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Chapter 16
A Model Composite Local Exchange System

Any sizeable group anywhere, any day, could start a nonpolitical monetary unit and system. There is no law against it, and no legislation need be invoked.

-- E. C. Riegel [106]

My work with LETSonora, the cashless trading system in southeastern Arizona, has provided an opportunity to experiment with various approaches and system enhancements. Although there is no single community exchange model which I consider to be adequate, there are several which contain useful elements. If we keep in mind the fundamental principles of equity, freedom and inclusiveness, and equip ourselves with sound theoretical knowledge, we can continue our approach toward an ideal exchange system. I am presently inclined to favor a composite system which incorporates several of the ideas discussed in previous chapters. Given the current state of the art in the development of complementary exchange systems, I would recommend that a local exchange system be established according to the following guidelines:

  1. Organize the system as a non-profit organization (it need not be legally incorporated, but larger operations should be).

  2. Allow membership to be open to include individuals, non-profit organizations, and businesses.

  3. Organize the system as a mutual credit system, but provide for the use of circulating notes, coupons, or receipts as an option to the transfer of credits through the ledger accounts.

  4. Avoid charging interest on debit balances. Service charges should be fixed amounts based on the cost of the services rendered. If system charges are levied against account balances, they should be assessed equally on both debit and credit balances.

  5. Elect a Board of Overseers, whose powers are limited and clearly defined at the outset.

  6. Establish credit (debit balance) limits for members according to a definite formula involving the member's average level of sales.

  7. Do not provide the option of redemption of local currencies or credits in official currencies (dollars).

As has been stated previously, banking should be conducted as a profession, not run as a business for profit. To avoid conflicts of interest in the operation of a local exchange system, it should be established as a cooperative or mutual association, "owned" by its members and run entirely for the benefit of the community. Since membership is open to everyone, there should be no problem with regard to representing and safeguarding the public interest.

Many LETS systems, in which the membership has consisted of only individuals, have been slow to grow. While LETS membership is open to businesses, LETS systems have not generally been very successful in attracting them. I believe it is very important to make a concerted effort to include established businesses, as well as individual members, in the start-up of a local exchange system. Established businesses, in addition to their name recognition, offer a wider range of goods and services and a greater volume of trading. Since they already are significant players in the local economy, business members provide local exchange systems with the prospect of a faster start and greater impact. The success of Ithaca HOURS is, I believe, mainly due to the extensive participation of local businesses.

The Governing Board

A local exchange system, whether it be simply a ledger system, a paper currency issue, or some combination of the two, requires some administrative group or authority. It is very important that the administrative Board be constrained in its power. No matter how well intentioned the people might be, "power corrupts," as we have so often seen. That's the basic problem with the existing monetary and governmental structures. The Board should have very little discretion. Its function should be to establish the basic ground rules at the outset, monitor the members' adherence to their agreements, and take the appropriate prescribed action in the event they do not. The Board would provide application forms to prospective members and oversee the processing of applications, verifying the information upon which each member's participation and debit limits are based (specifically, his/her average monthly sales volume and cost of goods sold and/or value added).

Credit Limits for Members

One of the fundamental questions in a local exchange system is that of how much credit to authorize to each individual or business member, i.e., how large a debit balance each member should be allowed to carry. For ease of discussion, let us refer to any unit of local trade credit as a "Riegel," after E.C. Riegel, one of the most lucid thinkers on the question of money. The number of Riegels or local trade units which a business or individual is expected to redeem in the course of trade each month should be the only basis for deciding the amount of credit to be authorized, and it should be based on a formula relationship such as the one described in a previous chapter. That formula is based on the following rationale:

  1. The member business itself decides what percentage of each sale to accept in Riegels, based on its proportion of "value added." Thus, a business which has a cost of goods sold of 60% (gross margin of 40%) and a net profit margin of 20% of sales, could choose to accept a percentage of Riegels anywhere in between 20 and 40 percent, depending on how much of their administrative costs they expect to be able to pay for with Riegels. One might expect them to start with the lower figure to be safe, then increase it as experience merits. There is no apparent reason for the Board to have any say about this percentage.

  2. Adherents of the "German school" have pointed out that a viable currency should have a 1% daily reflux. That means that the whole volume of currency must flow back to the issuers within about a 100 day period. It might be prudent to agree, at least initially, to have a total reflux within a 60 day period. That means each member business could be authorized to issue an amount of Riegels up to the amount it would be expected to redeem in trade during an average 60 day period (2 months). That's a simple formula calculation:

          Authorized Credit, Riegels =
    (2 x monthly sales) x (Riegel payment percentage)


    If a business has monthly sales of $80,000 and agrees to accept 20% payment in Riegels, it would be authorized to issue a total of 32,000 Riegels:

    32,000 Riegels = (2 x $80,000) x (.20)

  3. A member business should be allowed to adjust the percentage up or down as it sees fit, up to the limit of its value added percentage. [107] If up, it would be authorized to issue more Riegels in accordance with the formula. If a business ever wanted to decrease its percentage, or drop out completely, all it would need to do is repay the difference in the amount of Riegels it was authorized to issue. If it did not have enough Riegels to do that, it would have to earn them in trade, or it could be allowed to pay the remainder in any mutually agreed upon medium of exchange, presumably official currency.

Employee Participation

Employees of member businesses should be encouraged to become associate members. They would agree to accept a particular percentage of their wages in Riegels. In return, they might be allowed, themselves, to issue (spend into circulation) an amount of Riegels computed in the same way as the business authorization is determined.


If an employee earning $1,000 a month agrees to accept 30% of her salary in Riegels, she could be allowed to issue (spend) up to a total of 600 Riegels. (She would also be getting 300 Riegels a month in her pay envelope, but these are Riegels she earns, not issues.)

Employees will, no doubt, want to jump on the bandwagon when they see the system working. As unemployment becomes more of a problem, and official money becomes less available, people will probably be willing to work for most any kind of money which they deem to be trustworthy. As we have seen in previous chapters, when there is not enough official currency circulating in the local economy, a local currency can put people to work and provide a means by which they can get their needs met.

Ledger Accounts or Paper Notes?

Conceptually, it doesn't matter whether the Riegels take the form of paper notes, tokens, or ledger balances (bookkeeping entries). These are all symbolic representations of the same thing -- the values being exchanged, and each is "backed" by the same commitment of the issuers to redeem them -- so checks and notes and electronic transfers can all be used interchangeably, as they are in the official monetary system.

Convertibility of Local Currency to Official Currency

The basic idea of a local currency is to empower people by allowing them to issue currency on the basis of the goods and services they have to offer, i.e. to monetize their own labor. It is hoped and expected that as the merits of local currencies and exchange become more apparent, they will, to a large extent, supplant the official currency. As this happens, one needs to consider the possible need to covert dollars to Riegels or Riegels to dollars.

It is unlikely that there will be much demand for conversion of official dollars to Riegels so long as dollars are accepted at par along with Riegels as payment for purchases within the system. The situation is similar to current foreign exchange transactions. For example, when someone from the U.S. crosses the border into Mexico to shop, they must deal with the fact that the official currency there is different from the one here, and that most items are priced in terms of "pesos." In practice, at least in the border areas, few people bother to buy pesos because the merchants almost universally accept dollars. The key issue is the exchange rate which one can get. In the case cited, the U.S. shopper can often get the same exchange rate or better (more pesos per dollar) from a merchant as s/he can get from the banks.

In the local currency case there is even less reason to convert dollars to local currency, for if the local currency is denominated in dollars, the member merchants are committed to accept it at par with the dollar, i.e. the exchange rate is always fixed (by the local issuing cooperative) at 1 for 1.

However, going the other way is a different matter. People prefer to hold dollars rather than pesos because the dollar has been debased less rapidly, i.e. the inflation rate in pesos has typically been much greater than the inflation rate in dollars. In other words, although the Federal Reserve has been irresponsible in its issuance of U.S. currency, the Mexican central bank has been even more irresponsible, making the holding of dollars a better inflation hedge than the holding of pesos.

If a local currency is properly issued, it should hold its value better than the dollar, but if it is denominated in dollars instead of another standard, its value will tend to change in parallel to that of the dollar. The need to exchange local currency for official currency would arise from the need for goods and services imported from outside the local system, i.e., not available within the system. That is why the amount of local currency issued must be restricted, so it doesn't outrun the capacity of the local economy to produce value in the forms demanded within the local markets. The supply of Riegels needs to rise and fall automatically in accordance with changes in the multitude of factors which affect the local economy. Gearing the supply to the local value added, which the above formula does, assures that this will happen. The local currency needs to be insulated, as much as possible, from the adverse effects arising from manipulation of the official currency.

Two Meanings of "Dollar"

It is extremely important to distinguish between the use of the word "dollar," on the one hand to describe a unit of measure of value and, on the other, its use to describe the money issued by the Federal Reserve (the FED), either in the form of bank credit or as Federal Reserve Notes. Local exchange systems, while freeing people from using dollars, i.e. Federal Reserve money, typically use the dollar unit to measure the value of things traded. This makes sense because the dollar unit of measure is the unit which everyone is accustomed to using; it has meaning to people. The only problem with doing this is the fact that the dollar unit of measure is no longer defined in concrete terms. It used to be officially defined as so much fine gold, but that was abandoned long ago. The dollar is now a "rubber measuring stick" defined only by what it will buy in the market, and what it will buy in the market has been continually diminishing because of irresponsible issuance of money by the FED. That is the essence of general price inflation.

Using the dollar unit of measure, then, as a basis for valuing things creates a problem of comparability over time. A "dollar" today is not what it was yesterday, and a "dollar" tomorrow will most assuredly not be what it is today. But so long as the local currency is used only as a medium of exchange and not as a store of value, this lack of comparability over time is not much of a problem. Ideally, all currencies and exchange media should be defined in terms of some concrete standard which would establish their value along with the value of everything else being traded. [108] The existence of such a standard would make abuse and mismanagement of currencies readily apparent and allow fair exchange rates to be easily determined. It can be hoped that in the not too distant future, some organization or group will take the initiative in defining a standard of this type. Until such time, there is little choice but to use available measures. It is possible, however, to define local standards based upon some commodity (or group of commodities) important in local commerce, such as a bushel of wheat, a kilo of rice, or a pound of copper, and there is considerable historical precedent for doing so.

Another option would be to use some other concept for valuing the things traded. Ithaca's use of the "Hour" unit is a good example. While an "Hour" is not precisely defined, people tend to think of it as having a value more or less equal to the local average hourly wage. This is what the Ithaca founders encourage, and this is what seems to be happening in practice. Ithaca Hours currently exchange among traders for value equivalent to about 10 dollars.

Using the hour concept instead of the dollar concept for valuing exchanges, would probably be effective in de-coupling the value of the local currency from that of the official currency. As the dollar continues to be debased, hourly wages should rise, and, one might expect, the value of the Hour currency, in terms of dollars, to rise also.

Over-accumulation -- Is It a Problem?

The question has been raised, "What if a member business has an over-accumulation of Riegels?" The answer to this lies in another question, "Why would there ever be an over-accumulation of Riegels?" A local currency, in its sole role of exchange medium, should be spent as fast as it is taken in. If a member business finds that there is not sufficient opportunity to spend Riegels on the things it needs, that would indicate that it overestimated either, (1) the value added component of its business or, (2) the willingness and/or ability of others in the community to accept Riegels. It's logical response, in either case, should be to reduce the percentage of Riegels which it is willing to accept in payment, and to use its surplus (accumulated) Riegels to reduce its commitment to the association by turning them in. This is the proper adjustment mechanism which makes the system self-regulating.

Limited or Perpetual Life?

Having a "periodic recall" feature is one way of addressing the problem of keeping the Riegels an exchange medium and limiting their use as a savings or value storage medium. As I pointed out in Part III of my book, Money and Debt: A Solution to the Global Crisis, I think it is very important to segregate these two functions. It is still not entirely clear how best to do this. One way to do it is to have the local currency notes expire after a certain length of time, say one year. They could all expire on the same date or the expiration dates could be staggered. Having them all expire on the same date would be too disruptive. A period of several days would have to be allowed for an orderly process of exchange to take place. Given that fact, one might just as well stretch out the time period and make it even easier by having a fraction of the issue expire each week or month throughout the year.

Comparing expiration to "demurrage," expiration can be looked at as 100% demurrage, which can, however, be avoided by spending the notes before they expire. Only members of the issuing cooperative would be unable to avoid having to exchange old notes for new. The inconvenience of having to make the exchange would probably be sufficient incentive for most (non-member) individuals to try to spend a note before expiration, even if new notes were given for old on a 1-for-1 basis. A small redemption fee might provide a further impetus for circulation.

Even as I write this, however, I'm not sure that an expiring note would work well in practice. The general public might dislike having to remain cognizant of the expiration dates of notes they hold, or taking the risk of losing out by having a note expire while in their possession. It might be best to first try a note issue which has no expiration date, or if expiration is a feature, expired notes might still hold some value, say 70% of face value, and be exchangeable for new notes at that rate.

If expiration of notes is a feature of the system, we need to consider two possibilities: (1) a member returns fewer notes than he was issued, or (2) he returns more notes than he was issued. Those members who return too few Riegels could be asked to pay the balance in dollars, or they could simply be given a smaller number of new notes to spend in the next period. However, those who return too many Riegels should not receive dollars for the excess. To do so would be fraught with problems, and would be counter-productive to the intention to substitute, in part, the circulation of official currency with the circulation of the local currency. They should simply be given the option of receiving new notes in an amount equivalent to the old notes surrendered and, if desired, to reduce the percentage of local currency that they agree to accept in payment for purchases in the future.

Should Interest be Charged on Balances?

In accordance with the principles outlined earlier, there should be no interest charged on lines of credit or notes issued to members. Since no one has made any sacrifice, there is no entitlement to interest. The costs of operating the system should be borne by all members in proportion to the benefits they derive from using the system. With this in mind, it makes sense to levy membership fees in proportion to the amount of notes issued to each member. This may look like interest but it is not. The association, after all, is not a profit-making entity and it need only collect enough to cover the costs of operating the system.

There's no reason, of course, why a ledger system can not operate in conjunction with a local currency. That's precisely what the LETSonora system does. LETSonora started as a typical LETS system with a computerized ledger system and a telephone answering system for reporting transactions to the registrar. In an attempt to make the reporting of transactions more efficient, transaction record forms similar to bank checks were later developed. These transaction record forms would be filled out like a check and given to the seller who would then deliver them to the registrar to have the credit recorded. Finally, to further reduce the bookkeeping burden, circulating notes were issued. Figures 16.2 and 16.1 show the front and reverse sides, respectively, of a LETS Receipt used by LETSonora.

Fig 16.2: A LETSonora Receipt -- 
Face Side   Fig 16.1: A LETSonora Receipt -- 
Reverse Side

The mechanics of these options are essentially the same as present banking practice, in which a member can either "deposit" credits (get a credit to his/her LETS account) or take them in the form of paper notes. Similar approaches are also being taken elsewhere.

As the dominant institutions of industrial civilization continue to decay, and as more people find themselves pushed to the margins of the money economy, pressure will build for the implementation of alternatives. True democracy can only be forged within the economic realm, and money and exchange are the key elements which must be democratized. Local currency and exchange systems that are equitable and just will be essential in assuring that the transition will be smooth and peaceful.

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