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Improving Local Currencies, or How To Make a Good Thing Better
By Tom Greco
The local currency and exchange movement may be the most important development
in human liberation since the Magna Carta. It evidences a move toward economic
freedom which is every bit as important as political and religious freedom.
The proliferation of mutual credit systems like LETS and local currencies
like Ithaca HOURS demonstrates the intensifying need which people feel for
satisfaction of basic human needs and greater control over their own destiny.
It provides a hopeful sign that we are not powerless in the face of increasing
concentration of money and power, and the rapid globalization of capital
Those pioneers who have dedicated themselves to developing and implementing
these prototypes deserve our deepest gratitude and respect. Nevertheless,
there is still much to be done. Just as the early airplanes showed that
manned flight was possible, these early exchange system are demonstrating
that the specialization of labor and the equitable exchange of value in
the marketplace are not dependent upon centralized banks and national currencies.
Indeed, they are providing a means by which communities can maintain high
quality of life standards and thrive economically in the face of global
competition and capital mobility. As the Kittyhawk was not the last word
in aircraft, so too are our current local exchange prototypes far from optimal.
We should expect, and indeed require, refinement and improvement of our
local currencies and systems of exchange. This article attempts to clarify
the relationships among the various participants, and to define some terms
which may be helpful in understanding the way a system functions.
Gift Exchange vs. Reciprocal Exchange
The market has become the dominant institution in economic exchange, but
market mechanisms are certainly not the only means of exchanging goods and
services. There is an enormous amount of work which is unpaid, and there
are many exchanges which do not involve markets and money. Indeed, the imposition
of money into the exchange process can be destructive to the close interpersonal
relationship which are a necessary component of healthy families, for example.
Besides all of the economic activity which goes on within households, there
is a huge amount of goods and services which change hands as gifts. I would
contend that, in general, the more exchanges we can manage without money
and markets, the better. Nonetheless, I am a firm believer in the efficacy
of markets in particular situations, provided that they are free and competitive
and not dominated by any particular trader, company, or group.
Reciprocal exchange is the ideal to be sought within a market realm. We
can think of the economy as a game of put and take. Reciprocity demands
that each person puts in as much as s/he takes out. In other words, in reciprocal
exchange one is expected to give as much as s/he gets. This is an important
point to keep in mind when designing local exchange systems.
Although altruism and charitable giving might be built into a local exchange
system AS AN ADJUNCT, the essential characteristic of such systems should
be RECIPROCITY. No one should be made, by virtue of a system's design or
defect, an unwitting or unwilling donor to someone else's benefit. An exchange
system which has both equity and integrity must insist upon strict reciprocity.
Money is an IOU
Although we may not refer to local currencies as money, they perform the
same essential function as money and bear the same basic characteristics
as money. This goes for credits in a ledger system as well as for circulating
paper notes. It has been said that "Every piece of money is a credit
instrument." That means it is an IOU. The natural question, then, is
"Who owes what to whom?" Who or what stands behind the IOU.? The
answer may not always be obvious. When a community of traders agrees to
accept a particular currency, they are making a commitment to stand behind
it, that is, to give real value in exchange for it. When others who are
not a party to the agreement accept the currency, they are expressing their
confidence that the issuers of the IOU. will pay what is owed, although
the time frame may or may not be precisely specified.
Basis of Issue
Another important question with regard to a local currency is, "What
is the basis of issue?" In other words, how does it first come into
circulation? In general, currency comes into circulation when someone first
spends it, i.e., when s/he gets real goods or services and the seller accepts
the currency as payment. Reciprocity demands that the issuer be willing
and able, at some point in time, to redeem it (by accepting it as payment
for goods or services s/he sells).
Mutual Credit and Paper Notes
There are presently two predominant forms of local exchange. These are mutual
credit systems, like LETS, which uses a ledger of accounts to keep track
of exchanges, and local currency systems, like Ithaca HOURS, which use circulating
paper notes to give people a way of tracking their exchanges. There are
many variations on both themes. Some ledger systems which call themselves
LETS, may, in fact, depart significantly from the original and official
LETS protocols. Likewise, there are many HOUR currencies springing up which
correspond to the Ithaca model, but may differ in some of their details.
Essential features of LETS
LETS is a membership association in which each member has an account. All
accounts begin with a balance of zero. When a member sells something to
another member, his/her account receives a credit (plus); when a member
buys something his/her account receives a debit (minus). A credit causes
an account balance to increase, while a debit causes an account balance
to decrease. Accounts are allowed to have negative as well as positive balances.
In fact, there can be no positive balances unless there are also negative
balances. In such a system of mutual credit, the total of all the credit
balances must always equal the total of all the debit balances. What this
means is that the amount of value owed by those who have debit balances
is always equal to the amount which those with credit balances expect to
receive. This is a system of strict reciprocity. Of course, as in any system,
there will always be some who will default on their obligations, i.e., some
of those with debit balances will fail to provide the amount of goods and
services they committed themselves to when they incurred those debits (by
buying). These defaults should be recognized at some point and "written
off." In doing so, that amount of debits and an equal amount of credits
must be taken off the ledger. What this suggests is the need for the system
to have a capital fund, i.e., a supply of credits which can be used to offset
"bad debits." How this fund might be provided will be discussed
In a mutual credit system, we may think of the "money supply"
as being the total amount of debits or credits. Since these are two sides
of the same coin, and since debits and credits are always equal, we need
only count one of them. One of the elegant aspects of a mutual credit system
is that the "money supply," within reasonable bounds, adjusts
itself automatically in relation to the amount of trading that members wish
or need to do. There need be no central authority which must decide whether
the supply of credits should be increased or decreased in order to keep
the market value of the credits constant. The only thing to be decided is
the maximum amount of debit balance which should be allowed on each particular
account to minimize the risk of default. In usual practice, account balances
will be well below that amount.
How HOURS Work
Ithaca HOURS, and the many similar HOUR currency systems which have been
modeled after it, are paper currency notes that circulate in a local economy.
Unlike LETS, Ithaca HOURS is NOT a membership organization. The HOUR notes
are put into circulation by the operator of a newspaper called Ithaca Money.
The HOUR notes are delivered to advertisers when they buy an ad (for cash)
in the newspaper. As I understand it, those who advertise in Ithaca Money
generally agree to accept hours for at least partial payment but have no
obligation to do so.
As mentioned before, it is important to ask, what is the basis of issue,
and who or what stands behind the HOUR currency? There is generally a great
deal of confusion about currency issuance and the obligations which are
associated with it. It is crucial that we understand how and where the currency
originates, how it is placed into circulation, how it will be redeemed,
and who will redeem it. In the case of Ithaca HOURS, the answers to these
questions are not entirely clear. I think the ambiguity can easily be resolved
once we understand a few basic points.
Fish or Fowl?
A local currency must originate somewhere. Somehow the notes must be printed
and distributed and their use in exchanging valuable goods and services
must be initiated. Now here's the first point -- the originator may be either
a principal or an agent. What's the difference?
A principal is one who initially receives valuable goods and/or services
and uses the notes to pay for them. It is the principal who ISSUES the currency
into circulation by buying goods and services with it. The currency notes
are a generalized IOU. which must be redeemed at some point in time. Redemption
occurs when the notes are accepted by the principal in payment for the goods
and services s/he sells. A currency which makes no adequate provision for
redemption is bound for trouble.
An agent performs a different role. An agent does not spend the currency
notes into circulation. S/he does not issue the notes but merely distributes
them to the principals who will issue them (spend them into circulation).
The agent, therefore, is not responsible for redeeming the notes. That is
the obligation of the principals who are the ones who spend them into circulation.
What we need to know about Ithaca Money is whether it acts as principal
(issuer) or agent. If it acts as principal, Ithaca Money must be willing
and able to redeem its entire issue of HOURS by providing an equivalent
amount of goods and/or services to those who hold the notes. In this case
the HOUR notes represent its IOUs. Is that how Ithaca Money regards the
HOURS it distributes?
Ithaca Money does accept HOURS in payment for advertising, but is it prepared
(willing and able) to redeem the entire issue this way? If Ithaca Money
is not so prepared, then there could, and likely will, develop an eventual
problem of currency debasement. In other words, of "too much currency
chasing too few goods and services," which will show up as HOUR price
On the other hand, if Ithaca Money acts only as agent, then the responsibility
for redemption of the notes rests upon the advertisers who first received
them from Ithaca Money. They are the ones who first issue the notes into
circulation by using them to pay for goods and services. Do the advertisers
who receive the notes realize that they bear this responsibility? Do they
know what they must do in order to fulfill that responsibility? Is there
adequate assurance that they will do so?
How might such assurance be obtained? I think it is not at all necessary
to be legalistic about this, but the nature of the agreement should be clear
and explicit. One way to achieve this would be to have each advertiser to
whom HOURS are distributed, sign a simple agreement. This agreement might
ITHACA MONEY is acting as agent for its advertisers, and ANYONE WHO CCEPTS
HOURS FROM THE AGENT IS OBLIGATED TO RETURN AN EQUAL NUMBER OF OURS TO THE
AGENT IF AND WHEN THEY CHOOSE TO DISCONTINUE THEIR PARTICIPATION N THE ROGRAM.
The actions or inactions which constitute discontinuation of participation
must be defined. Discontinuation could be defined as being no longer willing
to accept HOURS in payment for goods and/or services. This might not be
enough, however, since there would probably be no formal declaration of
that to the agent. The agreement could be greatly strengthened if discontinuation
was defined as non-renewal of their ad in Ithaca Money. Even without having
any intention of legal enforcement, having such an agreement would provide
greater assurance that an advertiser will not spend HOURS and then fail
to earn them back, i.e. take value from the community without putting back
an equal amount (reciprocating).
The requirement of returning HOURS to the agent would provide the proof
that the IOUs issued by the advertiser have been honored (redeemed). The
loop will have been closed and reciprocity will have been achieved. Figures
1 and 2 show pictorially how currency notes are issued, circulated, and
redeemed when Ithaca Money acts as issuer and agent, respectively.
Adding a Capital Cushion
When a conventional bank is established, the founders must put in some capital.
This capital fund is necessary to cover the start-up costs, but it also
serves to provide added security for depositors in case some of the bank's
assets which back the deposits should lose some or all of their value.
A local exchange system, too, is a business of a sort. Although it may not
be operated for profit, it still incurs costs of operation. While most systems
have been started with grants and volunteer labor, that may not be an adequate
basis for operation in the long run. In order for the system to be independently
sustainable, it must eventually generate sufficient revenues to cover its
costs. Some of these costs may be unavoidable cash costs, while others might
be adequately covered with local currency. How might the system acquire
a capital fund, and how might it generate sufficient revenues to sustain
Let's consider the latter question first. Operating revenues must generally
come from fees which the system charges its clients and patrons for services
like advertising and/or accounting. But there is also another way, which
will be described in a moment. The capital fund could come from grants or
loans, but it too might be obtained in another way. What is this other way?
Using Excess Business Capacity to Support Local Currency
Every community has an economic base comprised of natural resources, skills,
productive capacity, etc. While each community has its own distinct array
and assortment of these, there is almost always excess capacity, i.e., the
businesses in the community are able to make and sell more than they actually
do. Further, the cost of that additional production is usually very low
in comparison with the average cost per unit of output. Economists call
this cost of the last unit produced, the marginal cost.
Everyone is familiar with discount coupons. They are typically used by restaurants
and retailers to attract more cash business and repeat customers, i.e. to
utilize some of their excess capacity. Since their marginal cost is low,
they can afford to grant the discount and still add to their overall profit.
This phenomenon of excess capacity can be harnessed to accomplish at least
three important community objectives. It can provide a funding source for
non-profit and community improvement groups, including the local currency
system, and at the same time, it can provide a way of introducing and promoting
the use of a local currency. Further, excess business capacity can provide
the local currency system with a capital fund to provide added security
against currency debasement. The essential process for doing this has been
variously described by at least three local currency/exchange advocates.
The Community Service Credit System which I describe in Chapter 15 of my
book New Money for Healthy Communities, lays out the basic approach. Variations
on the theme which I have been trying to promote in Arizona are Community
Service Coupons and Youth Employment Scrip. Joel Hodoroff has been promoting
a plan in the Minneapolis/St. Paul area for several years. His efforts have
recently come to fruition in a pilot project called the Community Hero Card
which was launched there in the Spring of 997.
A particularly elegant description of the process by Michael Linton and
Ernie Yacub was published in the summer of 1996 in a Canadian magazine called
Making Waves. Their plan is called "Community Way." Implementation
of Community Way in Vancouver, BC is in the planning stage, and there have
been some promising discussions about launching it in the San Francisco
Bay area. I believe that Community Way has the potential to shift tremendous
amounts of resources into the "third sector" (non-profits), and
at the same time, give the local currency movement a big boost into the
mainstream. Once the first prototype is up and running smoothly, I think
it will proliferate rapidly.
How does it work?
Whether a system uses ledger credits or circulating paper notes, the process
is conceptually the same. The bare-bones process is this:
Step 1. A business agrees to accept the local currency (or credits) as partial
payment for whatever it sells (just as it would its discount coupon). It
also agrees to donate back to the system a portion of its local currency
revenue. This may be a fixed numerical amount or a percentage of local currency
Step 2. This commitment provides the system with a capital fund (in local
currency), which allows the system to issue (spend) notes or credits, knowing
that the business will redeem them, completing the reciprocity circuit.
Step 3. The system then allocates the notes or credits to non-profit organizations
or community service groups. These groups can then use them to pay their
volunteer workers, purchase supplies, or pay for services. The system can
use some of these donated notes or credits to pay the people who do the
work of running the system, and to build its capital fund cushion.
Step 4. The volunteer workers can then spend them at the businesses which
have agreed to accept them, or they can sell them for cash to cash-rich
supporters who then spend them at the businesses which have agreed to accept
Step 5. When the business donates back to the system the amount of notes
it agreed to, the circuit is complete, the obligation has been discharged
and the notes are retired until another business makes a donor commitment.
Then the notes may be reissued.
Of course, the notes may change hands many times before they reach the donor
business, and it is hoped that they will, allowing the notes to serve not
only as a fund raiser for community improvement activities, but also as
a supplemental medium of exchange. One further advantage of this approach
is that the donated notes increase the available supply, making it easier
for those choosing to leave the system to repay the notes they owe.
What if a business takes in more notes than it agreed to donate back to
the system? In this case, the business can spend the excess notes at other
participating businesses which are eager to have them in order to fulfill
their own obligation to the system. There are a number of other details
associated with such plans but they need not be discussed here.
Figure 3 shows pictorially how the notes are issued, circulated, and retired
so that reciprocity is achieved.
This is what it shows:
1. The system distributes notes to non-profit organizations on behalf of
business donors. 2. The non-profit organizations use the notes to pay workers,
buy supplies, and pay for services. 3. The non-profit workers sell the notes
for cash to cash-rich supporters. 4. The supporters spend the notes at participating
businesses. 5. The business donates the notes to the system as agreed.
Once the notes return to the System, they are retired.
The diagram shows who gets what when the notes change hands. The non-profits,
including the System, get labor, services and supplies; the workers get
cash or discounts at participating merchants; the supporters get discounts
at participating merchants; the participating merchants get the benefits
associated with being a donor. These are (1) more business, (2) good will
in the community, (3) advertising, (4) a better environment in which to
conduct business, and (5) a stronger local economy.
# # #
This article is a draft of a chapter for a forthcoming book.
Brief Biography of Thomas H. Greco, Jr. (updated December 11, 1997)
Thomas H. Greco, Jr. is a community economist, writer, networker, and consultant,
who, for the past 20 years, has been working at the leading edge of transformational
restructuring. A former college professor, he is currently Director of the
non-profit Community Information Resource Center, a networking hub, which
provides information access and administrative support for efforts in community
improvement, social justice, and sustainability.
His articles have appeared in The Whole Earth Review, World Business Academy
Perspectives, At Work, Earth Island Journal, The Catholic Worker, The Permaculture
Activist, Permaculture Drylands Journal, Green Revolution, and other publications.
He has authored and published two books: New Money for Healthy Communities
describes voluntary alternatives to conventional money, which empower communities
and reward people fairly; Money and Debt: A Solution to the Global Crisis
explains how conventional money malfunctions and how an ideal money would
Mr. Greco holds a Bachelor's degree in Chemical Engineering from Villanova
University and an MBA (Business Administration) from the University of Rochester.
He spent a year in residence doing doctoral study in Management, and Instructional
Technology at Syracuse University. His work experience includes 5 years
as an aerospace engineer and 14 years in academia where he held a tenured
position. His expertise includes monetary theory, local currency and exchange
systems, computer applications, statistics and survey research.
Mr. Greco may be contacted at: PO Box 42663, Tucson, Arizona 85733, Telephone:(520)
577-2187 E-mail: email@example.com
Web site: http://azstarnet.com/~circ/