Sacred Economics: Chapter 15, Local and Complementary Currency (Pt. 16)


The following is the sixteenth installment from Sacred Economics: Money, Gift, and Society in the Age of Transition, available from EVOLVER EDITIONS/North Atlantic Books. You can read the Introduction here, and visit the Sacred Economics homepage here.

A proper community, we
should remember also, is a commonwealth: a place, a resource, an economy. It
answers the needs, practical as well as social and spiritual, of its
members-among them the need to need one another. The answer to the present
alignment of political power with wealth is the restoration of the identity of
community and economy.
–Wendell Berry


A sacred way of life connects us to the
people and places around us. That means that a sacred economy must be in large
part a local economy, in which we have multidimensional, personal relationships
with the land and people who meet our needs, and whose needs we meet in turn.
Otherwise we suffer a divide between the social and the material, in which our
social relationships lack substance, and in which our economic relationships
are impersonal. It is inevitable, when we purchase generic services from
distant strangers and standardized products from distant lands, that we feel a
loss of connection, an alienation, and a sense that we, like the things we buy,
are replaceable. To the extent that what we provide is standard and impersonal,
we are replaceable.

of the effects of a homogeneous national or global currency is the
homogenization of culture. As the money realm expands to include more and more
of material and social life, our materials and relationships become
standardized commodities, the same everywhere that money can reach. Nowhere is
this more evident than in the United States, the "landscape of the exit ramp,"
where the same stores, same restaurants, and same architecture dominate every
locale. And everywhere we are the same employees and consumers, living in
thrall to distant economic powers. Local distinctiveness, autonomy, and
economic opportunity disappear. Business profits are sucked away to distant
corporate headquarters and ultimately to Wall Street. Instead of vibrant,
economically diverse communities with their own local character, we have a
monoculture where every place is the same.

money system described so far in this book removes many of the barriers to
local economic sovereignty and weakens the pressure toward globalization. Here
are three ways:

1. Much
global trade is only economic because of hidden social and ecological
subsidies, which would be eliminated by the internalization of costs.

2. Commons-backed
currency relocalizes economic power since many of the commons are local or
bioregional in nature.

3. Negative-interest
money removes the pressure to maintain growth through the conversion of the
unique, local relationships and natural wealth of other lands into commodities.
Ultimately, local difference stands in the way of commoditization and therefore
of growth.

because the habits and infrastructure of local economy have largely
disappeared, additional measures are necessary to rebuild community-based,
place-based economies. This chapter discusses one of these measures: the
localization of money itself.

I am not advocating
the abandonment of global trade. While many things that should be local, such
as food, have become global, there are many realms of collective human
creativity that by their nature require a global coordination of labor.
Moreover, economists' doctrines of efficiency of scale and comparative advantage
(that some places and cultures are better suited to certain kinds of
production) are not entirely without basis.1 In general, though,
sacred economics will induce the local sourcing of many commodities that are
shipped across oceans and continents today.

While the changes
described thus far make globalization less economic, my affinity for local
economy is not primarily motivated by economic logic: the maximization of some
measurable quantum of well-being. It comes rather from a longing for community.
The threads of community are of two types: gift and story, warp and woof. In
short, a strong community weaves together social and economic ties. The people
we depend on, and who depend on us, are the same people whom we know and who
know us. It is just that simple. The same goes for the broader community of all
beings: the land and its ecosystems. Lacking community, we suffer a painful
deficit of being, for it is these multidimensional ties that define who we are
and expand us beyond the miserable, lonely, separate ego, the "bubble of
psychology in a prison of flesh." We yearn to restore our lost connections, our
lost being.

Local economy reverses
the millennia-long trend toward the homogenization of culture and connects us
to the people and places we see every day. More than fulfilling the longing for
community, it also benefits society and the environment. Not only does it
entail less energy consumption, it also makes the social and ecological
consequences of economic decisions harder to ignore. Today, indeed, it is quite
easy to pretend that our economic decisions have no consequences. The things we
use with little thought are part and parcel of birth defects in Chinese cities,
strip-mining of West Virginia mountains, and the desertification of previously
lush regions. But these effects are distant, reaching us only as pixels on a TV
screen. Quite naturally, we live as if they weren't happening. If the people
who grow your food and make your stuff live in Haiti or China or Pakistan, then
their well-being or suffering is invisible. If they live nearby, you can still
exploit them perhaps, but you can't easily avoid knowing it. Local economy
faces us with the consequences of our actions, tightening the circle of karma
and fostering a sense of self that includes others. Local economy is therefore
aligned with the deep spiritual shift of our time.


Catch-22 of Local Currency

Local currency is often proposed as a way to revitalize
local economies, insulate them from global market forces, and re-create
community. There are at present thousands of them around the world, unofficial
currencies issued by groups of ordinary citizens. In theory, local currency
offers several economic benefits:

1. It encourages people
to shop at local businesses since only they are willing to accept and use local

2. It increases the
local money supply, which increases demand and stimulates local production and

3. It keeps money
within the community since it cannot be extracted to distant corporations.

4. It allows
individuals and businesses to bypass conventional credit channels and thus
offers an alternative source of capital for which the interest (if any) will
circulate back to the community.

5. It facilitates the
circulation of goods and services among people who may not have sufficient
access to national currency but who may have time and skills to offer.

Say you want to buy a
hamburger and have local currency. You might buy it at a locally owned
restaurant rather than McDonald's, even if the price is higher, because
McDonald's won't accept the local currency. What does the hamburger joint do
with the local currency then? Well, it can't buy beef from the national
distribution chain with it, but maybe it could buy beef from a local farmer, or
pay part of employees' wages with it. And what would the farmer or the
employees do with it? Buy things from other local suppliers, including people
who eat at the hamburger joint. This is how local currencies strengthen local

Unfortunately, the
practical results of local currency initiatives have been disappointing. A
common pattern is that the currency is launched with much enthusiasm and
continues to circulate as long as the founders promote it. But eventually they
get burned out, the novelty factor wears off, and people stop using it.
According to one study, as of 2005 some 80 percent of all local currencies
launched since 1991 were defunct.2 Another common pattern is that
local money accumulates in the hands of the few local retailers that are
willing to accept it and who cannot find ways to spend it. Finally, even where
local currencies have been relatively successful, they comprise an
insignificant portion of total economic activity.3 If we are to
realize the theoretical advantages of local currencies, it is imperative that
we acknowledge that they aren't working today and figure out why. After all,
they did work quite well in the nineteenth and early twentieth century.
In the nineteenth, paper money consisted of "bank notes" issued by local banks
and accepted only in the economic region where the banks were located. As
recently as the 1930s, local currencies were so successful that central
governments actively suppressed them. What has happened since then to make them
(with a few notable exceptions) the plaything of social idealists?4

Several factors are at
work. The first is that the economy has become so delocalized that it is hard
to keep local currency circulating. In the words of one shopkeeper in Germany,
speaking of one of the more successful local currencies, the Chiemgauer, "We do
accept it, but we don't know what to do with it." His acceptance was
reluctant-understandable when few of his suppliers are local. Local currencies
are viable only to the extent that producers are making goods and services that
are consumed locally by people who themselves produce locally consumed goods
and services. In the 1930s, economies were still highly local. People had goods
and services to exchange but no money to use as a medium due to bank failures
and hoarding. Today, the situation is quite different. Most people provide
services that only make sense in a vast, often global, coordination of labor.
Local currency cannot facilitate a supply and production chain that involves
millions of people in thousands of places.

However, while some
products, such as electronics, are inherently global in the nature of their
manufacture, many products could be produced locally but are nonetheless part
of global production systems. This implies a considerable untapped potential
for local currencies. Unfortunately, much of the infrastructure of local
production and distribution has disappeared. Local currencies can be part of
the rebuilding of that infrastructure, but by themselves they are not enough.
If nothing else changes, they are consigned to a very marginal, usually
subcritical role. As things stand, local money is not very useful to us because
we import nearly everything we use from outside our region.

Why would anyone be
willing to accept local currency to begin with? One reason is idealism, but if
we are to rely on idealism, then why not just apply that idealism to the
existing currency and use it to "buy local"? Why bother with a complementary
currency? What we want is to align our ideals with what is practical, not to bear
them in opposition. Besides, the recent history of complementary currencies
suggests that idealism is not enough, that they stagnate and disappear when
that initial idealistic enthusiasm wears off. The question, then, is how local
currencies might be aligned with economic self-interest.

We have to see local
currency within a larger economic context. If a region has its own currency,
yet is so integrated into the global commodity economy that nearly all its
production is sold abroad and most of its consumption is purchased from abroad,
then it might as well not even bother with its own currency. Under such
conditions, the currency must be freely convertible (since economic circulation
goes to and from the global market), making it into little more than a proxy
currency for the dominant global unit of account (presently the U.S. dollar).
Such a place is little more than a colony, and indeed that is what most places
have become, especially in the United States, where towns have lost their local
character and serve only as production and consumption centers for the global
economy. For a region, city, or country to have a robust currency of its own,
it must have a robust economy of its own as well. Key to building one is what
economist Jane Jacobs called "import replacement"-the sourcing of components
and services locally, and the development of the associated skills and
infrastructure. Otherwise, a place is subject to the whims of global finance
and dependent on commodity prices over which it has no control.

In "developing"
countries that still have strong local economic infrastructure, local
currencies help to preserve that infrastructure and insulate them from global
financial predation. But in highly developed economies dominated by a national
or supranational currency, anyone seeking to establish a local currency faces
something of a catch-22. Local currencies only work if there is a local system
of locally circulating production for which it can mediate exchange. Yet for
such a system to grow and withstand the pressures of the global commodity
economy, it needs a protected local currency. Import replacement cannot happen
if local producers must compete with unrestricted, cheap imports. That is why
such an economy can only manifest as an intentional choice motivated by a new
Story of the People that generates shared vision, values, and goals. In other
words, it will happen only through some form of democracy, popular action, and
a government that responds to the will of its people rather than the will of
international banks, investors, and the bond market. These forces are always
ready to offer again the old story of the people: competition, growth,
separation, conquest, and ascent.

Several historical
examples bear this point out. Compare the disastrous results in countries that
have "opened their markets" to "free trade" in recent years with the earlier
success of Taiwan, South Korea, and Japan, who intentionally fostered local
industries with import replacement, tariffs, and industrial planning, while
limiting the convertibility of their currencies. I am most familiar with the
case of Taiwan, having translated in the 1990s a multivolume history of the
development of its small and medium enterprises.5 In the 1950s and
60s, Taiwan placed stringent conditions on foreign investment. Foreign-invested
factories were required to purchase a high percentage of components locally,
encouraging the development of domestic industry. In Japan, South Korea, and
Singapore as well, formal and informal mechanisms gave domestic enterprises a
privileged status.6 At the same time, they imposed currency controls
and restrictions on the repatriation of profits. Foreign investors could freely
convert their currencies into won, Taiwan dollars, and so on, but they couldn't
convert it back again as freely. Today, these countries have a large middle
class, world-class industrial plants, and tremendous overall wealth, despite
starting in great poverty after World War II.

Compare their policies
with those of Mexico, which allowed foreign manufacturers to set up factories
in the Maquiladora zone, with no taxes, no limits on the expatriation of
profits, and no requirement to source components in Mexico. Mexico and the many
other countries offering such "free-trade zones" merely provided low-cost labor
and freedom from environmental restrictions, essentially selling off their
natural and social capital without gaining much know-how or infrastructure in
return. Instead of enriching their economies, they bled them. Then the
factories moved to take advantage of even cheaper labor elsewhere. First GATT,
then NAFTA and the WTO and EMU destroyed in one country after another the
protections that kept local economies from becoming helpless colonies of
commodity export and consumption. The only beneficiaries were the elites, who
are relatively independent of the local economy. Unlike the masses, they can
import what they need and move away if conditions become too terrible.

Monetary autonomy is a
crucial part of political sovereignty. Ultimately, political sovereignty means
very little if outside corporations can strip-mine that society's natural and
social capital-its resources, skills, and labor-and export them to global
markets. At the present writing, Brazil, Thailand, and other countries are
taking measures to protect their economies from the flood of cheap U.S. dollars
that has resulted from the Fed's quantitative easing program. Left unchecked,
these dollars would allow foreigners to buy up domestic equities, mines,
factories, utilities, and so on. These countries recognize that meaningful
sovereignty is economic sovereignty.

What is true for
nations is also true for smaller regions. However, compared to tweaking
interest rates to below the zero lower bound, the proposal that local and
regional governments issue their own currency may seem naively impractical.
Actually, it is a very accessible solution that is constantly being suppressed.
Although it is illegal for states to issue currency in the United States and
many other countries, people find ways around laws when the necessity arises.

The case of
Argentina's financial crisis of 2001-2002 is most illuminating. When provincial
governments completely ran out of money to pay employees and contractors, they
paid them in low-denomination bearer bonds instead (one-peso bonds, five-peso
bonds …). Local businesses and citizens readily accepted these bonds, even
though nobody really expected they would ever be redeemable for hard currency,
because they could be used to pay provincial taxes and fees. Acceptance for
payment of taxes enhanced the social perception of value, and as with all
money, value and the perception of value are identical. The currencies, which
were all denominated in a common unit of account, circulated far beyond their
region of issue. They revived economic activity, which had ground to a halt
since, after all, people still had the capacity to produce goods and services
that other people needed, lacking only the means to make exchanges. This was
only possible because Argentina is fundamentally a rich country that had not
been completely converted into export commodity production. At the same time,
Argentina's government repudiated its foreign debt, temporarily cutting it off
from imports and increasing the need for local self-reliance. At that point the
IMF stepped in with emergency loans to induce the country to keep its debts on
the books.

In 2009, the state of
California came within a hair's breadth of doing nearly the same thing. Faced
with a budget crisis that rendered it unable to pay tax refunds and money owed
to contractors, the state issued IOUs instead. Similar to bonds, these were to
be redeemable for their face value plus interest at a later date, or they could
be used to pay state taxes. Although the IOUs were denominated in U.S. dollars,
banks threatened not to redeem them, which would have made them a separate
currency. However, the program was terminated after a month or so when the
state obtained short-term loans from banks. The episode shows that there are
forces just below the surface pushing toward a different money system.
Unthinkable in normal times (i.e., the normality of exponential growth, which
will never come again), the measures in this book are increasingly becoming
common sense.

As of 2011, we are
still living, if no longer in normal times, at least in the inertia of the
habits of those times. Accordingly, local currencies still face an uphill
battle, languishing without government support. Even worse, governments present
them with crippling handicaps through tax laws. Citizen-created currencies are
unacceptable for payment of taxes, yet transactions made in these currencies
are subject to income and sales taxes. That means that even if you used local
currency exclusively, you would have to pay taxes in U.S. dollars-even though
you earned none!7 Taxing people in a currency they don't use is
tyrannical-it was a cause of the American Revolution and a key instrument of
colonialism (see the discussion of the "hut tax" in Chapter 20).

In places where local
currencies have been effective, either they have received government support,
or they have emerged in war zones and other extreme circumstances. In Argentina
in 2001-2002 and the United States and Europe during the Depression, local
governments actually issued currency themselves. Moreover, in those places and
times, there was still a lot of local production, subsistence farming, local
distribution and supply networks, and local social capital in general. Local
currencies had a real chance there and, unsurprisingly, provoked the hostility
of the central authorities. In the case of Argentina, the IMF demanded their
abolition as a prerequisite for aid.

Nonetheless, the
efforts of local currency activists over the last twenty years have not been in
vain. They have created a model-many models, in fact-to be applied when the
next crisis erupts and the unthinkable becomes common sense. They are creating
a new logic, a new template, working out the kinks, gaining experience that
will become essential very soon. So let us examine some of the types of
complementary currency being explored today that may have a role in the coming
sacred economy.


in Local Money

Proxy Currencies

The first kind of local currency I'll consider is the dollar
(or euro) proxy currency such as the Chiemgauer or the BerkShare. You can buy a
hundred BerkShares for $95 and buy merchandise at the usual dollar price; the
merchant then redeems a hundred BerkShares for $95 at participating banks.
Because of this easy convertibility, merchants readily accept them, as the
5-percent discount is well worth the extra business volume. However, the same
easy convertibility limits the currency's effect on the local economy. In
principle, merchants receiving BerkShares have a 5-percent incentive to source
merchandise locally, but in the absence of local economic infrastructure, they
usually won't bother.

Proxy currencies do
little to revitalize local economies or to expand the local money supply. They
provide a token of desire to buy local but a very small economic incentive to
do so. Since BerkShares originate as dollars and are convertible into them,
anyone with access to the former also has access to the latter. The
international equivalent is found in countries that adopt a currency board. We
call these dollarized economies
because they have effectively surrendered any monetary independence. Proxy
currencies like BerkShares are useful as a consciousness-raising tool to
introduce people to the idea of complementary currencies, but by themselves
they are ineffectual in promoting vibrant local economies.

Complementary Fiat Currencies

More promising are fiat currencies, such as Ithaca Hours,
that actually increase the local money supply. Many Depression-era scrips also
fall into this category. Essentially, someone simply prints up the money and
declares it to have value (e.g., an Ithaca Hour is declared equal to ten U.S.
dollars). For it to be money, there must be a community agreement that it has
value. In the case of Hours, a group of businesses, inspired by the currency's
founder Paul Glover, simply declared that they would accept the currency, in
effect backing it with their goods and services. During the Depression, scrip
was often issued by a mainstay local business that could redeem it for
merchandise, coal, or some other commodity. In other cases, a city government
issued its own currency, backed by acceptability for payment of local taxes and

The effect of fiat
currencies is much more potent than that of proxy currencies because fiat
currencies have the potential of putting money in the hands of those who would
otherwise not have it. It is only inflationary if those accessing the money
offer no goods or services in return.8 In extreme economic times, it
is often the case that there are plenty of people willing to work and plenty of
needs to met; only the money to mediate these transactions is missing. So it
was during the Great Depression, and so it is becoming today. Municipalities
all over the world are facing severe budget cuts due to lack of tax revenue,
forcing important maintenance and repair tasks to languish and even laying off
police and firefighters; meanwhile, many of their residents who could do those
tasks sit unemployed and idle. Though legal hurdles presently stand in the way,
cities can and probably will issue vouchers, acceptable in payment of city
taxes, in lieu of U.S. dollars to hire people to do necessary work. Why not?
Many of the taxes are in arrears anyway. When local government is the issuer,
scrip much more easily takes on the "story of value" that makes it into money.

Such currencies are
often called complementary because
they are separate from, and complementary to, the standard medium of exchange.
While they are usually denominated in dollar (or euro, pound, etc.) units, there
is no currency board that keeps reserves of dollars to maintain the exchange
rate. They are thus similar to a standard sovereign currency with a floating
exchange rate.

In the absence of
local government support, because complementary fiat currencies are not easily
convertible into dollars, businesses are generally much less willing to accept
them than they are proxy currencies. That is because in the current economic
system, there is little infrastructure to source goods locally. Locally owned
businesses are plugged into the same global supply chains as everyone else.
Regrowing the infrastructure of local production and distribution will take
time, as well as a change in macroeconomic conditions driven by the
internalization of costs, the end of growth pressure, and a social and
political decision to relocalize. Noneconomic factors can influence the social
agreement of money. The idealism of a few that sustains local currency today
will become the consensus of the many.

Time Banking

There is one resource that is always locally available and
always needed to sustain and enrich life. That resource is human beings: their
labor, energy, and time. Earlier I said that local currencies are viable only
to the extent that producers are making goods and services that are consumed
locally by people who, themselves, produce locally consumed goods and services.
Well, we are always "producers" of our time (by the mere act of living), and
there are many ways to give this time for the benefit of others. This is why I believe
that time-based currencies (often called "time banks") offer great promise
without needing huge changes in economic infrastructure.

When someone performs
a service through a time bank, it credits his or her account by one time dollar
for each hour spent and debits the recipient's account by the same. Usually,
there is some kind of electronic bulletin board with postings of offerings and
needs. People who could otherwise not afford the services of a handyman,
massage therapist, babysitter, and so on gain access to help from a person who
might otherwise be unemployed. Time banks tend to flourish in places where
people have a lot of time and not much money. It is especially appealing in
realms requiring little specialization, in which the time of any person is in
fact equally valuable. A prime example is the famous fureai kippu
currency in Japan, which credits people for time spent caring for the elderly.
Time banking is also used extensively by service organizations in America and
Britain. It can also apply to physical goods, typically by way of a dollar cost
for materials and a time dollar cost for time.

In our atomized
society, the traditional ways of knowing who has what to offer have broken
down, and commercial means of disseminating this information (such as
advertising) are accessible only with money. Time banks connect individuals who
would otherwise be oblivious to the needs and gifts each can offer. As one time
bank user puts it,

Everyone has a skill-some might surprise you. An elderly
shut-in who doesn't drive can make beautiful wedding cakes. A woman in a
wheelchair who needs her house painted used to train police dogs and now
provides puppy training. The retired school-teacher who needs her leaves raked
has a kiln and is teaching ceramics. A common question when we meet each other
is, "What do you do?" "What do you need?" or "What can I do for you?"9

Beyond the meeting of immediate needs, you can see from this
description the power of time banks to restore community. They generate the
kind of economic and social resiliency that sustains life in times of turmoil.
As money unravels, it is important to have alternative structures for the
meeting of human needs.

The fundamental idea
behind time banks is deeply egalitarian, both because everyone's time is valued
equally and because everyone starts out with the same amount of it. If there is
one thing that we can be said to truly own, it is our time. Unlike any other
possession, as long as we are alive, our time is inseparable from our selves.
Our choice of how to spend time is our choice of how to live life. And no
matter how wealthy one is in terms of money, it is impossible to buy more time.
Money might buy you life-saving surgery or otherwise enhance longevity, but it
won't guarantee long life; nor can it purchase more than twenty-four hours of
experience in each day. In this we are all equal; a money system that
recognizes this equality is intuitively appealing.

When time-based
currency replaces monetary transactions, it is a great equalizing force in
society. The danger is that time currency can also end up transferring formerly
gift-based activity into the realm of the quantified. The future, perhaps,
belongs to nonmonetary, nonquantified ways of connecting gifts and needs.
Still, at least for a long time to come, time banks have an important role to
play in healing our fragmented local communities.


the Credit Commons

Another way to foster local economic and monetary autonomy
is through the credit system. When an economic community applies formal or
informal mechanisms to limit the acquisition of credit and, consequently, the
allocation of money, the local economy can maintain its independence just as if
it had instituted currency controls. To illustrate this point, consider an innovation
commonly mentioned in discussions of complementary currency: mutual-credit
systems, including commercial barter rings, credit-clearing cooperatives, and
local exchange trading systems (LETS). When a transaction takes place in a
mutual-credit system, the account of the buyer is debited and the account of
the seller is credited by the agreed-upon sales price-whether or not the buyer
has a positive account balance. For example, say I mow your lawn for an agreed
price of twenty credits. If we both started at zero, now I have a balance of
+20 and you have a balance of -20. Next, I buy bread from Thelma for ten
credits. Now my account is down to +10 and hers is also +10.

This kind of system
has many applications. The above scenario exemplifies a small-scale, locally
based credit system often called LETS. Since its inception in 1983 by Michael
Linton, hundreds of LETS systems have taken root around the world. Mutual
credit is equally useful on the commercial level. Any network of businesses
that fulfill the basic requirement that each produce something that one of the
others needs can form a commercial barter exchange or credit-clearing
cooperative. Rather than issue commercial paper or seek short-term loans from
banks, participating businesses create their own credit.

In commercial barter
exchanges, firms sell excess inventory and unused capacity for which there is
no immediate cash market to others in the exchange for trade credits. The buyer
conserves cash, and the seller builds up credits to use in future transactions.
No idealist commitment to complementary currencies is necessary to motivate
businesses to join; in fact, most exchanges levy a hefty fee for membership.
Some six hundred commercial barter exchanges operate around the world today,
involving some half a million firms.10

A more recent
innovation is mutual factoring, conceived by Martin "Hasan" Bramwell.
Typically, businesses receive orders far in advance of receiving payment for
those orders. To obtain the cash necessary to fulfill the order, they would
ordinarily have to sell the account receivable at a discount to a third party
(called a "factor"), such as a bank. Mutual factoring bypasses the banks and
allows accounts receivable to be used as a liquid medium of exchange among
participating businesses.

The most famous
commercial mutual-credit system is undoubtedly the Swiss WIR, in operation
since 1934, which boasts tens of thousands of members and trade volume of over
a billion Swiss francs. As of 2005, its volume dwarfed that of all the rest of
the world's commercial barter rings combined.11 According to
economist James Stodder, both the WIR and other commercial barter exchanges
exert a contracyclical effect, showing greater exchange activity during
economic downturns, a fact he attributes to their ability to create credit.12
This demonstrates the ability of complementary currency and credit systems to
shield participants from macroeconomic fluctuations and sustain local

In any mutual-credit
system, members have access to credit without the involvement of a bank.
Instead of paying money to use money, as in an interest-based credit system,
credit is a free social good available to all who have earned the trust of the
community. Essentially, today's credit system is an example of the
privatization of the commons I discussed earlier in the book, in this case the
"credit commons"-a community's general judgment of the creditworthiness of each
of its members. Mutual-credit systems reclaim this commons by issuing credit
cooperatively rather than for private profit.

Mutual credit is not
so much a type of currency as a means of issuing that currency. In the dominant
system, it is primarily banks that grant access to money by extending credit.
In a mutual-credit system, this power goes to the users themselves.

The development of
mutual-credit systems is extremely significant, for credit essentially
represents a society's choice of who gets access to money and how much of it.
Mutual credit replaces the traditional functions of banks. People with a
negative credit balance are under social pressure, and the pressure of their
own conscience, to offer goods and services that will bring their account back
into positive territory. But I'm sure you can see a potential problem with this
system when applied on a large scale. What is to prevent one of the
participants from running up a higher and higher negative balance, in essence
receiving goods for nothing? The system needs a way to prevent this and
eliminate participants who abuse it.

Without negative-balance
limits, a mutual-credit currency can be created in unlimited amounts simply by
the will to make a transaction. This might seem like a good thing, but it won't
work if that currency is used to exchange scarce goods.13
Ultimately, money represents a social agreement on how to allocate labor and
materials. Not everyone can have access to enough credit, say, to construct a
multibillion-dollar semiconductor plant or buy the world's largest diamond.

More sophisticated
mutual-credit systems have flexible credit limits based on responsible
participation. Global Exchange Trading System (GETS; a proprietary
credit-clearing system) and Community Exchange System (CES) use complicated
formulas in which credit limits rise with time according to how much or how
well one has participated in the system. Those who have fulfilled their
negative-balance obligations in the past get a larger credit limit. This
formula functions just like a conventional credit rating.

The real world,
however, does not always conform to a formula. Different kinds of businesses
have different credit needs, and sometimes exceptional circumstances arise that
merit a temporary increase in credit. Some mechanism is needed to set these
limits and to grant or reject requests for credit. This might require research,
familiarity with industries and markets, and knowledge of the borrower's
reputation and circumstances. It could also encompass the social and ecological
effects of the investment. Whatever entity performs this function, be it a traditional
bank, cooperative, or P2P community, must have a good general understanding of
business and must be willing to assume responsibility for its evaluations.

New forms of P2P
banking run up against the same general problem of determining creditworthiness
over the anonymous gulf of cyberspace. One could imagine a system in which a
database connects you, who have $5,000 you want to lend for six months, to a
distant person who wants to borrow it for six months. You don't know her. How
do you know she is creditworthy? Perhaps some user rating system à la eBay
could provide a partial solution, but such systems are easily gamed. What you
really need is a trustworthy institution that knows her better than you do to
assure you of her creditworthiness. You lend your money to that institution,
and that institution lends it to her. Sound familiar? It's called a bank.

Banking, like money,
has a sacred dimension: a banker is someone who finds beautiful uses for money.
If I have more money than I can use, I can say, "Here, Ms. Banker, please find
someone who can use this money well until I need it back." Decaying currency,
described in Chapter 12, aligns this conception of banking with self-interest.
It will continue to be a necessary function even when "better" no longer means
"to increase my personal wealth."

Whether it is through
social consensus, formulas, or the decisions of specialists, there must be some
way to allocate credit. Banking functions, whether implicit or explicit, will
always exist. Today, a banking cartel has monopolized these functions,
profiting not only from its expertise in allocating credit toward its most
remunerative use but also from its monopoly control over the former credit
commons. Ultimately, a new banking system might arise from the ground up,
starting with small mutual-credit cooperatives that form exchange agreements
with each other. Convertibility among different mutual-credit systems is a hot
topic in the field, with prototypes being developed by CES and the Metacurrency
Initiative.14 The challenge is to strike a balance between
convertibility, in order to allow long-distance trade, and insulation of the
members' internal economy from outside predation or financial shocks. These are
essentially the same issues that face small sovereign currencies today.

Mutual-credit systems
reclaim the functions of banking for a local community, a business community,
or a cooperative entity. They foster and protect the internal economy of their
members, insulating it from external shocks and financial predation in the same
way that local currencies do. Indeed, local currencies will never be able to
expand beyond marginal status unless they have a credit mechanism that protects
them from the speculative runs that numerous national currencies have suffered
in the last twenty years. Local and regional credit-clearing organizations can
exercise capital control functions similar to those that wiser nations imposed
when developing their economies through import substitution. The most famous
mutual-credit system, Switzerland's WIR, provides a rather extreme model for
this principle: once you buy into it, you are not permitted to cash out. On a
local level, this would force foreign investors to source components locally.
Less extreme but similar measures were applied by Taiwan, Japan, Singapore, and
South Korea in the 1950s and 1960s, when they restricted foreign companies'
repatriation of profits.

One of the "imports"
that local and regional governments can replace is credit itself. The
above-mentioned Asian countries did this too, keeping the banking industry
off-limits to foreign banks through government policy and informal cultural
barriers. On a regional or local level, and even without a local currency,
governments can replace exogenous credit by operating their own public banks.15
If we are to pay for credit, then shouldn't that payment stay in the local
economy? Today, state and local governments deposit tax proceeds with
multinational banks that lend it wherever they can profit the most; indeed, in
an era of banking consolidation they have little choice, as local banks have
merged into larger ones. State-owned banks, exemplified by the Bank of North
Dakota, can lend locally, finance local projects without having to issue
high-interest debt on the bond market, exercise a contracyclical effect by
lending during credit crunches, and keep banking profits local instead of
exporting them to Wall Street. Publicly owned banks needn't be driven by
profit, and any profits they do make can be returned to their owners, the
people, thus restoring the credit commons. These advantages pertain even in the
present monetary system.

On the national level,
public banking is little different from the power to issue currency, a power
that the United States (and most other countries) has abdicated and given to a
private institution, the Federal Reserve. But in theory, it could set up its
own bank and lend money to itself, essentially printing money at zero or
negative interest. Or it could bypass the banking system and create money
directly, as authorized by the Constitution and enacted during the Civil War.16
The currency proposals outlined in Chapter 11 would enable local governments to
do the same, issuing money "backed" by the bioregional commons under their
stewardship. Ultimately, political divisions may shift into greater conformity
with biological and cultural regions. Regional governments will have more
autonomy than they do today when they have the power to issue their own money.

The decision of how to
allocate capital on a large scale is more than an economic decision; it is a
social and political decision. Even in today's capitalist society, the largest
investment decisions are not always made on considerations of business profits.17
Putting a man on the moon, building a highway system, and maintaining armed
forces are all public investments that do not seek a positive return on
capital. In the private sector, though, bank profit determines the allocation
of capital, which is the allocation of human labor, creativity, and the riches
of the earth. What shall we, humanity, do on earth? This collective choice is a
commons that has been privatized and shall be restored to us all in a sacred
economy. That does not mean removing investment decisions from the private
sector, but rather changing the nature of credit so that money goes to those
who serve the social and ecological good.

The reclamation of the
credit commons will take many forms: P2P lending (described in the previous
chapter), mutual-credit systems, credit unions and other cooperative banks,
publicly owned banks, and innovative new kinds of banks such as Sweden's J.A.K.
Bank. In different ways, these systems return the power of money and credit to
the people, whether mediated through grass-roots P2P structures as in mutual-credit
systems, or through politically constituted institutions such as public banks.
And since political sovereignty is worth little in the absence of monetary
sovereignty, reasserting local, regional, and (in the case of small countries)
national control over credit is an important path toward the relocalization of
economy, culture, and life.


1. They are, however, exaggerated. Comparative advantage is
often a cover for hidden subsidies, and efficiency of scale is often a cover
for market leverage and bargaining power. An example of the former is the U.S.
sugar industry, beneficiary of both direct government subsidies and indirect
subsidies in the form of soil and water depletion, which allow it to undercut
producers in other countries. The indirect subsidies are especially pernicious,
because in essence they represent the competitive advantage of more efficient
drawdown of natural capital. If one producer grows crops sustainably and
another depletes aquifers and topsoil at no cost to himself to undercut the
first, he is in effect gaining a public subsidy. The measures described in this
book negate such subsidies. Internalizing the costs of depletion of the natural
commons negates subsidies from the natural commons, and ending future cash-flow
discounting deters producers from using the future to subsidize the present.
Both of these measures will make local production more economically viable.

2. Collom, "Community Currency in the United States," 1576.

3. For example, according to one study (Jacob, "The Social and Cultural Capital of
Community Currency"), users of one of the most successful local currencies,
Ithaca Hours, reported spending an average of only $350 per year worth of local
currency-and these users comprise a very small part of Ithaca's population.

4. The same study (Jacob,
"The Social and Cultural Capital of Community Currency") reports that users
tend to be well-educated, progressive, countercultural activists. Time banks
and some LETS systems are exceptions to this generalization; the former in
particular are well-suited to hospitals, elder care, and other underserved
populations. Another significant exception is commercial credit currencies such
as the WIR, discussed later in
this chapter.

5. C. J. Lee et al., The Development of Small and
Medium-Sized Enterprises in the Republic of China.

6. The informal mechanisms include business culture taboos
against foreign firms, interlocking boards of directors and family ties giving
preference to local firms, and unofficial government favoritism in awarding
contracts. From the outside, many of these mechanisms look like nepotism and
corruption, but they acted to preserve these countries' economic sovereignty.
Next time you read about corrupt foreign governments, take it with a grain of

7. On the other hand, the IRS's position is understandable:
without this requirement, people could use proxy currencies to avoid taxes.
Nonetheless, the tax system puts local and complementary currencies at a
distinct disadvantage.

8. In that case, the money supply would increase without
increasing the amount of goods and services (i.e., there would be more money
chasing fewer goods).

9. From "An Introduction to Time Banking" (anonymous post on

10. Statistics from the International Reciprocal Trade

11. Stodder, "Reciprocal Exchange Networks," 14.

12. Ibid.

13. It might work quite well for nonscarce goods, such as
digital content. User ratings for YouTube videos and other online creations are
a kind of nonscarce currency.

14. See Community
Currency Magazine
for cutting-edge discussions of this and related issues
in local currency and credit.

15. See the writings of Ellen Brown, author of Web of Debt, for a thorough argument in
favor of public banking. An article that observes the similarity between public
banks and mutual credit currencies is Brown's "Time for a New Theory of Money,"
available at

16. Dennis Kucinich has recently revived the idea in H.R.
6550: National Emergency Employment Defense Act of 2010.

17. More and more, these political decisions are made in the
interests of business.

Image by Ancient Art, courtesy of Creative Commons license. 

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