be "fully funded," the amount of currency issued must not exceed the value of the assets held for redemption.

  7. If the value of the assets held should decline in terms of some other currency or value measure, the value of the currency itself would decline in relation to that same measure.

  8. If some official currency, such as the U.S. Dollar, or securities denominated in dollars, are used as backing (reserves) for a funded local currency, then the value of the local currency will fluctuate in accordance with the value of the official currency.

Using Inventories as Reserves

One approach toward issuing a funded currency would be to use the value of inventories as the basis of issue. Since inventories must be maintained as part of the process of doing business anyway, why not use the value of those inventories to provide a sound medium of exchange? Basic commodities in inventory would seem to serve this purpose very well since they provide foundational inputs upon which subsequent economic activity depends, and provide an early indicator of value on the way to market. They would provide a medium of exchange which is grounded in reality and subject to all the natural limitations of the physical commodities which that exchange medium represents. The supply of money thus created would be self-regulating, expanding and contracting in step with changes in the stocks of the basic commodities.

One might envision such a currency being issued through a network of local merchant banks or business associations. The system would be decentralized, locally controlled, open, and subject to audit by a public-service, non-governmental agency. This is how it might work.

Newly produced grain, for example, might be deposited in a warehouse and new currency would be issued to the farmer in return for his warehouse receipt. The farmer would then be able to spend this money into circulation. When the grain is finally sold, to say, a miller, the miller would use money acquired in the market to buy the warehouse receipt allowing him to take possession of the grain. That money then would be extinguished. Having done its job, it is taken out of circulation. The process is shown pictorially in Figure 13.1.

Fig 13.1: A Commodity-based Currency Circuit

Note that the warehouse receipt makes a complete circuit. It is issued by the warehouse to the farmer when he deposits wheat in the warehouse. The farmer then exchanges the receipt for credits or currency notes at the mercantile bank. The miller buys it from the mercantile bank using credits or notes which he has acquired in the course of doing business. He then takes the receipt to the warehouse that originally issued it, where he exchanges it for the actual wheat. The warehouse receipt, having done its job, and having arrived back at its point of origin, is destroyed.

Likewise, the credits or notes also make a complete circuit. The mercantile bank creates and issues them to the farmer in exchange for his warehouse receipt. The farmer then spends them into circulation, in effect, exchanging them in trade for goods or services. They may subsequently be used by any number of traders to mediate exchanges of goods and/or services. Eventually, they are returned to the mercantile bank where they originated, and used to redeem the warehouse receipt which was the basis for their issuance. Once this basis is gone from the bank, the notes or credits must be retired.

In the present system, the supply of money is not automatically expanded to provide the means for purchasing the goods being brought to market. Since the supply of money may be artificially restricted, as well as misallocated, increased production typically drives market prices down. This causes producers to produce less, even though the real need and demand for the product may be far from being satisfied. This is one reason why there is hunger amidst plenty; many of those needing the food lack the money to buy it. If the need is there, and the supply is there, the money to match them up should also be there.

The current system makes producers slaves to money. There are three factors which create this condition. First, because money can only come into circulation through borrowing, a producer, one who owns real wealth, is allowed to convert that wealth to money only by becoming a debtor and using that wealth as collateral. Secondly, because interest is levied on this debt, most of the value, over time, is transferred to non-producers who control the money and banking process. Thirdly, because the supply of money is artificially regulated and kept in short supply relative to the amount needed for payments of the debt, some producers will inevitably default on their loans and be forced to forfeit their collateral.

Using basic commodities as the basis for issuing currency to producers automatically in proportion to their production makes the producer "king" by placing the money issuing power in his/her hands. It allows him/her to reap his proper reward for his contribution to the community. It creates the amount of currency necessary to allow the purchase of the goods produced -- the greater the amount produced, the greater the amount of currency in circulation; the more real wealth the community has (in the form of grain, lumber, metals, fuels, etc.), the more money there will be. Thus, the real wealth of the community is reflected (symbolically) in the amount of money in circulation.

If next year's production falls short of this year's, the amount of money retired in the process of redemption of commodities will be greater than the amount of new money issued. This will cause the money supply to contract along with the supply of commodities, reflecting the relative poverty of the community. If, on the other hand, production should increase from one period to the next, the amount of newly issued money will exceed the amount retired in the process of redemption. The supply of money will thus increase along with the supply of commodities, reflecting the relative prosperity of the community. This approach to currency issue would maintain a stable general price level, since there would be no central-bank-created artificial shortage, no legalized counterfeit from monetized government debt, no interest, and no misallocated bank credit.

Producers would not be charged interest on money issued in this manner. The initial amount of money issued on the strength of any particular warehouse receipt would be based upon the price history, stability of supply and perishability of the commodity. The final total received by the producer would be determined by the eventual price which he received in the market. Producers' accounts would be updated periodically to bring them into line with the actual market results.

An Example

To illustrate how this might work, consider an example of a wheat farmer. Suppose the recent history of wheat prices shows them to be fairly stable at around $3 a bushel. Farmer brings in a crop of 20,000 bushels of wheat which he deposits in a bonded warehouse. Upon receiving his warehouse receipt, Farmer takes it to the local cooperative mercantile bank which credits his account or gives him currency at full parity with the recent average price of $3.00. [97] Farmer thus receives $60,000 in currency or credit ($3 x 20,000). Now since wheat is perishable, Farmer is not going to wait too long to market it, if he can help it. Wheat has a limited storage life and proper storage costs money. The longer he waits, the greater his costs and the more the wheat deteriorates. Unless there is an upward fluctuation in the market price sufficient to offset them, these costs will result in Farmer getting a lower eventual total return.

Suppose Farmer sells his crop two weeks later for a price of $3.20 a bushel or a total of $64,000. His account will then be adjusted by adding the extra $4,000 which his crop proved to be worth over the $60,000 originally issued to him. In the unlikely event that the coop bank were to badly misjudge the market and Farmer could only get $2.60 for his wheat, his account would be debited for the difference of $8,000. If his account balance was insufficient to cover the debit it could be carried over and Farmer would receive that much less when his next crop was deposited.

Now suppose Miller buys the wheat from Farmer for $3.20 a bushel or a total of $64,000. Miller must then take that amount of currency to the bank. Of that amount, $4,000 is credited to Farmer's account and the remaining $60,000 is used to redeem the warehouse receipt. Miller then takes the warehouse receipt to the warehouse, which allows him to withdraw the wheat. The warehouse receipt is then canceled. Since the bank no longer has the warehouse receipt, the $60,000 which Miller paid to redeem it must go out of circulation. [98] When both the warehouse receipt and the credits or notes which were issued on its basis have made the complete circuit, they are then retired. The process begins again when more wheat or other valuable commodities are deposited in the warehouse.

Under this type of system, nobody has to go into debt to bring money into circulation, the amount of money and the amount of value are always in balance, and there is a natural incentive to expedite commerce and keep the money circulating rapidly. There are two reasons for this. First, it is to the farmer's advantage to sell his crop quickly to avoid storage costs and spoilage. Secondly, it is to his/her advantage to spend his/her money into circulation, giving others the means to buy his crop. All that one need do to issue money under such a system is to be productive.

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