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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.