HOMEPAGE /PAPERS


UK LETS and Complementary Currencies
Development Agency

_____________________________________________

ARTICLES,
PAPERS &
REPORTS
published by
LETSlink UK

MAY 1999: SPECIAL FEATURE
The Future of Money
From Global to Local
extracted from the May 1999 newsletter

Keynote speech by Professor Bernard Lietaer, designer of the Euro and complementary currencies expert, delivered at the LETSLINK UK Complementary Currencies Conference, October 16, 1998
(Transcription and editing by Jan Wyllie)

My perspectives
I have been looking at money for 25 years from many perspectives, through my careers in central banking, currency speculation, financing developing countries, in academia and business. Every time I have been exposed to a different dimension of money, and have had to change my whole view of the money system.
The beings that know the least about water are the fish. We are all fish when it comes to money. It therefore takes an extraordinary effort, or luck, to see the whole picture.

Topics to be discussed
My first point is remarkably similar to the point made by Jan Wyllie, the previous speaker. I would say it is amazing that coming from such different backgrounds, we have actually, without coordinating or agreeing, ended up with roughly the same analysis .
 The second point I want to talk about is the role of the many different types of complementary currencies. LETS is the 'Bible' in the UK. But there are many other different forms operational elsewhere, from which we can learn.

I will have also three proposals.
1. It is time to go mainstream, come out of the margins and work at the level where changes are being made, because we will be propelled into that position by the troubles in the main system. Let's not be reluctant to press home the point.

2. The second has to do with using the demurrage system in developing truly sustainable complementary currency systems.

3. And finally I will propose the formation of an automatic clearing house for complementary currencies using the Internet.

What's happening in the Global Economy

The current turmoil of the conventional global currency system did not happen in one fell swoop. It has built up over 25 years. The process started in 1971 when we moved away from the Bretton Woods Agreement, when the US dollar was detached from its connection with gold. I am not a gold bug, but it was the first time in history that we entered a world of floating fiat currencies. This experiment is now coming to a rather dramatic 'questioning'.

     The second ingredient is the near universal acceptance of open financial systems as the best thing since sliced bread. Deregulation started in Britain with Thatcher, spread to America with Reagan, and from there to the world. In the early 1980s, 17 Third World countries became pioneers of deregulated open financial systems as a US policy response to the Less Developed Countries debt crisis.

     The third ingredient has been the creation of a fully integrated, computerized global foreign exchange market.

     The result of these three changes can be seen in the growth of speculative foreign exchange transactions. In the 1970s the volume per day of speculative foreign exchange transactions represented between 10 and 20% of all foreign exchange transactions. Now the figures indicate that the tail is wagging the dog.

     The speculative foreign exchange tail is now 98% of the total foreign exchange transactions. Foreign exchange transactions for the purpose of international trade, is now only 2% of the total.

     The reason is the invention of a fourth class of asset where money is invested, after real estate, bonds and stocks. This fourth asset class is currencies.

     It is now the biggest of all asset classes being traded 100 times larger than the trading volume of all stock markets in the world. The amount of foreign exchange traded grows at the breakneck rate of 20-25% per year, while the real global economy grows at only 3% per year. It is clear that the situation is not stable.

     The consequence according to Paul Volcker, the former governor of the US Federal Reserve is "We now have a growing constituency for instability". Traditionally, big money was on the side of stability, along with governments. Now we have big money partially on the other side of the table, actually making money from instability. The total volume of the world's central bank liquid reserves is about $250 - $350 billion. So the whole thing could be blown out in 2-3 hours of active trading.

     What follows from this situation is now front page news. The Mexican financial crash of 1994-95 was the prototype of the subsequent financial crises, a model of how the other ones are going to be. Nobody is in charge, a system without rudder. The Asian crisis (1997) and the Russian crisis (1998) are part of the same process of economic dislocation caused by the rapid flow into and out of national currencies.

     The system has gone unstable. When I break something like a pencil it cracks all at once. However when something which is dynamic, it vibrates and pulses in waves first, before it falls apart. What we are seeing in the news are these growing dislocation waves. The next wave could be Latin America, Europe, or even the US next. None can resist.

     Usually financial regulators are not alarmists. It is the one domain where you do not say you have a problem. If you say you have a problem, you are going to have a bigger problem.

     So the warnings by the likes of Camdessus, Rubin and Greenspan are particularly significant in this context. My personal opinion is that we have at least a 50-50 chance -- trying to be kind of optimistic -- that this thing will fall apart in the next three to five years.

     The consequences of that are dramatic. Jan has explained some of them. The likelihood is very low that the necessary consensus to implement corrective actions by governments and businesses will be reached in time. So we have to face the probability that the whole thing can fly off the handle.

     On the Euro -- I know this is a hot topic in the UK -- I think that Europe does not have a chance to have any influence at all on its monetary future unless the Euro happens.

     If we did not have the Euro, Spain and Italy would already have had to devalue by 25%. With 20% unemployment, as is the case in Spain, it is inhuman not to ask the government to devalue.

     France would then have to follow up with the same policies. We would be in a 1930s type competitive devaluation spiral. The Euro is a way of avoiding this danger. Without the Euro, the integration of Europe would fall apart in three to six months.

     However, I think the Euro is good only if at the same time there are social policies that provide the safety net below the national currencies.

     In other words, we will be better off with the Euro and 500 local currencies in France, than with the French franc by itself. And Britain in that sense has been pioneering with the highest density of local currencies in the world. So you are actually doing what I am talking about, although it still remains marginal. I think the time to question the marginality is now.

     There are of course negative aspects to the Euro. The main one is that the larger scale of production and marketing units will increase unemployment.

     This is particularly true because the Euro will be a strong currency, a tight, tough ultraliberal form of currency with the consequence that its political viability will only be maintained in the long-run if we do something at the social level with complementary currencies.

     The European bank will out-Bundesbank the Bundesbank for the first three or four years in an environment where there is 12% average unemployment. Something has to give. We must not go back, but we must jump forward with the Euro and a centipede of complementary currencies. We have the real possibility that the Euro could help propel the multiplication of complementary currencies.

 

The role of complementary currencies

We need to find a way of healing the social fabric of the community. By the way the word community itself means "to exchange gifts". The main reason that community has been falling apart as modern progress has been steaming ahead during the last century is that monetary exchanges of an artificially scarce currency have replaced previously informal gift exchanges.

     The reason that Japan, for example, has by far the strongest social fabric among all the developed countries is the strong survival of the tradition of butsu butsu kokan or "object-object exchange". I give you something I make, a little poem or drawing or tea ceremony and you'll do something else another day. And they perform these small gift exchanges in all kinds of environments, among workers, neighbours, guests it's a perpetual gift exchange which is the hidden mechanism which keeps the fabric of Japanese society together.

     In contrast, conventional national currencies are designed to be competitive and scarce artificially scarce. Typically, there will be almost a third of society for which money will be unbearably scarce. So we have had to invent tricks, often inefficient devices, such as progressive taxation and welfare, to make available to these people some medium of exchange.

     I am not saying that such a process involving national currencies is bad, but I claim that they need to be complemented by the availability of other, non-scarce currencies. The solution you are all familiar with. We need the two sides -- national and complementary -- to be active at the same time.

     Economists see only one part, the competitive economy that is mediated by the national currency. The other part is forgotten, for example work that used to be done traditionally mostly by women, in an "invisible" gift economy. We need to find new tools to fuel that other economy. The mutual credit systems of which LETS is one type, the most frequently used type in the world, is a currency that is compatible with a gift economy precisely because it is not scarce or programmed for competition. You make it as you go along. As soon as we have an agreement between you and me, the currency is there. We don't have to compete for it. That is why the complementary currencies are feeding the cooperative economy.

     In the US, they call any currency that is not the dollar or the pound "alternative". This word is a trap. An alternative basically implies that it could be a substitute and these cooperative currencies are not a substitute. Do not have the illusion that they will become true substitutes. Do not expect to pay for your gasoline or telephone services with complementary currencies. It is a complementary tool, which is doing things which national currencies can't do and are not designed to do. Finally, complementary currencies also provide a safety net below the existing system.

     Today, in 1998, my latest database has 1650 complementary currency systems operational in the world. [As of February 1999 there are over 2.000]. Britain was not quite the pioneer, but definitely has the largest number.

     I like the case of France because it demonstrates the speed at which this complementary currency development can happen. Since 1994, 250 systems came into being. This proves that when conditions are right -- high unemployment and social needs for which national currency is not available -- complementary currency systems can come into being very quickly. Unfortunately, I think these conditions are about to become more prevalent in Europe.

     It is also important to realise that this is not the first time that local currencies have appeared. In the US for example, in the 1930s there were over 5000 local currencies. Some were more sophisticated than those we have today, such as the stamp script currencies inspired by Silvio Gesell. It also happened in America in 1857 and during the Civil War.

     What is a real first today is that complementary currencies are beginning to flower before any crash. That is interesting. Somehow there seems to be a collective wisdom in action. It also could be an unconscious sign that the next crash is going to be a big crash. Just in case, you better get ready and fasten your seat belts.

     

 

TABLE of CURRENCIES

     National currencies - Fiat money, run by central banks.

     Ithaca Hours - Paper fiat currencies issued at Potluck dinners, 39 - 40 systems. Its weakness is that someone has to decide how much to issue. Although it is more democratic than central banks, potluck diners are liable to make the same mistakes as central bankers

     LETSystem - Mutual credit. Its main power is that the quantity is always in exact correct supply. This is the dream of the central banker, which he can never realise. Main weakness for those that use a national currency equivalent for their unit of account: if you had LETS in Russia or South America they would have collapsed at the same time as the national currency. If the national currency collapses, so will the value of the LETS currency. You may want to consider that aspect. It may help shops become involved in a LETS scheme, though. Those that use a combination of time based and negotiated value independent of national currency value are free from that risk.

     UK / European model community currency exchanges - Also known as LETS Schemes. Mutual credit, as well. There are more than 900 exchanges in the UK, France, Germany and the Netherlands. Major differences include locally determined, negotiated value (trend: moving from being pegged to national currencies with negotiated hour exchanges, through to standard rates per hour, with real value of currencies arising from the total value of community exchanges). It is community organised and democratically controlled. Its prime objective is adding value to the social economy.

     Time Dollars - Mutual credit with the hour of service as the unit of account. My feeling is that this is the most robust system currently available. The main weakness is not structural, but a rule that one hour has to be an hour. The brain surgeon's hour is not the same as the gardener's hour. It may not be politically correct to believe that, but I suspect you will not have many brain surgeons operating on Time Dollars, and if a brain surgeon accepts at this rate, I would be worried!

     In a number of activities there are legitimate differences in the value of work, for example due to the need of long training and expensive equipment. Insisting on that totally eqalitarian rule will simply imply that a number of people will not trade in that currency. People will lose on both sides. I say let a dentist charge five hours for one hour. I don't mind. However, there is strong evidence that such price differentials narrow when people trade using flexible time dollars.

     WIR - Only fully mature complementary currency system has now 80,000 members. Total volume of trade is equivalent to over $2 billion per year. Shows the scale to which it is possible to aspire.

     Japanese Health Care Currency - In Japan, there are 1.8 million handicapped people who need daily care. They created a system where people are paid in hours for (say) helping the lady down the street with shopping and house chores between 9 and 5. When it is outside 9 and 5, the rate is 1 1/2 hours for an hour. When people do body care, the rate is two hours per hour. People put their time credits in a savings account with a monthly statement with the number of hours they have. They can either keep the hours for themselves for when they are sick, or they can give it to their parents who may be living on the other side of the country. Two private clearing houses have sprung up to perform that function, and the government is considering creating a national clearing system.

     What was most fascinating to me about this complementary currency service is that people prefer the service paid in the health care currency to the same service paid in Yen because it is more caring. While a professional paid in Yen gives only a standard service, the little old lady I am helping represents my mother, so I am inclined to give a bit extra.

     That difference in quality is something which economists cannot see, but is extraordinarily important. One way that I recommend that LETS in the UK launch itself into the mainstream with the Blair government is to model itself on the Japanese Health Care currency.

     ROCS, an Ideal hybrid - The last system doesn't exist. It is a hybrid of the most robust elements. Hour unit, mutual credit, negotiated exchange rate. I believe that will resist almost any shock.

Three recommendations

I have three ideas to offer you. Some may be controversial. I believe they show a way that what has started can flourish and become mainstream. First, I think it's time to come out of the woodwork. It is time to talk to power and government local, regional, national, European -- about what you are doing. I think you need people who can speak the language that Blair, for instance, can hear.

     It's time to make the complementary currency movement legitimate by implementing robust designs, sound structures, and develop a plan that makes sense. I think what has been done in the UK so far has been extraordinarily productive, and I have great admiration for anyone with the strength and patience to get any system going because I know the work it represents. Too often, the amount of dedication necessary is not appreciated.

     The second recommendation is the concept of demurrage charges. Usually, the costs of running the system are absorbed or written off. I think this is not sustainable. Typically LETSystems die when the originators of the systems are tired and fed up. Demurrage is the answer.

     The third is the automated clearing house.

     Some words about each of these ideas follow.

Going mainstream

I don't know what your agenda is with public authorities, but I would suggest that there is a valid case for tax deductibility for transactions performed in complementary currencies. Time Dollars managed to obtain that status with the IRS, the toughest tax regime in the world. It is time to put this on the political agenda. It will take five perhaps even ten years, but it is important.

     Don't be technology shy and don't be technology dependent. And involve local businesses. This is something LETS has not tended to do. There is a systematic advantage for small business to make a deal with you. Why? Small local businesses can use the currency. Chains cannot. Go to the locally owned smaller businesses, because you have a case to make -- complementary currencies can be their best way to compete against the large scale chains. Use mixed payment systems on smart cards. Make a deal with Mondex, or other smartcard applications, they are already set up to deal with multiple currencies.

     Finally, I would say connect to other applications, such as health care, which may be sector and application specific. Make your local LETS convertible to health care units which can be used regionally. The Time Dollar and Japanese model has some value of precedent here. It will help in reinforcing the perception of value of your local currency, and help in mainstreaming it. .

Demurrage

Now demurrage. Any service has a cost. I think the people who do LETS administration work should be paid in a mixture of national and local currency. The way to feed overhead or project expenses has traditionally been service charges or transaction charges which -- thinking about it systemically -- do exactly the opposite of what you want. They penalize trading and therefore give an incentive to hoard the currency, the opposite of what is desirable. Transaction charges are a carry over from the official bank-debt money system. One result of this hoarding incentive is that the promotion of the system will be left to the initiators. Most members do not feel the pressure to sell the system to new people.

     Demurrage charges change that dynamic. Silvio Gesell's idea was to calculate charges on the balance, not on the number or value of the transactions. Demurrage is a time-related charge on balances, equivalent to a negative interest rate. Both the positive balance and negative balances would attract such a charge, in order to give an incentive for both sides to trade. The ideal situation for any member is to have a zero balance, but with many frequent trades on both sides. Demurrage provides an automatic incentive to go in that direction.

     By the way demurrage is not inflationary. The unit of account keeps the same value. It simply provides a disincentive to hoard. What usually happens when complementary currencies are introduced? People always ask what do I spend it on? With demurrage, they start looking themselves. Varying the per cent of "rusting" according to the size of the balance can provide further refinements in the incentives.

The Automated Currency Clearing House

The final proposal is a complementary currency clearing house (CCCH). Cyberspace is the first Yin space that exists. In other words, it is the first self-organising, decentralised, non-controllable, non-limited space. Physical space is not of that nature. Cyberspace is therefore the ideal space for different paradigms to co-exist. From the complementary currency viewpoint, the clearing house amounts to adding one member to your community, which is your computer. You would have access to trades which would otherwise not be available, while still keeping the management of your local currency completely local. I believe cyberspace will be important for creating jobs in the future, and denying it is just depriving yourself of such a possibility.

     The way to handle this opportunity best would be to set up a complementary currency clearinghouse. Each participant pays and receives only his or her own currency. The CCCH accepts trades of each participant community up to a maximum debit of the outstanding amount.

     The internal accounting of the CCCH would be in hours. So for currencies based on hours, there is no need for an exchange rate. Otherwise an exchange rate has to be agreed for the hour. This is a way of not losing the identity of each group and complementary currency type, while providing opportunities for new trades.

In conclusion: The importance of diversity

To conclude, I believe it is important to have a variety of systems. What is really happening is prototype experimentation. Nobody knows where this is going in the long-run. Nobody has the Bible. I certainly don't claim to have one.

     I think it is important to experiment with different systems. Practice is ahead of theory, here.

     You are doing things that theoreticians haven't got the theory for yet. So go on doing it. Don't be afraid of experimenting with something new, while learning from other experiments around the world.

     Finally, I think it is important to cooperate among systems, a process which a meeting like this is already doing.

Professor Bernard Lietaer, Letslink UK Complementary Currencies Conference, 16/10/98 }

 

 

© Published by LETSlink UK, 12 Southcote Road, Tufnell Park, London N19 5BJ