Currency Issuing Procedures
- 1 Introduction
- 2 Typology of Issuing Procedures
- 3 Discussion
"This is perhaps the least familiar of all four dimensions of this classification system, but is nevertheless also one of the most important. Errors in designing the issuing process are the most common reason for dramatic failures of complementary currency systems (consider the fate of the Argentinian creditos1 for instance)."
Typology of Issuing Procedures
There are seven major ways of issuing a currency:
The strongest currencies are typically those that are fully “backed” by a good or service, and are directly and legally redeemable for them. Historically, many currencies were inventory receipts, i.e. with 100% backing secured by a physical inventory of a good (e.g. the wheat currency in Dynastic Egypt). Some contemporary complementary currencies are using conventional money as backing, others some specific goods or services.
Borrowing with legal collateral:
This is the way the bulk of the conventional currency is created: through bank loan backed by collateral such as a mortgage on a house, or inventories for businesses. It can be considered as a form of a “backed” currency, but their redemption requires a legal action (seizure of the collateral) and is normally an exception rather than the rule. Some complementary currencies, most notoriously the WIR in Switzerland, are exactly reproducing the conventional banking model in this sense.
Purchased and Redeemable Vouchers:
Vouchers that are purchased directly with national currency, and that are circulating as a medium of exchange, and are redeemable at some pre-determined conditions into national currency again. Examples: Save Australia vouchers; Swiss Chiemgauer, Toronto dollars.
These are similar to the vouchers, except that they are not redeemable back into conventional money. They may be given for free (for example as coupons in newspaper ads) or could be purchased at a discount. They are not redeemable for cash, but typically are redeemable into some good or service instead. They tend to be used only between the issuer and the customer, and rarely circulate as payment device among customers. The most typical example is the commercial vouchers “give aways” by supermarkets as discount tokens.
Loyalty currencies are commercial complementary currencies that are issued by businesses to customers in proportion to their purchases in conventional money. It is a form of corporate scrip typically redeemable for goods or services in the same corporation or in a consortium of participating businesses. The Frequent Flyer Miles issued by airlines was the first large scale system; the Tesco loyalty currency in the UK is probably one of the most successful of such systems.
Currency issued by a simultaneous debit and credit between participants in a transaction. Examples of Mutual Credit Systems include LETS or Time Dollars. For instance, in Time Dollars if Julia renders a service of 1 hour to James, she gets a credit for one HOUR, and James a debit for one HOUR. They have therefore created the Time Dollars necessary for their transaction by agreeing on the transaction itself. The main advantage of mutual credit systems is that they self-regulate to have always currency available in sufficiency.
Borrowing without collateral:
A currency issued as a credit, but without formal collateral of any sort (other than perhaps an informal promise to provide a good or service in the future). In fact, mutual credit can be seen as a form of borrowing among the participants themselves without collateral. There exist also systems that consider the borrowing without collateral from a central office that plays a role similar to a complementary currency bank (e.g. Bia Kud Kum in Thailand).
One of the simplest ways to issue a currency is to have a central office distributing it to everybody or to everybody who qualifies. This is the way major currency reforms are typically introduced when a radical departure is necessary (e.g. the German “Währungsreform” after WW2, the credito system in Argentina, or the purchase coupon experiment used in Japan in 1999).
Some systems combine features of various issuing approaches described above. For example WIR is issued both as mutual credit and from a central office with legal collateral. Or some social purpose complementary currencies are also accepted in partial payment by local businesses as a loyalty currency.
Advantages and Disadvantages of Issuing Procedures
"Here again, one can identify some advantages and disadvantages for each one those systems. There tends to be a systematic trade-off between the ease of creating the currency and the effort needed to gain and maintain its credibility. An appropriate balance between these two objectives is a key decision for a robust currency design.
All things being equal, as one goes down the above list of the different ways to issue the currency (from Backed Currencies to Central Distribution), it becomes easier for its participants to create the currency; but it requires simultaneously more discipline to maintain the currency’s credibility.
Currencies that have a legally enforceable collateral (as is supposed to be the case for the majority of the national currencies issued), currencies that are fully backed by a good or service that is in broad demand, or that are purchased and backed with national currency have logically an easier time to gain credibility. But on the downside, often the very people who don’t have the necessary collateral or cash are also those for whom a complementary currency would be most beneficial. Loyalty currencies have as backing mainly the reputation of the businesses that issue them.
Mutual credit has as significant advantage that the quantity of money created is by definition always perfectly matching its need. There are also no risks of inflation in mutual credit systems. In contrast, the problem of over-issuing is the biggest risk run by currencies that are created by borrowing without collateral, or by central issue. It is important with these latter models to cautiously control the quantity of currency issued, otherwise its depreciation and risk of loss of credibility is a predictable outcome." (http://www.global-community.org/gc/newsfiles/25/Community%20Currency%20Guide.pdf)