Why Exchange Alternatives Fail to Thrive
The State of the Alternative Exchange Movement, by Thomas Greco
Excerpt from The End of Money and the Future of Civilization, Chapter 13,
Exchange alternatives are not entirely new. Indeed, in times past, there were many different exchange media that circulated simultaneously—and for a time, each bank was responsible for the issuance and redemption of their own banknotes. There are also numerous historical precedents for nonbank curren¬cies—such as the 1930s Great Depression–era scrip issues, and the mutual credit clearing system that was organized in Switzerland as the WIR Economic Circle Cooperative (since renamed WIR Bank). There are entire catalogs that list the many kinds of privately issued scrip, vouchers, notes, and coupons that have circulated as payment media. Some of these have been described in my earlier books.140
The current wave of innovation and implementation of exchange alter¬natives dates from around the early 1970s with the advent of commercial “barter” exchanges (properly called “trade exchanges”). This was followed a few years later by the grassroots emergence of mutual credit clearing asso¬ciations (LETS), Time Dollars, and various local currencies. From that time onward, we have seen a rapid proliferation, all over the world, of these kinds of exchange alternatives—they now number in the thousands. There has been growing global recognition and considerable journalistic coverage of these alternatives—with articles appearing in mainstream publications like the New York Times, the Wall Street Journal, Time.com, The Guardian (UK), and more than a little coverage on TV and radio. The commercial (business-to-business) side of the movement also continues to grow, developing better standards of practice and becoming ever more sophisticated.
In addition, a new and growing wave of activist energy has been directed toward making money once again a political issue, with the objective of changing the dominant national monetary and financial systems. In this, there has been particular emphasis on the matters of usury and interest, metallic money, and the gold standard. Ron Paul’s candidacy during the 2008 presi¬dential campaign has been particularly significant in raising this issue in the United States, while in the United Kingdom similar efforts by various groups and members of Parliament to raise awareness have been ongoing for many years. While prior efforts to reform the dominant monetary and banking system through the political process have been wholly unsuccessful, the issues they raise have relevance and need to be considered in the design of private, free-market exchange options.
Two Currents of Alternative Exchange
There are two distinct “currents” in the present movement toward alternative exchange and noncash payment mechanisms.
1. the grassroots, noncommercial, community-oriented currencies and mutual credit systems; and, 2. the commercial, business-to-business trade exchanges.
Encouraging as these developments might be, none of the grassroots alter¬natives, with a couple of notable exceptions, has managed to become a signifi¬cant economic factor; the commercial segment of the movement, while having achieved a measure of success, has barely begun to realize its enormous market potential. Both have been limited by some serious design deficiencies and vari¬ous other factors that will be discussed in the following chapters. Many local currencies and LETS have been launched with a flourish of enthusiasm only to fall back into oblivion. The typical pattern is initial enthusiasm by the organiz¬ing group and rapid growth in participation, followed by volunteer burnout and a slow, steady decline in both trading volume and number of participants. A system may be formally declared defunct, but more often it simply limps along in the background with little trading and a much diminished participant base, then eventually fades away. Even well-designed systems can experience the same pattern of decline, as I can attest from personal experience.
The Tucson Experience
By the time I arrived in Tucson, Arizona, at the end of 1989, a mutual credit clearing system—called LETSonora—had already been launched. Working in conjunction with a small group of other community-minded people, LETSonora was started by David Koressel, a social entrepreneur who also happened to be a professional accountant. Having read the article about LETS systems that had appeared in the Whole Earth Review141 (which I had coau¬thored with Michael Linton), they were inspired to give it a try. I soon joined the core team and helped to run the system until it finally ground to a halt around 1993. During that time, despite considerable inputs of volunteer labor, the membership never grew beyond about forty members and the monthly trading volume never exceeded more than a few hundred dollars.
A few years later, I began a series of discussions with some local activists with the intention of introducing them to the possibilities of using in-kind donations from local merchants to back the issuance of vouchers that might be used to support local nonprofit groups, vouchers that could also circu¬late as a supplemental local currency.142 This was to be a type of arrangement that Michael Linton and Ernie Yacub refer to as “community way.” This did not interest the people I was talking to, but they were interested in starting a mutual credit clearing system. I cautioned them about the difficulties and risks, describing to them my earlier experience with LETSonora, but they were enthusiastic and eager to try it—arguing that it wouldn’t take much work to set up a ledger of accounts and that conditions might now be right for it to achieve critical mass. I agreed to act as an advisor, but made it clear that I would not be involved in the administration. Thus was launched Tucson Traders.
It was easy to create a set of accounts to keep track of trades among the twenty or so initial members. It started with a notebook and a pencil. The notebook contained a page for each account holder, on which their trades could be recorded and which would show their running account balance.
It was decided that the accounting unit would be called a Tucson Token (TT), with each token having a value equivalent to one U.S. dollar. It was also decided that, in the absence of any data upon which to decide initial lines of credit, each and every account would be allowed up to 200 tokens, i.e., an account balance could be negative to a limit of minus 200.
As the word got out among the various activist and nonprofit networks, the membership grew quickly—eventually reaching a peak of more than two hundred participants, which included a handful of progressive businesses. Trading fairs and potluck dinners were held regularly, and for a while they attracted a sizeable crowd of enthusiastic traders. A directory and a newsletter were also produced. Along with the growth in membership, the workload of recording the transactions also grew. The notebook ledger was shortly replaced with a computerized set of accounts. Still, the work of recording transactions became too much for the volunteer administrators. It was then decided that the administrative burden could be greatly reduced by eliminating the need to record each and every transaction. This would be accomplished by allowing each member to draw out paper currency notes against their line of credit. Thus someone who already had a debit (negative) balance of, say, 75 tokens would be allowed to draw paper notes to the extent of 125 tokens against her account. Members of Tucson Traders could then pay each other by passing the paper TT notes from hand to hand, in just the same way as we do with regular cash transactions. A few local artists volunteered to design the notes, and a local printer volunteered to print up a supply. There was a big party at which the notes were distributed, and at that point the tokens that originated as ledger credits began their life as a circulating paper currency. There was a formal agreement that, if anyone wished to leave the system, they would first settle any outstanding negative balance—either in tokens or in cash.
As the novelty wore off, people lost interest in potlucks and trading fairs, and with the membership scattered all over town, the inconvenience factor began to take its toll. Despite the reduced workload that accompanied the shift to circulating paper notes, the volunteer core grew tired and less enthusias¬tic. Administrative personnel changed several times, but the downward spiral continued. By the fourth or fifth year, trading using Tucson Tokens had virtu¬ally stopped.
This story typifies the experience of grassroots complementary curren¬cies and mutual credit clearing systems as they have thus far developed. New ones continue to pop up and a few vintage systems are still functioning. One high profile case that has attracted an astonishing amount of worldwide media attention was the 2007 launch of the Berkshares currency in western Massachusetts. That is not a credit clearing system, but a local currency that (for the moment at least) is sold for cash.
It is important to recognize that, even though Tucson Traders did not achieve sustainability as a mutual credit clearing system, there were significant positive outcomes.
In the words of permaculture design consultant Dan Dorsey, who had been a core group member,
- we who worked together on the project still refer to Tucson Traders fondly—as a wonderful and useful experiment and model that will be valuable when economic times really get tough. We also refer to the great connections and friends we made, which went beyond just the money exchange and trading. I still have friends today that I met through TT, who I might not have met otherwise. . . . I use Tucson Traders as an excellent local case history of using Permaculture design principles to put together what we call in Permaculture an “invisible structure”—those structures that have a big impact on our lives but aren’t necessarily visible like sun angles and water cisterns.
'Why Exchange Alternatives Fail to Thrive
There is much to be learned from these experiences if we are willing to accept their hard lessons. Here we will consider the grassroots initiatives. The limi¬tations and possible improvements to commercial trade exchanges will be addressed in Chapter 15.
The pertinent questions are:
• What are the main factors responsible for this pattern of decline? • Why have complementary currencies and credit clearing options remained a fringe phenomenon and not been widely adopted? • How can mutual credit and community currency systems be made to sustain themselves and to thrive?
There are two fundamental reasons why exchange alternatives fail to thrive.
1. failure of reciprocity and 2. inadequate scale and scope of operation.
Failure of Reciprocity
Any payment system exists for the purpose of facilitating reciprocal exchange, which can be roughly described as “getting as much as you give, and giving as much as you get.” Whether it be a currency or a credit clearing system, anything that interferes with its ability to fulfill reciprocity (or creates doubt regarding its ability to assure reciprocity) will work against its adoption and continued patronage. Failures of reciprocity can stem either from system design flaws or from management issues.
System design flaws include:
• Improper basis of issue of credits or currency • Inadequate account limits, i.e., overissuance of credits or currency in relation to an issuer’s productivity and the demand for their goods or services • Lack of a clear agreement between issuers and users of credits or currency
Management issues include:
• Lack of accountability and transparency • Inadequate management procedures and controls • Overreliance upon volunteer administrators • Failure to respond to internal or external threats
Inadequate Scale and Scope of Operation
There are several aspects to the problem of scale and scope, which can be summarized as follows:
• Failure to achieve critical size of the participant base • Too narrow an assortment of goods and services being offered • Failure to attract participants from all levels of the supply chain (production/distribution circuit)144 • Failure to gain wide acceptance among the mainstream business community"