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LETS AND THE FOUNDATIONS OF A NEW MONEY SYSTEM Richard Kay, 1993 Compuserve: 100265,3530 Internet: richard.kay@uce.ac.uk Janet: RICHARD.KAY@UK.AC.UCE GreenNet: richkay Phone: +44 203 450152 Contents 1. Introduction 2. Local Exchange Trading Systems: What they are and how they work 3. The tax and benefits position 4. Starting a LETS group 5. Developing the LETS system 6. Interest and inflation 7. savings and investment 8. Inter-LETS: how you get round the limitations 9. LETS and the finance of public and community projects 10. The demise of the old money system ? 11. The emergence of a new social contract 12. Where do we go from here ? 1. Introduction I have been interested in economics for a number of years and am currently involved in setting up a Local Exchange Trading System (LETS) in Coventry. I have also been involved in developments in information technology which have made it technically feasible for all currency transactions to be carried out electronically. The rapid growth and development of the LETS movement in the English speaking world has encouraged me to communicate some of my perspectives on this subject to a wider audience. LETS means different things to different people. No two LETS systems are the same; any group of people can set one up to suit themselves, so long as they operate within the law. Some of these schemes will be more successful than others because they more closely meet the needs of their participants. The potential impact of this growing movement on public and economic policy is significant. Developments in the methods of financing all sorts of public and private projects made possible by LETS type currencies may ultimately affect everyone; changes such as these should not take place in a democratic society in the absence of a full and open public debate. This pamphlet represents my attempt both to contribute towards this debate and to persuade others of the potential benefits of joining and supporting the LETS movement. In chapters 2 to 8 I look at how LETS systems operate, how they are set up and how they may be developed in future. In chapters 9 to 12 I look at some of the wider implications. 2. Local Exchange Trading Systems: What they are and how they work A Local Exchange Trading System (LETS) association is simply a group of people who exchange goods and services amongst themselves. Examples of the very many goods and services which are traded include organic vegetables, second hand cars, bricklaying, child minding and computer consultancy. In order to facilitate their many and various trades, the members of a LETS association create a currency which circulates amongst themselves and exists solely within the accounts of the association. Money is often defined as being the medium of exchange. It is also a measure of value, as agreed between buyer and seller; in a similar manner hours are used as a measure of time. The act of measuring value for the purpose of quoting prices and then agreeing sales of goods and services also results in measurements, or information about the creditworthyness, credit and debt held by the parties involved in the exchange. So money is not just the medium of exchange; it is also information about credit. For example, when I go into a shop with a five pound note, the writing on it indicates that the Governor of the issuing bank has given me an IOU for the stated amount. This credit used to be based on known weights of valuable metal. The un-creditworthiness of governments and the economic inefficiency of digging gold from deep in the earth so that it could be reinterred inside a guarded bank vault (and other technical reasons which I will not explain here) ended the custom of retaining some returnable commodity for the purpose of redeeming the circulating IOUs. Technically the promise to pay is cancelled by exchanging a banknote at the issuing bank for any coin or token claiming itself to be the sum involved, rather than a promise to pay it, and deemed by the government of the day to be legal tender. In a society which enjoys freedom of expression and association, no laws can prevent a group of people from choosing to form an association and recording and distributing information about credit relating to the sales of goods and services between individuals within this group. Every credit worth describing as such must be based on an equal and opposite debt or debit for which there can be a reasonable expectation of repayment. However there is nowadays little reason why all or part of the sum total of these debits should represent borrowing by the state; e.g. during bank strikes in the past, people have continued trading by circulating IOUs issued by local businesses and individuals whose standing in the local community is sufficient that their credit is accepted by others. So within a LETS association an agreed currency unit circulates; the credits result from sales while the debits result from purchases. Repayment of the debits involves cancellation of the equivalent credit, and the money supply fluctuates according to need. There is no requirement for interest in this scheme of things, but there may need to be occasional provisions for debits which are both inadequately secured and cannot be repaid and also to pay for the costs of administrating the system. One way or another, these costs are shared by the members of the association. Before the availability of cheap and powerful computers, the regular compilation, update and circulation of information about credit within an association of more than 30 to 40 trading members without using physical money tokens such as notes and coins would have required an unwieldy bureaucracy. Smaller LETS associations can do this job using a card index, but the fact that the first LETS system started together with the availability of the cheap personal computer in 1983 is no coincidence. Historically therefore, the credit used in old money systems was most conveniently circulated using physical tokens except for large amounts where the expense of clearing cheques was accepted in return for better security. LETS associations use cheque or automated money transfers and avoid using physical money tokens for the following reasons: a. If all transactions go through sufficiently open accounts all members can know the creditworthyness of everyone else. b. It avoids the high costs of manufacturing notes and coin which are difficult to counterfeit. c. In some countries there are legal obstacles to anyone other than the government issuing banknotes. d. The fact that a LETS currency only exists within the accounts of an association makes it impossible to steal. LETS type currencies do not need to circulate solely within local communities but they work best with individuals and businesses where the people involved recognise mutual economic interests before they set up a LETS association. For some the key reason why many LETS associations are getting established is because this enables these communities to take control over their own economic development from distant central bankers, governments and global market forces. Why should a community suffer unemployment if it has unused local resources capable of meeting local needs ? For others the most important reason for starting a LETS association is that a local currency is more likely to encourage sustainable development. It makes it easier to reuse, repair and recycle things in preference to wasting them. LETS currencies are not called "green" for nothing. There are those who compare the ethics of the western banks in their dealings with the third world unfavourably with those of a back-street loan shark. LETS, however, as an interest-free money system is an opportunity for fairer economic relations between rich and poor. For most people however, the key benefit is being able to draw on the skills and resources of others in exchange for their own when they know they can't achieve this using a conventional currency which drains too quickly away from regions of high unemployment. Whatever advantages LETS has to offer, very many people are getting involved. Because the rate of growth is so fast it is difficult to present accurate figures; most information is quickly out of date. In Australia, the largest LETS association has over 1000 members, while in England, the number of LETS associations known to LETSLINK UK grew from 40 to 110 in the first 8 months of 1993. No doubt the average size of the more established groups increased as well; the Stroud group being the largest with over 300 members by summer 93. 3. The tax and benefits position Some who know little of LETS consider it an opportunity for benefit fraud and tax evasion. Nothing could be further from the truth, because it is in the nature of a LETS system that the income, expenditure and current balances of all members are made available to all others. There is nothing to prevent tax or benefits officials joining privately and making use of this information in their official capacity; nor would any LETS administrators be likely to refuse cooperation in response to a legitimate official enquiry. I can only comment on the position in the UK as I must claim ignorance of the tax and benefit laws elsewhere, but from what little I have gathered, I understand that similar principles apply throughout the English speaking world. According to Michael Linton, the originator of the first LETS system in British Columbia, Canada, the current tax and benefit laws (presumably in Canada ?) are as appropriate to LETS money systems as the 19th century transport laws were to jet travel. The tax laws are less of a problem to the development and use of LETS than the benefit rules. Tax is payable on any regular source of income earned in connection with a business. I am not aware of anyone with a regular contract of employment where the income is paid wholly or partly in LETS currency but presumably in this event similar principles will apply as to the taxation of fringe benefits. So if you were working as a full-time computer programmer and you sold a bicycle for LETS you would not be liable for tax, but if you sold bicycles as a regular business activity and sold one or two for LETS then you would be liable for tax on the income earned, the tax being payable using legal tender. A business operating mainly using LETS must therefore earn sufficient old currency to pay the obligatory taxes under current law. One way of doing this is for a business to charge a percentage of the total price using old currency. The position on benefits is variable and seems open to negotiation, as it currently depends on the attitude of different claims assessment officials. This varies between benefits officers threatening to cut off all benefit in response to the suggestion that a claimant was thinking about earning LETS income and ignoring LETS income totally because the limited range of goods and services available within a small and new scheme can only represent social favours for which benefits are not normally provided; e.g. if single parents on benefit barter occasional babysitting services this should not be classified as income for the purpose of deciding whether benefits should be withheld. A kind of income for which it is not easy to calculate a financial equivalent can result in much extra work for the officials involved and many would privately prefer not to know about it. Another reason why the benefit regulations are problematic is that the social security system was never designed for the modern reality of many people being able to gain temporary and occasional marginal employment which does not together add up to enough for life's essentials. Having to reassess the benefit level involved for each of these many changes in personal circumstances goes beyond the ability of the officials and claimants to handle the paperwork and administration. In practice this is why so many are forced into a semi-criminal underclass where anything other than the absolute bare essentials of survival is obtained through the black economy. There seems to be a need for clearer procedures for claimants to become more self-sufficient within the law and for less reduction in benefit for each additional unit of income earned. These changes may need to be combined with a different approach to providing minimum benefits to those in need of them. Are we to accept that the purpose of a money system is to match needs and resources and that there are many unmet needs ? If so then it follows that if the money system operated correctly there would be no such thing as unemployment. Supplementary benefits and the dole are patches which are only needed because the system is malfunctioning. In later chapters I will look at the question of how using a LETS based money system enables us to tackle this problem. 4. Starting a LETS group Experience has shown that a LETS scheme is best started by organising a meeting intended to attract the people most likely to become involved. It is useful to obtain one or two speakers from LETS associations which have already become established and there are some useful LETS trading games which can be played to break the ice. Such a meeting is a good place to form a core group involving those who are going to be active in organising the scheme. If this meeting generates sufficient interest, this will lead to further meetings to coordinate the work involved in setting up. It is useful to draw up a few simple pieces of paper: a. A members agreement b. A cheque form c. A form which can be used to collect information which will go into a directory containing information about goods and services offered and wanted d. A leaflet for general publicity e. A description of how the LETS system operates At these meetings decisions can be made about who will carry out the key responsibilities, such as drawing up the accounts, liaison with the media, organising social events etc. Decisions will also be needed about the cost of membership and the nominal value and name of the currency unit. These meetings are needed but don't have too many of them. Groups which start trading at the earliest opportunity are more likely to grow quickly. Useful assets include a permanent address to which the cheques can be sent and collected by whoever is doing the accounts; having a local cafe, church or community centre is useful for this as it is likely to act as a focus for the community served by the LETS scheme. Once the group is established, trading and regularly publishing its accounts and directories, further attention is likely to be given to encouraging new members to join. Obviously the more members, the greater the variety of goods and services on offer and the higher the volume of trading. To start with much voluntary work will be needed by those willing to form the core group. When the trading volume is sufficient, the service charges that can reasonably be levied on accounts can be expected to cover the efforts involved in administrating and developing the system. 5. Developing the LETS system At a certain stage of growth, perhaps having reached 100 members or so, a LETS group is likely to be interested in involving more local businesses. The ones most likely to want to join will be those mainly serving the same community within which the LETS system operates. Many such businesses will be willing to offer a discount to members of a local association if this provides them with free advertising by virtue of the fact that the association is likely to publicise the members' discount. This discount can act as the starting point for negotiations intended to get a suitable business involved. Supposing a business were willing to offer a 10% discount anyway, then why not negotiate a 20% discount on the cash price if 20% is also paid in LETS ? The business owner might feel that this cuts the cash profit margins by too much, but if the LETS can be spent on goods and services available within the community then the extra turnover this arrangement can be expected to bring is likely to be of more interest. Of course by taking a greater share of the local market from competitors, a business involved in using LETS in this manner will be accused of unfair competition, but no-one will be excluding competitors from joining on fair terms. Once they are asking to join in order to avoid losing business it becomes reasonable to expect them to contribute more towards the cost of administration and development. This will result in competition between local businesses by offering a higher percentage LETS contribution to their prices, thereby encouraging trade that stays within the community. With more people joining and more LETS being traded it is likely that the character of the scheme will change; those who take the small is beautiful perspective to great lengths might feel that the system is becoming less personal and are naturally at liberty to found new smaller LETS groups within the larger community so that the extended-family nature of the original LETS group is not lost. Computer software is already available to enable those who are concerned about this to do just that with little administrative inconvenience. The larger scheme will need to adapt to these new realities. For the credit circulating within the system to be valued as a useful kind of money, more thought will need to be given towards preventing some members from acquiring more debit than they can (or want to) repay. Within a smaller scheme, people won't do jobs for or supply goods to those who are doing relatively little for others compared to what others are doing for them. The "offenders" will be easily identifiable to anyone who looks at the accounts, but in a larger scheme some members are likely to be less concerned about minding other people's business in this manner so long as they can still spend their credits. In a group which has so many members that the people involved don't know each other, different controls are needed. By this stage the larger group is likely to have adopted a formal constitution which allows for democratic elections for an executive committee, perhaps by postal voting or at general meetings. Experience within other kinds of voluntary associations which try to expand significantly without formal constitutions suggests that these are likely to split into factions. Up to this point I have been dealing with known practice. Further expansion will depend on the credibility of the LETS currency which will itself depend upon how reasonable are the expectations that debits can be repaid and whether the accounts have been kept in good order. Larger volumes of trading will require an adequate money supply. This will mean there are incentives for allowing individuals and businesses which have demonstrated that they can generate a steady income to go into debit up to agreed limits, with these limits to be reduced at an agreed rate. Perhaps debit limits could be based on the previous income into the relevant account. A second method of control might involve weighting the cost of repaying any bad debits disproportionately on those who have obtained most credits from an account which is defined as going into default under the rules of the scheme. This has the advantage of decentralising responsibility for setting debit limits within a larger system. For example, supposing someone succeeds in opening an account under a false identity, buys some valuable jewels from someone else and then departs with no forwarding address, then at some stage this account would be declared as being in default and the member who sold the jewels might then be expected to make good most or all of the credit obtained. A business would then need up-to date and accurate account information (preferably on-line) to help determine a prospective customer's credit rating before deciding whether to take on a large contract or sell valuable goods. I am not sure if the clause in a LETS member's agreement which prevents someone leaving the group without balancing their account can be enforced under civil law because there has not yet been such a serious default that a group has wanted to take an ex-member to court. It may require a test case before we find out whether this kind of agreement is as enforceable as any other voluntary organisation's member's agreement under contract law. If this proves to be a problem, minor legislative change may be needed. Eventually there will be a need to secure larger debits on assets such as title deeds or share certificates, both to reduce the risk of fraud and to give new and existing members sufficient confidence in the system to use it to its full potential. This could probably be done in much the same manner as a mortgage is secured on existing assets, the only difference being a need to translate the LETS currency liability into a legal tender liability for the benefit of courts which do not recognise a LETS currency as legal tender for the purpose of discharging debts. The manner in which this translation could be made would be written into a mortgage agreement. This provision would only come into effect in the event of a default on repayments on an interest free LETS debit secured in this manner. Another important area of development concerns how cheque or direct debit type payment messages are best handled. Small groups can use various methods. Here are the most popular: a. Using cheque books with the cheques being sent to a collection address by the vendor. b. Expecting the purchaser to leave a message on a telephone answering machine, c. Keeping a book for the purchasers to write in their payments at a central place such as a cafe, church or community centre. Method b. can be the cheapest and simplest for a small system whose members do not all visit the same place regularly, but it has been found to be less reliable because people tend to forget whether they have left a message on the machine. This can result in entries being made twice or not at all and sometimes messages may be lost due to technical difficulties. Method c. will only be suitable if there is a central point which members visit regularly during the normal course of events. With more powerful computers now being cheap enough, there is interest in developing the software needed to enable tone-dialling phones to be used to input transactions to computer systems connected to a phone line and capable of speaking standardised messages; this could also be used to request account information and statements at less cost than other means. Another method of handling automated accounting might involve running a LETS currency from within a standard Bulletin Board System run on a computer connected to a modem accessed by other computers through ordinary telephone lines or other networks. This method is only likely to be useful for a LETS group whose members all have access to computers and modems. With larger schemes there is likely to be more interest in authentication of the messages to further reduce the small probability of fraud. Currently the use of either a signature on a cheque or in a book, or a PIN number or password for an automated credit transfer is adequate. One advantage of LETS money is that it is inherently more secure than older currencies, because all payments must go through the accounts and the money only exists within them. Technological developments will inevitably result in further improvements: few would object to using a plastic card with their own picture on it and letting a point of sale terminal in a shop display their picture accessed from a central database for comparison. Other possibilities such as automated voice, face or fingerprint recognition seem less likely to be politically acceptable. 6. Interest and inflation For those involved in a new LETS scheme there is little point in building up credit unless you spend it reasonably soon because you don't earn any interest on it. Most of us have known the continuous devaluation of the purchasing power of money for so long that the idea that inflation is not a necessary condition of money seems strange. In countries with very high inflation rates people don't save money; if there is temporarily more money available than needed they look for things to spend it on which can be resold later. In countries suffering lower inflation rates, say between 1 and 20 percent, few would save much money for long unless it earned interest at more than the prevailing rate of inflation. Neither inflation nor interest are necessary conditions. LETS money does not earn interest by its very nature; I will now explain why it need not suffer from inflation either. The conventional explanation of inflation is that it results from too much money chasing too few goods and services. To some extent this depends on the psychology of workers and merchants; if everyone were willing to take real cuts in profits and wages then a temporary increase in the money supply would not necessarily result in inflation; but everyone knows that increases in the supply of old kinds of money are permanent and workers and traders will not voluntarily respond to exhortations to accept lower returns . With modern governments being elected on promises to tax low and spend high, the resulting deficit cannot be prevented from entering the money supply. Issuing longer term bonds in preference to banknotes has bought time in the past, but this has gone on for so long that the problem is now greater and its solution more drastic. True, high interest rates will prevent some of the public deficit from being re-circulated for a while, but we are now suffering from the long term effects of our debilitating addiction to public deficit financing. The resulting economic stagnation and consequent unpopularity will not be endured for very long by any government, so more money is printed and the usury is temporarily reduced in the hope of buying the next election; consequently we are stuck in a vicious spiral of high interest and unemployment followed by inflation. LETS type currencies can be used to address this problem by spreading the debits, on which the circulating currency is based, between many business owners and other individuals who can be expected to repay them. Those of us who are involved in LETS systems which are receiving encouraging help from our local authorities must be careful that we do not let them spend LETS which we have neither given nor paid them, otherwise inflation will creep in by the back door. So long as charities, public agencies and banks are prevented from taking on the debit on which the currency is based and we do not allow too many individual members to vanish into the wide blue yonder with large unsecured debits, then the LETS currency supply can be controlled. The role of the LETS system, as a voluntary agency which exists to maintain the accounts of its members and thereby controls the circulation of a currency, is similar to a bank in some respects and a public agency in others. The LETS system should not go into debit to its members if it wants to maintain the credibility of its currency; this requires that the total credits are balanced by debits which are unlikely not to be repaid. If one of the members defaults, the bad debit may need to be written off by payment from a service or general insurance account which may temporarily go into debit for this purpose, but the cost of bad debits and administration will need to be paid for by some or all of the members one way or another. For a charity, spending more than it is given involves going beyond the authority vested in it by its donors. The same principle needs to be established in relation to state spending in excess of the taxes which we are prepared to vote for. ( It goes without saying that the state can also legitimately spend revenues obtained from services which we are willing to pay for directly.) If the distribution of this authorised public revenue can be carried out more efficiently and more in accordance with the wishes of the taxpayers ( I will propose how this may be achieved in a later chapter ), this sensible restriction need not result in any essential public service being underfunded. That is not to say that any public services will ever be perfect but there is little purpose blaming the government for the nature of reality. Some LETS currency units are based initially on the value of the relevant old currency; others are based on the minimum, average or common wage paid for an hours work. Basing the currency unit on an old currency has the advantage of making it easier for people to set realistic prices initially and helps businesses offering price options involving a percentage in LETS. The disadvantage is that if buyers and sellers expect this parity to be maintained, it is unlikely that the value of a LETS currency will be stable when an old currency depreciates. If those in credit see the value of what they have done in the past depreciate, this will limit the total of goods and services they will sell to others for the purpose of savings, which in turn will limit the contribution the LETS currency can make to the local economy. Basing the currency unit on the minimum hourly wage has the following advantages: a. Traditional socialists are likely to be concerned about the existence and purchasing power of a minimum wage. Basing the currency on it will give them an incentive to defend the purchasing power of the currency unit. b. Traditional conservatives will be concerned about sound money. In order to achieve this they will have to defend minimum wages. c. This standard is more likely to slowly improve the purchasing power of the currency unit than depreciate it. Over many years, productivity and expectations of the purchasing power of minimum wages will rise. d. Using a currency unit based on a commodity such as gold can cause a slump in trade whenever there is an increase in the value of this commodity relative to wages. Basing the currency standard on wages, however defined, avoids this problem. At the expense of making initial LETS or mixed currency transactions slightly more difficult to calculate, it is worth adopting a minimum hourly wage rate as the basis of the currency unit. This will help guarantee the stability of this currency because a new political consensus can be built around its base value. If the decisions concerning how public finance is to be divided between the various services which compete for it can be delegated to the taxpayer, politicians will no longer have any incentive for financing state expenditure through public borrowing or by increasing the money supply in order to devalue the standard by which the public debt is measured. 7. Savings and investment People will not hold savings in a depreciating currency without the incentive of interest if they have alternative methods of retaining the value of money not required immediately, e.g. by purchasing durable goods, land or buildings etc. solely for the purpose of resale later. This is grossly inefficient and wasteful because these assets are withdrawn from use or production. Saving is a natural human activity because some large purchases cannot be afforded immediately; the desire to put something aside for retirement can be harnessed to enable others in the community to invest in the productive assets and resources needed by all its members. Currently most LETS currencies are too new and have insufficient turnover to support much of this kind of use, but there have been cases where individuals have taken on large debits to build their own houses, and then repaid these debits more quickly than would be possible using an interest-burdened currency. Macroeconomic theory states that savings must always equal investment; savings being the money put aside for future use while investments represent that which is spent on lasting assets, means of production or stocks i.e. what is not currently being consumed or lost through depreciation. This follows from the fact that expenditure is split between consumption and investment, while income, which equals expenditure for the community as a whole, is split between consumption and savings. Now clearly not everything thought of as being saved is actually saved if the money is not invested in something productive or of intrinsic value by the savings institution. One example of this is where the manager of a bank is stealing and spending the money and presenting false accounts. A far more serious problem for most people concerns the money thought of as savings which are used to purchase the bonds sold to individuals, banks and pension funds by a government which simultaneously sells public assets to pay for its current account deficit. Traditionally state borrowing was only acceptable when governments invested the money in schools, roads and state-owned industries. Now that these bonds are simply sold to finance the public deficit the savings supposedly secured by government bonds should no longer be considered as such either by the person who puts money into them or for the purpose of understanding the state of the economy. Public deficit financing ruins the economy in two ways; firstly by taking much of the money people intend to save and using it for consumption rather than investment and secondly by driving up interest rates to the point where few investments can pay the cost of financing them. Savings and investment are activities generally carried out by different people, though they share common objectives. For example, if one person wants to build a home while another wants to put something aside for retirement then both can benefit from a sound money system which enable credits being accumulated for retirement to mirror debits accumulated while a house is built by someone else. The retired person should later be able to spend these credits reflecting regular reductions of debit or repayments made by the house purchaser. Before LETS type currencies become real vehicles for economic regeneration they will need to become a credible means for channelling savings towards investment. It will probably take a few years for the users of a new currency to trust it for long term savings. This does not need an interest incentive for the saver so long as the currency can maintain or improve its real value over a period of a few years and be expected to continue doing so. Not everyone involved in LETS schemes wants to see them used to finance substantial investments; some see no value in having money unless it is spent. They are welcome to continue forming smaller LETS schemes where this use for investment purposes is less likely or to spend the currency of the larger schemes as soon as they earn it. Enough people are likely to want to use the new currencies to channel their savings towards other's investments to ensure that this will happen. 8. Inter-LETS: how you get round the limitations The astute reader may have noticed that I have referred to separate LETS systems as organising separate currencies rather than a single new kind of currency that can be traded between all members of all LETS schemes. This is both the strength and the weakness of LETS based economies. The smaller the currency, the sooner your money comes back to you and the more trading will depend on non-economic values such as a sense of community. There may on occasion be the need to combine two LETS currencies into one, because a large overlap forms between their memberships and to avoid the duplication of administrative and development effort. But much of the beauty of the LETS concept derives from the smallness of its origins and the fact that it starts from the grass roots of society, grows organically and encourages both diversity and a healthy form of competition between different LETS schemes. The smaller community based LETS scheme matches local needs and resources well but does not provide sufficient competition or economy of scale to generate adequate trade or sufficient diversity and choice to enable its members to enjoy the quality of life which they have come to expect, without using another currency which operates on a larger scale. The business of keeping separate currencies in separate pockets for those trading on more than one LETS system need not be too complicated in practice, because LETS money systems are inherently simple in comparison with the old currencies. Some will find it easier to earn in one kind of currency while another is easier to spend. There should be no need for a busy specialist to become a jack of all trades simply so he or she can be involved in a small LETS group which provides an insufficient market for his or her specialism. There is inherently no reason why someone should not be able to buy one currency in exchange for a second if someone else wants to buy the second in exchange for the first; the extra flexibility this gives is of benefit to both parties and enables greater participation in a LETS scheme. To use a LETS currency you must be a member of a LETS association. For such a transaction to take place between two LETS type currencies both parties would need to be members of both schemes. If, as I propose in the next chapter, taxes are to be charged in future on all transactions resulting in income to a private account, this would make imports relatively uneconomic compared to local products and exports relatively uncompetitive. There would still be a place for global industries where the economies of scale are sufficient to justify the extra taxes, e.g. the computer, telecommunications and air-travel industries. LETS does not have to be local. There is no reason why a LETS type currency should not serve a major conurbation or regional community with several million inhabitants. This will obviously need a more professional approach to the administration and facilities management. The essential features that will need to be maintained for it not to deteriorate into something just like another old kind of currency are as follows: a. The currency should only be used within a community which values itself as such. b. The circulating credit should be based on debits spread between many individuals or businesses. Banks, charities, public agencies or the LETS system itself should not go into debit. c. All payments go through the accounts. There are no notes or coins. d. The administration of the system is accountable to the community it serves; i.e. the trading members who hold accounts. e. There should be no interest charged on balances in debit or paid to those in credit, though administration, service charges and taxes may be deducted from income received. f. Transactions only take place by agreement between buyer and seller. g. Information about the income, expenditure and current balances on all accounts is made available to all members of the scheme. There are many situations where those engaged in a cooperative form of economic activity can benefit from using a LETS type currency to enable and encourage their internal transactions. For example, The European farmers will need to replace some of their specialised technological inputs with local skills and resources resulting in more sustainable and organic forms of agriculture if trading extensively using local or regional currencies, but their customers will still want to buy foods produced more easily in different climates so they have every reason to trade amongst themselves using their own currency system. Some would also be able to trade farm machinery or specialised goods or services into this scheme if these were available locally in exchange for currencies obtainable through sale of agricultural products into the farmer's local community. Other areas where this kind of approach would work include the global telecommunications, computer and software industries where the businesses involved in this already carry out much inter-trading amongst themselves and need to operate on a global scale. On a smaller scale, a good basis for a local LETS scheme involving building and construction trades is the idea of a "self build" cooperative, whose members buy a large plot of land which is subdivided into smaller plots so they can pool skills to build a house for each member. By using a LETS currency to account for the use of each other's skills, this can continue to circulate and expand to finance other community activities and projects after the original houses are completed. A new currency system could also be used to enable the industrialised countries to provide their technological expertise and abilities to help the third world build up its basic infrastructure to the point where this effort can be repaid without harming these emerging economies. This trade is necessary, both for the third world to become more self-reliant and to provide useful employment among those with the necessary skills and organisational abilities in the industrialised world. I can see no sustainable objection to this kind of currency being brought into existence if it operates according to the principles described above and helps liberate the poorer half the world from having to pay so much of its earnings as interest to the richer half. Income received in the form of a global currency could also result in taxation being raised for the finance of global institutions. The UN is in urgent need of finance without strings attached by governments with their own nationalist agendas, to pay for its peacekeeping, health and educational programmes. The experience gained so far with operating LETS type currencies at the local level indicates that any community can create its own currency system. If we are serious about solving the third world debt crisis it is time we started thinking of all humanity as belonging to a global community. 9. LETS and the finance of public and community projects One of the main incentives for forming a LETS scheme is that this gives a community more control over its own economic development. So far we have only looked at the private side of the resulting economy but this is only half of the picture. LETS currencies are already being used to finance voluntary or charitable activities typically by levying a percentage on each transaction or by encouraging voluntary donations by individual or businesses members, particularly those who have difficulty spending all the LETS money credited to them. This is all well and good, but it is unlikely to provide enough for all of the necessary activities within the community which have traditionally been funded by the state. As a LETS currency operates on a smaller scale it becomes possible to enable more people to contribute to and participate in the economy, but we still need to provide benefits for the elderly and disabled and health and education services; the people who need these most are those least able to pay for them. Those involved in using a new money system will prefer to contribute more directly to these needs rather than through the current kind of system where the administration, collection and disbursement of taxes is expensive and bureaucratic and people feel they have little control over it. Why not let individuals decide for themselves to which public services their taxes should be distributed ? People are capable of doing as good or better a job of cutting the tax cake than most politicians because the latter have too many conflicting responsibilities. Some might decide to put all of their taxes into just one kind of public service but this would even out. If it were generally felt that some services were underfunded then people would divert a higher proportion of their taxes appropriately. This would be easy to automate, because the private and public service funds all exist within the same computerised system for the same LETS currency. We would still need a democratic process to decide the minimum tax rate and to elect representatives to supervise the audit and use of these funds to prevent misuse. However if politicians are freed from the task of setting public service account budgets this will help them to discharge their other responsibilities more effectively. This change will help them ensure that these funds are properly managed and that the need for public finance is not allowed to compromise the integrity of the money system through which it is provided. Much has gone wrong in the public services because excessive regulation and management has stifled enterprise and initiative. Those working in these areas feel prevented from advancing new ideas because of the probability that they will be penalised for rocking the boat: any improvement inevitably challenges vested interests. If a branch of government is not seen to be using the tax revenues which we choose to give it effectively, why should it go on having an unlimited licence to spend our money if others are able to do a better job for less ? Enabling tax payers to decide how their taxes should be split would introduce a real and necessary atmosphere of competition, flexibility and innovation into our public services. LETS Benefits for those unable to provide for their own accommodation, clothing or food should be supplied in kind, rather than money; the direct provision of basic necessities will be more popular amongst those contributing tax revenues for this purpose. This will also be easier to administrate within a smaller community. Perhaps there could also be a small LETS fund for a universal money benefit. For the rich this would replace the need for personal tax allowances; for the poor this money should not be taken away as soon as they earn a little more. Everyone needs some income whether or not they can earn it, but the incentive to work openly should not be removed as occurs under the current system of unemployment. We could then also get rid of the current tax breaks on so many individual or business transactions which result in income flowing into privately held accounts. Income tax need not be the only source of revenue; there are sound reasons for taxing the ownership of land and property, the use of polluting processes and the sale of unhealthy products etc. However there is a strong case for considering all payments into private accounts as being private income and taxing it equally, because: a. This will put an end both to the misuse of money for short term speculation and lending for interest because these activities would attract so much tax that no-one would find them worthwhile. b. Investment markets will be forced to take a long term view, resulting in things being made to last, with more consideration of the environmental effects being needed if an investment is to be profitable. c. This would make the deduction of tax from income ( and crediting tax payments to the public service or charitable accounts nominated by the taxpayer ) capable of being automated relatively easily. For LETS systems to be encouraged to develop in this manner alongside the current money and tax system some minor enabling legislation is needed. Any LETS system whose accounts are properly audited, and which levies taxes in the manner described above on all internal transactions at or above the basic rate of income tax, should be in a position where all income earned through this scheme by its members is exempt from other forms of taxation. If LETS systems keep growing and proliferating over the next few years as they have in the past, I think it very likely that sufficient support can be gained in legislatures for proposals of this nature to succeed. 10. The demise of the old money system ? Having developed local and regional LETS currency and tax systems in the manner in which I have described, we must now address the question of whether the old money system still has a useful role to play. In the recent report of the National Performance Review by US Vice President Al Gore (September 7, 1993, From Red Tape to Results, Creating a Government that Works Better & Costs Less ) the performance of the system of government inherited by the new presidency was likened to a car with a broken engine; with new policies being as ineffective as pointing a broken down car in a different direction. Clearly most public agencies have a useful job to do but need to undergo fundamental change if they are to be responsive to the needs of their clients. I think something more than just propagating good practice from the more to the less responsive public agencies is needed if the system of financing state enterprise is defective. We must first ask whether this system is even capable of being repaired. Certainly all of the principles which I have written about could, in theory, be incorporated into the existing system piecemeal in which case the old system would survive by a process of evolutionary change. This would obviously require very major surgery, but it is doubtful whether the patient would make it out of the operating theatre. There is a more practical difficulty to this approach: the public-deficit problem which lies at the core of the disintegration and collapse of the old system is politically insolvable. How do you get people to vote for higher taxes in return for further cutbacks in the financing of public services ? It is not only the third world governments that have become bankrupt; this condition is near universal. The collective government debt forms the basis of credit in the old currency system and I doubt many believe it to be sustainable either with or without further massive doses of the same medicine: i.e. further borrowing to pay interest on the loans. Under this state of affairs, global hyperinflation is both a necessary precondition for and an inevitable consequence of the cancellation of this debt. If people can meet some of their needs by using a new currency they will work less hard in return for an old one; either the supply of the old one will have to be decreased or its value will diminish. Global hyperinflation is therefore made more possible by, and its probability requires, the kind of developments in alternative currency systems which I have described. The possibility of getting rid of the old system is created by the availability of a new one, but we do not want a sinking ship to go down until we have got as many of the passengers into lifeboats as can be managed. In conclusion, various factors will accelerate the transition from the old system to the new one and appear likely to result in the demise of the old money system. 11. The emergence of a new social contract These changes will bring the old system to a crisis point. In the short term it is likely that things will get worse before they get better. The result of the emergence of a new money system on the lines which I have described will involve some fundamental changes in the relationship between government and the individual. For starters, to use money you will need to join an organisation and agree to its rules. There will still be a need for the common law to regulate and where necessary punish the basest of human instincts in a fair and impartial manner, but much social harmony can be achieved through the codes of conduct governing voluntary associations. These rules are typically treated as having the status of a legally binding contract between two parties when tested before the courts unless there are good reasons to ignore them. Many are still thrown into jail for non-payment of fines or taxes etc. When there is no such thing as money outside of an account this practice will seem mediaeval. So much crime could be traced and would be prevented if there were no longer a financial incentive or much prospect of it escaping detection. There is no reason why our society should have to accept having one in ten or more of its members excluded from making a contribution or receiving an economic reward. No system can alter man's basic nature or result in a perfect society, but people can change and in doing so they will inevitably seek improvements in their social conditions and those of others; without this basic desire we would never have known the end of slavery or the beginnings of democracy. A LETS based money system may enable us to tackle some of our problems but this will inevitably leave others for future generations to solve. These changes will result in a radically different perception of our relationship with government. Instead of regarding the government as them, we will have to get used to thinking of it as us. 12. Where do we go from here ? Nothing about the possibilities that I have written about is inevitable or predestined. We have the ability to choose our future to a degree never before imagined, but our essentially passive mass media has made us closer to events elsewhere in the world while lulling us into believing that it is other people's responsibility to do something about it. Change does not happen as if we are machines following a predefined program; it happens because we desire it, choose to accept it into our own lives and take action to bring it about. First we need to understand the path we are following; once this is clear there is no excuse for sitting back and expecting others to act while the world crumbles around us. If there is a LETS association near you then why not join it ? If there isn't then why not get together with some of your friends and start one ? If you can't do this then please consider whether you can afford to support others already involved in starting and encouraging LETS developments. Many LETS activists are working long hours on this for little economic reward. They need your help, support, enthusiasm, encouragement and prayers. The experience already gained with LETS developments proves that people from all walks of life can use their talents, skills and resources to the full in this great, exciting and challenging project. With your help it may result in the greatest improvement in social, economic and environmental conditions seen in our lifetime.