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Chapter Three - page 1

CUTTING THE MONETARY TIE

If people living in an area cannot trade among themselves without using money issued by outsiders, their local economy will always be at the mercy of events elsewhere. The first step for any community aiming to become more self-reliant is therefore to establish its own currency system.

The establishment of a local money system is absolutely fundamental to greater economic self-reliance. This is because, at present, the level of trading activity in almost every part of the industrialized world is determined by the amount of money which flows in from outside. Unless that flow is adequate, even jobs which local people could do for themselves without any outside resources will be left undone. For example, I may have the materials to paint my house and a neighbour, an experienced painter who is temporarily underemployed, might be keen to do the job for me. However, if I have no national currency with which to pay him, I will not be able to use his services unless we can work out a barter arrangement, something which might be difficult as I may have nothing I am prepared to give up which he wants from me and which is roughly equivalent to the value of his labour. As a result, I may be forced to do the painting rather inexpertly myself.

The conventional solution to this problem is for me to try to earn more national currency. Individually, I might be able to do so by working for someone else in my community but if the community as a whole is to increase the number of things its members do for each other on a permanent basis, we will need to get a larger stock of pounds into circulation permanently amongst us. This can be done by increasing the amount of goods and services we sell to - and hence our reliance on - the outside world. However, quite apart from the risks to which this exposes us, the new money tends to flow out again nearly as fast as it came in so that a big rise in external sales is likely to be needed before we can achieve a significant rise in the local national currency stock.

A better alternative is therefore for us to try to stop what national currency we are already earning outside from leaking so quickly away by making more of the goods we are buying from elsewhere for ourselves. This is a valuable strategy. However, even when we have replaced a proportion of the goods imported into our communities with those of our own, the link between the level of economic activity and the flow of money from outside remains. Only the ratio has changed. By cutting the leakage rate we have simply moved to a higher activity level for a given amount of money flowing in.

The best approach is therefore for us to make our internal transactions independent of the external money flow by using a special currency with which to carry them out. After all, the only role the national currency plays in transactions between neighbours is as a measuring stick, a scale by which the value of the work done by the man who comes to paint my house can be compared with the value of the work I do for him or for another of my neighbours. It is a way of ensuring that no-one takes out more than he or she puts in. Functional families and small, stable communities do not need to use money to measure each person's input in order to ensure that everyone pulls their weight: members just do things for each other without keeping count in the confidence that it will all balance out in the end. The community on Inishmore, one of the Aran Islands, still functions this way. In larger groupings, however, most of us seem to feel the need for some way of keeping score.

In the past all successful societies had systems under which people worked for each other and the common good without the intervention of cash. Hugh Brody writes in his well-known book on Irish rural life Inishkillane1 that some form of mutual aid 'compounded of claims and counter-claims between farm households has prevailed in virtually every society where small farming has been the basic activity' and quotes a phrase from Isabel Emmett's study of a North Wales village: "to farm this district, a man must either have the constant daily co-operation of his fellows, or he must have a very large sum of money behind him".

In Ireland, Brody says, there is little evidence that the households involved in a mutual-aid relationship ever bothered to keep an account of each other's obligations. "It seems that the details were vague and the fact of the relationship more important than the memory for particular exchanges that occurred in it. What a household knew was the neighbours they could look to for help, and to whom they would not refuse to give help if asked themselves."

He likens the relationship to that of savers to their bank. "The giver, by giving, guaranteed that he would be the receiver in the future. In that way, the giving of surplus to friends and neighbours is not very far from the giving of surplus to the cashier in a bank. The quality of integrated society, like the legal rules of banking, guaranteed that the gift would not be forgotten and a future claim ignored."

However, as subsistence farming gave way to more specialised production for sale to exporters, it became possible to save actual cash for a rainy day rather than storing up favours with one's neighbours. Remittances from family members overseas also helped reduce the household's near-total dependence on its own resources, and consequently reduced its need to have neighbours available for back-up should those resources fail. Nevertheless, examples of mutual aid systems still exist or have ceased to operate only very recently. A friend of mine can remember neighbours coming to her father's farm in the West of Ireland each autumn until it was sold in the mid-1960s to help bring in the crops and then, after this work was done, her father, his five men and his threshing machine going off to help harvest the neighbours' crops in return. "No money changed hands, even though the contributions to the overall effort varied" she says. "It was the  meitheal. The imbalance just did not matter."2

In general, however, economic relationships are now too complex and too transitory throughout most of the industrialised world to allow systems of exchanging labour without a measuring stick to survive apart from those involving relatives, close friends and immediate neighbours. Our intra-community transactions have consequently become highly dependent on the flow of cash from the outside world, a change which makes us very vulnerable should the external money supply fail to supply us with enough measuring units to do all the trading we would like with each other.

Developing an independent local supply of measuring units to facilitate local exchanges is therefore an essential step towards greater community self-reliance and several hundred communities, almost all in the English-speaking world, have already established such systems of measure. Most of these are based on one developed in the early 1980s by a Scots-born Canadian, Michael Linton, in the Comox Valley in British Columbia and use either the national currency or time as their units of measure, although other units have been proposed such as cords of firewood (in certain areas of Canada and the US more or less anyone can go out and cut wood, thus turning their time into a readily-measured amount of winter heat) or litres of milk.

Click for panel from original book on Michael Linton's work with LETS

Most of the Linton-inspired LETS (local exchange trading system)4 ,issue their members with special cheque books and operate their own computer-based cheque clearing system to record the payments in and out of each individual's account. In the system to which I belong in Westport in Ireland, we each collect up all the cheques we have received on the last Thursday of each month and post them off to the member who operates the computer system. Our statements of account are available for us by the following Thursday. It's simple and works well.

Click for 2003 update on the Westport LETS, by Richard Douthwaite

The units in which we write out cheques are not Irish pounds but Reeks ( after The Reek, the local name for a nearby holy mountain, Croagh Patrick) and every six months or so we bring out a new issue of a directory listing the goods and services which members are prepared to supply for them. Of course, members need to know what is going on more often than that and so, each month, along with their statements, everyone receives a set of supplementary pages for the directory listing new entrants' skills and a newsheet reporting what's going on. It's a lot of work preparing this material but those who do it find it enjoyable and get paid in Reeks for their efforts.

When we were planning the Westport system we were worried that settling all our transactions by cheque could prove cumbersome because each cheque would take a member's time (for which he or she would have to be paid in Reeks) to process through the computer system, an elaborate procedure just to buy a pound of carrots. And, as people without conventional bank accounts are reluctant to accept payment in national-currency cheques, we also felt that people outside our system would be reluctant to be paid in our cheques even though they would be able to spend them with members by endorsing them on the back . This, we thought, would make the system undesirably exclusive because there would be no way for waverers to use it casually before committing themselves to becoming members and paying the entrance fee. We therefore decided to issue Reeks tokens for use in small transactions and for paying non-members who could spend them at the stall we operate once a week on market day or in the cafës and shops which have joined our system.

Because other things got greater priority, it was almost 18 months after trading began that the tokens appeared. They had been designed by a member, scanned into a computer and run off on a laser printer ten to an A4 sheet. Each sheet had then been laminated between clear plastic, guillotined, and the individual tokens validated to make them hard to forge with an embossing stamp bearing the words 'Meitheal na Mart' the name of the co-operative society we had registered to run our LET system. Each of the five values - they are issued in denominations of 1, 5, 10, 20 and 50 Reeks. - had been printed on a different coloured paper and the tokens were the right size to be kept in a credit-card wallet. How did they work? Well, physically they were excellent. Tests showed that they could be washed in a jeans pocket twenty times without losing legibility. But practically, for all the good they were doing six months after they came out, we might as well not have bothered. "They’ve never really been promoted but the number of people using them is slowly increasing " commented Ben Ryan, who runs the system's market stall and issues tokens in exchange for a cheque to members who want them. "The thing is, they are not really necessary as members can buy from the stall without using cheques just by signing for their purchases in the book. But I did pay two non-members with them and they joined afterwards"

Besides experimenting with tokens, Westport is slightly unusual in that the Reek is a time-based unit which represents a minute of average working time. We use this non-national-currency-based measuring stick because we do not want prices within the system to be automatically identical with those outside and also because we do not want the tax and social welfare authorities to be able to treat local currency earnings as if they were cash.

Click for panel from original book about how LETS earnings are treated for tax

We feel that a LET scheme which claims that its unit is of equal value to the pound or the dollar is deluding itself because everyone would always prefer to take payment in the national currency instead of the local one if they were given the option since the latter can be spent in only a limited number of ways among a limited group of people whereas the former can purchase almost anything anywhere. In view of this, it seems best to make our local unit as different from the Irish pound as possible.

Both time- and national-currency-based units work well as measuring sticks. However, on balance, I feel that non-monetary units are preferable if only because they makes it more difficult for people to quote prices in a mixture of national and local currencies - something which LETS members quite reasonably wish to do since they cannot live by earning local units alone. However, since the need to use national currency alongside LETS units undermines the object of establishing a LETS in the first place, it is also quite reasonable to make rules which restrict it. The system in Katoomba, New South Wales, for example. says that members cannot use its directory to advertise anything if more than half the price has to be paid in Australian dollars.

Groups should be constantly striving to eliminate national currency supplements. If a mechanic working within a LET system has to buy parts to mend a car, he will naturally pass whatever they cost in national currency cost on. Ideally, however, his charge for his time should be billed in the local unit alone. True, because of his overheads, he will need to cover, say, 30% of his labour costs in national currency but he does not have to collect that 30% on every job and he can charge LETS members 100% local currency on work he does for them because non-members will be paying 100% cash. All he has to do is to balance the amounts of each currency he gets over a month, not on each transaction. The fact is that every LETS member incurs some national currency cost on every transaction they do, even if it is only that of making a 'phone call . However, so long as everyone’s national currency costs are more or less the same, none of us will be any the worse off if we don’t charge each other for them and we won't need to have national currency moving round between us to keep our local currency system running.

Indeed, it is sometimes possible to charge 100% local currency prices even when one has had to cover considerable national currency costs. During Westport LETS first summer, a woman who baked wholemeal bread every Thursday for sale on the stall we run in the market place found that she could charge all-Reek prices to members because sales to non-members, many of them tourists, provided the national currency to meet the costs of her gas and flour. During the autumn, however, two other members began baking bread after the first had started a drama course in Dublin, and found that, as the tourists had gone, so few cash sales were being made each week that their national currency costs were no longer being met. Unfortunately, but understandably, they began charging mixed prices, asking members to pay half of the cost of a loaf in Irish pounds, the rest in Reeks. Sales fell off alarmingly, dropping from 16 loaves a week to two, cutting their net earnings from baking to the point at which it was not worth carrying on. "They used to spend all their Reek earnings at the stall anyway buying eggs and cheese" a committee member said when we discussed this. "Now they've got to buy those things for cash, so they are not saving themselves any national currency by charging the mixed prices and they've got fewer Reeks to spend in the group." Today, three people are baking for the stall, all charging all-Reek prices on sales to members.

Apart from tax, the other big advantage of not fixing the value of a system's unit in terms of the national currency is that it makes it easier for LETS prices to differ from those quoted in pounds or dollars. Prices in the Westport system began to move away from straight conversions from the national currency after three months - and not in the way one might expect since, for the most part, they went down. This was because some members found that their services were not being used sufficiently often to pay off the overdrafts they were running up on their accounts so they cut their rates to get more business. Others found when the first directory appeared that their rates were seriously undercut by other members and brought them down when it was reprinted. A third group cut Reeks prices to give the system a boost.

Some rates moved both down and up. For example, a builder adopted the entirely reasonable view that if someone wanted to hire him, his time had to be worth at least as much to the other member as that member was listing as an hourly rate in the directory. He therefore began adjusting his charges to match the other member. "If they could do the job themselves they wouldn't bother to hire me so I must be worth at least as much as they are" he commented.

The Westport core group's policy is not to recognise or support any exchange rate between the local unit and the national currency and to discourage members from selling one to buy the other. Members are required to quote a Reeks price for goods sold on the market stall but are free to quote a cash price for the same items to enable them to be sold to non-members. However, it is up to them to set both prices and the exchange rate therefore varies from member to member. Some suppliers of goods in short supply - free-range eggs, for example - refuse to set a cash price at all because they want them to be sold solely to other members in order to develop the system.

Michael Linton's view on the exchangability of currencies is quite different and he sees nothing wrong in people with a good cash income but insufficient time to offer services through the system spending local units they don't have in, say, a restaurant, and then balancing their accounts by buying units from someone with plenty of time and an inadequate national currency income. "That way, everyone benefits. The people with a high income and no time support the LET system and the member with plenty of time and no cash gets the cash income he needs" he argues.

The Westport view, however, is that this approach weakens a LET system by underlining the inferiority of the local unit and that it is much better for people with cash but insufficient time to balance their LETS accounts by finding something they no longer want they can sell through the system, particularly as so very few actual goods are available through many LET systems that they amount to little more than diversified baby-sitting circles. In Westport, we make a real effort to ensure that an attractive range of goods is always on offer: this was one of the reasons we opened the stall. If someone offers, say, a bicycle for Reeks to balance their account, that's really good because it widens members' range of options and thus strengthens our currency.

Another of Linton's ideas we have decided not to adopt is his strongly-held belief that systems should not set limits on the amount by which members can overdraw their accounts. Linton thinks that, if the debit or credit balance of every member's account is circulated regularly, no-one's overdraft will get out of hand because if other members see that he or she is taking too much out of the system, they will refuse to deal with them until they have brought their indebtedness down. He adds that members with big overdrafts are in a poor position to refuse offers of local-currency employment because of the group pressure to cut their debts.

All this is true, and the Westport system publishes members' account balances by pinning them up on the stall. After all, all Reek overdrafts are debts, not to the system itself as would be the case with an overdraft at a bank, but to every other member, so it is right that members should know what they are. However, we felt that we would all be happier if we issued some guidance on what was a reasonable deficit to run and suggest to new members that they limit themselves to an overdraft of 4000Rs (approx 200) for their first month and then keep below whatever figure represents three months' average Reek earnings for them. What everyone fears is that some members might get themselves so deeply in debt that they will feel unable to pay off their obligations within a reasonable time and withdraw from the system, damaging both it and themselves.

Other systems have a similar guidelines, even those which claim not to do so. For example, Stroud LETS in Gloucestershire, one of the most successful in England, says that if it imposed credit limits it would destroy the atmosphere of mutual trust and empowerment which it is trying to build up. However, though it may not set explicit limits, it does have implicit ones and whenever an account seems to the co-ordinator, Sandra Bruce, to be getting its holder into trouble, she contacts the person involved, frequently with an offer of work, and helps them come back into line. Perhaps the only system genuinely not to have had limits might have been Michael Linton's own in Comox Valley. When this slowed almost to a standstill for several years for reasons we will discuss shortly, Linton's own account was the most seriously extended - his commitment was the equivalent of $17,000 out of a total of $60,000 outstanding in a system which had turned over $300,000 - and outsiders have criticised him for using the system to get goods and services for his own benefit without putting enough back. Linton, however, rejects their charge: "During those three years there was no appropriate way within the system to pay me for my more than full-time work. My function was design, development, promotion, publication and training and it was related to longer-term issues, and required wider resources than the local network could possibly provide. Since I couldn't be paid I ran up my own commitment" he comments 8.

Linton acknowledges that this probably damaged the Comox Valley system. "Any non-providing negative can tend to detract from system performance and certainly, in this instance, mine did. However, it can also stimulate. And equally, mine did. We worked that out beforehand and took the risk with, in my view, considerable success. The system operated with these biases for almost half its first successful period."

An overdraft on a LET system's own account is often a substantial ’non-providing negative’ and thus a source of danger in itself. It can arise because once a LETS is running there is no need for the committee or anyone else who works for it to do so unpaid since they can always be given local units to recompense them for whatever they do. Moreover, committees often feel that membership subscriptions do not have to be adjusted to cover all the setting-up costs while the system is going through its development phase. Why should early members have to bear the entire cost of something which, everyone hopes, will benefit a far greater number of people for many years to come? And so, the deficit on their system's account is allowed to mount up steadily. The question is: How far can it go without damaging or endangering the system? And the answer? Nobody knows.

Up to a point, a deficit in the system's account is good because it means that the average balance in individual members' accounts is positive and this encourages them to spend. Nobody likes incurring debts they can avoid or defer, even in a LET system. In Westport, we even considered giving new members several hundred Reeks the moment they signed up in order to get them trading in the system immediately. Instead, we decided it would be more effective to subsidise the stall's running costs until its turnover had grown enough to pay the members staffing it an adequate amount for their time. Everybody in the system benefits from having the stall because of the goods it offers and the meeting place it provides. On top of this, it is a good advertisement for the system and most new members are recruited through it.

Click for panel from original book about Ithaca Hours

Even if it avoids the problems associated with a serious decline in trade, any LETS where the system's account is in deep deficit is bound to be afflicted by a subtle, insidious malaise because of a lack of balance between supply and demand. This arises because many members - a majority perhaps - will have credit balances in their accounts and feel that they ought to be able to spend them, whereas only a small number will be in deficit and feel that they ought to work their indebtedness off. Everyone's statement will give false signals because the system itself is not trying to provide goods and services to members to reduce its debts to the same extent that individual members owing the same total sum would undoubtedly be. As a result, people find credit balances difficult to spend and tend to lose confidence in the entire system. Management committees should therefore err on the side of safety and keep their system’s own overdraft very small.

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Short Circuit by Richard Douthwaite: links within this site

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