People-Produced Money

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= (can) exist alongside Commerce-Produced and Government-Produced Money


Richard Douthwait:

"let's answer our eight questions about popularly produced currencies:

Question 1) Who creates the money? - With the commodity-based currencies, anyone with time and access to resources. With LETS and WIR, it is the members.

Question 2) Why do they create money? - To facilitate their own trading.

Question 3) How do they create money? - With the commodity-based currencies, by producing tokens which embody a fixed amount of labour and resources. With LETS and WIR, by granting each other the right to borrow up to a certain amount. No interest is charged on these borrowings. Only a service charge to cover the costs of running the system is paid.

Question 4) When do they create money? With the commodity-based currencies, whenever it is more advantageous to produce more currency than to produce other goods and services. With LETS, whenever a member wishes to trade and other members, or the committee, allows them to create the units to do so. With WIR, whenever the management thinks that the demand for loans can be satisfied without putting too much extra spending power into the system. If the latter happens then members with positive balances in their accounts will be reluctant to accept more Wir as they cannot find attractive ways of spending it.

Question 5) What gives the money its value? With gold, Yap stones and wampum, purely their acceptability to others. Their exchange value for other commodities or labour is not guaranteed. Wheat, tobacco and other consumable commodity-based currencies are backed by the amount of the commodity the receipt represents. Their exchange value for the purchase of other commodities will fluctuate quite widely from year to year, according to relative growing and harvest conditions. With LETS and WIR, the value of a unit is determined by the readiness of other members of the system to provide their goods and services in exchange for it at its nominal value in the national currency. The range of goods and services available in exchange is also a consideration.

Question 6) Where is the money created? Within the group of people or the territory using it. It does not have to be earned or borrowed from outside first.

Question 7) How well does the money work?

A. As a means of exchange? Gold does not work well as a means of exchange unless it is turned into coins, something that is discussed in the next chapter. Moreover, the supply of coins has often been inadequate for the amount of trade desired, forcing people to barter, or use a range of gold-substitutes. Yap stones seem to have played the role of large denomination notes, only useful for major purchases, which is why mats, ginger and shells were required as small change. Wampum strings were designed to make counting easy and obviously performed well since they survived in use in competition with other currencies for hundreds of years. The Egyptian grain and the New England tobacco receipts also worked well and sophisticated money transfer systems developed for them. It would, however, be a mistake to establish commodity-based currencies in economies that were not dominated by the production of that commodity and that were consequently not prepared to allow all price relationships to vary according to its level of production. LETS units perform poorly as a means of exchange because of the lack of pressure on those in debt to earn them. Their use is also restricted to a small group. Wir are better than LETS but still work significantly less well than the Swiss franc, as they are only acceptable among a particular group. As a result, users frequently want to exchange their Wir for Swiss francs and, breaking their system's rules, sell them at a discount to do so.

B. As a unit of account? Only the Wir scores highly here. It functions as well as the Swiss franc since, unless a firm wishes, there is no need for it to distinguish between the two in its books. LETS units are never worth as much as the national currency they shadow, and the gap between the two is variable (depending on a system's membership and its attitude at the time). The gluts and shortages caused by differing harvests, gold rushes and technological change mean that the value of the commodity-based currencies in terms of other goods and services is too erratic to provide a good accounting base.

C. As a store of value? Gold proved an excellent store of value between 1658 and 1798, fluctuating by no more than a third during this time. The discovery of the cyanide method of extracting it from crushed rock in 1887, coupled with major finds between 1847-97 increased production enormously. This damaged it as a store of value. The world's gold stock is estimated to have doubled between 1890-1914 allowing prices in Britain to rise by 25% during this period, and in the US by 40%. Doubtless if powered equipment had been used it would have lowered the value of Yap stones too, and as we have already seen, steel drill bits devalued wampum. All commodity-based currencies have the defect that their value will fall if the commodity on which they are based becomes cheaper to produce. The Exeter Constant19 was an experiment currency used in New Hampshire, in the US, for a year in 1972-3 whose value in dollar terms was based on the current market price of specific amounts of thirty commodities. It would have lost almost 20% of its purchasing power in terms of other things between 1990-99 because of the rate at which commodity prices have fallen. LETS units are a hopeless store of value, since one cannot predict if the system will still be in operation in a few years. Like LETS, the Wir is also money that should be spent quickly, although it holds its value reasonably well from year to year. The drawback with it as a form of saving is that, as no interest is paid on accounts in credit, people with a lot of Wir usually want to convert them to Swiss francs to take advantage of the much wider range of investment opportunities in that currency.

Question 8) Is popularly produced money compatible with sustainability? Yes, in all cases, because the availability of these monies only increases when the systems in which they operate have underused resources, particularly those of human labour. In other words, these monies tend to keep the level of economic activity in step with its technological and resource base. And, because these monies are spent into circulation, the constant payment of interest on almost all the money stock entailed by the present system is avoided. This means that the economic systems they would produce would not depend on continual expansion in order to avoid a collapse." (