From oil dependence to local resilience

LETS/Green Dollars and "zero shift"

Hi folks,

I wrote this explanation of a problem I've seen in many LETS (often called Green Dollars over here) systems. I've decided to post it here in case it's of use to someone who's running such a system or considering doing so. I call the problem "zero shift" and certainly it can be avoided with good management.

cheers,

Craig

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This problem is specific to LETS, and I found it to be the downfall of all the LETS communities that I have been involved in. As you know, the purpose of LETS is to be used as a wealth transfer system, rather than a wealth storage system. The main way it encourages this is by an agreement that when your balance is negative you have an obligation to earn points, and when it is positive you have an obligation to spend points. I spent much of my time in running a LETS system convincing people that the obligation to spend was just as vital. Both these obligations are somewhat psychological pressures, and much of the interaction that a LETS organiser needs to do with the group's members is to provide the feedback needed to generate these pressures.

The most obvious example of this feedback is prompt and up to date information about each member's current balance. Possibly one might decide that the psychological pressure to move in the right direction (particularly for members with large positive or negative balances) needs to be re-enforced with a bit of peer pressure, and so this information on balances should also be public.

As you can imagine, when considering a trader's balance in LETS, the zero point is particularly critical, since a balance on one side of zero gives the member the opposite obligation to a balance on the other side. The ideal trader in LETS trades lots, but always swings around that zero point on average.

I did say that I was describing a problem though, and that was all preamble. The problem occurs when for some reason a some "points" are introduced into the system, either positive or negative, without their inverse being applied to some other account balance. This can be seen to have occurred if the sum of all balances in the system is no longer zero.

In three LETS communities which I've been a part of, one of which I volunteered as president of the committee for a year, this problem was rife. In the system I volunteered with in particular, the problem was caused by a lack of understanding of how LETS worked. When new people joined, the organisers gave them 20 free lets "points". This is a normal way to distribute money in some CC systems which are based on only having positive balances, but in LETS all it did was shift the "zero" point to 20 instead. The organisers were wanting to be nice and welcome new members, but they didn't understand that because the 20 points weren't subtracted from anyone else's balance, they weren't giving the new members anything at all. All they were doing was making it harder for people to understand the obligation implied by their current balance.

A further source a "zero shift" in this same community was caused by the committee paying itself or other volunteers for any time spent working for the LETS community, such as sending out the newsletter, once again using points that were just made up and not subtracted from the balance of any other account. I believe the normal thing to do in this case is to levy a regular amount of points from all members to pay for these operations.

The result of the above two actions in particular meant that the zero point had shifted by about 200 points for each member by the time I joined. Thus, if I had a balance of 150 I really had an obligation to earn, although almost no one knew this. No one in the system was particularly bothered by this, and really just wanted to be left alone to go on trading. The result was a wonderful, close knit, community of people who did very helpful things for each other for almost no reason other than because they wanted to. An economist would probably describe it as a gift economy, and the group itself as the sort of tribe or trust network needed to maintain a gift economy. I'm not against gift economies, in fact I think that they are the perfect system to use within a close knit community, but they will not create a vibrant local economy in a geographical region or allow people to use the system for part of their livelihood.

In other LETS systems to which I have belonged, there weren't quite so many problems with "creating free money", but the zero point still shifted due to members leaving without first fullfilling their obligations to trade their balance back to zero. Also, LETS systems in Australia allow trading between each geographical region by using an account for each neighbourning system. The trouble is, an account for a system doesn't exert a strong psychological influence on anyone's behaviour, so such an account might sit heavily in the positive or negative, thus greatly upsetting the zero point of the system that it's in, without anything being done about it.

So, on sum, I think that LETS is more complicated than people who run a LETS system often realise. It's a much harder currency to run than something with simple printed notes like Berkshares or Ithaca hours. LETS attempts to be quite revolutionary in that it is working hard not to be useable as a wealth storage system. It also claims to be free from the influences of interest or inflation (the last point is certainly not true, the first one may be). To make LETS work as it does, LETS hinges very much on the psychology of each trader's feeling of obligation. As these obligations are a little different to what people using a more standard currency are used to, they need to be managed very carefully, including education of all members, high quality prompt feedback, and absolutely no drift of the key zero point.

Tags: Dollars, Green, LETS

Replies to This Discussion

Permalink Reply by Deirdre Kent on November 14, 2008 at 14:48

What a wonderful contribution Craig. Thank you so much.

Permalink Reply by Christoph Hensch on November 23, 2008 at 10:21

Hi Craig,
thanks for this analysis.

Some of the issues you mention are due to faulty software (or other recording mechanisms) used - like the 'free' 20 points taken out of nowhere, or the admin work paid without corresponding fees and levies. Today's software (CES for example) would require you enter another account to debit those amounts, and the enlarged debit balances would show. Of course, it still needs proper administration, and a discipline to enforce strict debit (and credit) limits.

Permalink Reply by Craig on November 24, 2008 at 8:56

Yes, that would solve the problem. Neither of the LETS groups in Australia which I used as examples used *any* software at all. They used paper and a pen.

Permalink Reply by Martin Adlington on April 8, 2009 at 20:45

I have had experience of a local currency in Byron Bay. Unfortunately I have to tell you that the concept has very limited application...viz: I sold my artworks at the local market & accepted "ecos" from local people. Note at this point that I had paid cash for the canvases, paint, & stall rent.When I had $500.00 worth I went to spend them - but I didn't want a craniosacral massage, my chakras balanced, or to get in touch with my spirit guide. I wanted to pay my rent, buy fuel for the car, pay my power bill, buy a digital camera, buy more canvas, pay my stall fee, buy lunch.......no mainstream business was involved.........OK..... I decided to try getting my chakras balanced as after a week of this they were getting seriously out of kilter....the fee was $50 - half payable in "ecos" & half in real hard cash[??].......I ended up donating the 500 green dollars to the charity shop - basically they were worthless...
I agree that after the abandonment of the gold standard, all curriecies became intrinsically worthless, however this issue is compounded in the case of the ‘eco dollor’ - the basic principle of currency is that it is simply a convenient medium of exchange...we all know that no currency is worth the paper it’s printed on...but regionally, nationally, & globally we all need an agreed medium of exchange...that’s simply all money is......try going to Wellington & buying a flat white with an Orewa dollar, or in Browns Bay even.......they will laugh you out of town - I know I’ve done it.....
Another problem is forgery - so simple today with a laser printer..any smart cookie will print eco notes............another issue I found is that people will tender a 20eco note for a 5eco product & ask for change in hard currency - I only obliged this once!!..for very obvious reasons........
The idea may work on a small scale - but not for people in business, who have to pay cold hard cash for rents, raw materials etc - there is no point in having a million eco dollars when your suppliers/landlord demand CHC [cold hard cash]....
I’m sorry, but I cannot really see what problems instigating local currencies will solve.....is there actually a problem???...I’m afraid that I haven’t encountered a single problem tendering CHC worldwide....as far back as the Roman Empire they realized that for economies to work on any scale they needed a widely-recognised currency. “Local” in Orewa may be a geographical radius of 20km, but Orewa is an urban area...Byron Bay is a rural area & ‘local’ is within a radius of 100k - I was not prepared to drive a round distance of 50km to pay 10ecos for a haircut to Mullumbimby- that’s where the nearest eco-dollar-accepting hairdresser lived....
personally, I think that this whole issue is a waste of time..lets not derailed by the latest incarnation of Social Credit...

Permalink Reply by Richard on May 2, 2009 at 12:08

To a large extent I agree with Martin,

Obviously, there needs to be significant change when it comes to finance and economy and personally I think local currency, local trading schemes etc are a reactive approach rather than a proactive as they do very little do address the fundamental structural problems of our economic systems. What they do is simply provide an existing organised barter system, if times get bad other than that in my opinion they are more "feel good factor" than structural change agent..

That is not to say I don't think economies should not be loaclised, they absolutely should be but they should be localised by using applications that draw in as much participation as possible and this is where Local currencies fail. They are essentially too fringe. To create change we need to be engaging the mainstream.

I think the best way to do that is to actually take back the existing currency and make it work for your community rather than going to the effort of creating a new one that as Martin suggests does not adequately replace the existing currency.

I peronally think the approach we should be taking is to not focus on local currencies, we should be building back up the social infrastructure that our communities have lost over the past 30 or 40 years.

So for me It would make a hell of a lot more sense to be setting up local Credit Unions to facilitate and encourage the appropriate localised distribution of currency that is generated within or enters the communtity. This to me is a much better approach, simply because it would provide the community with suitable place to manage their existing currency in a way that builds and regenerates the community as opposed to drains it which is what that currency is currently doing.

Such financial institutions can then invest into the local community to build further community orientated enterprises and services such as food cooperatives, sustainable home building, buying groups etc.

By integrating that appraoch with a network of local credit unions, it means you can be confident your "Orewa dollars" if spent through initiatives supported by other credit Unions in others towns are going to continue to function in the way you want, i.e keeping it local.

But ultimately the goal for a Local Currency is a good one as it does build a strong level of local resilience if times do become difficult. But and youv'e heard me say it before by investing in a Local credit Union could help give your community the collective "credit" to develop a local fuel ethanol plant and or other renewable power systems. You could then back your Credit Union with energy as an income stream. Which is something that I doubt will happen with just a local currency.

From there you can THEN develop your "local currency" through you Credit Union that can run in parallel to the existing national currency but becuase its tied to the ethanol, it has material value and is not just service value as is the case with many LETS)

This means that if the national economy falls over youv'e essentailly got the resilience of your local currency (which you wanted in the first place) but is now based on tradeable commodity However, if the National currency doesn't fall over you are actually preventing existing dollars from degrading your community and the rest of the world, as your community's share of the $9 billion that leaves our shores annually to line the pockets of Big Oil now stays within your community and works for you.

So I have to say I think Local Currencies are a distraction at this stage because its not the type of currency we use, its how we choose to use the currency. The problem is the solution.

Cheers
Richard

Permalink Reply by Christoph Hensch on May 2, 2009 at 14:45

Hi Richard,
I think I've pointed out somewhere else already that I don't agree with Martin. While I agree with most of what you are saying, I think it is superfluous to talk about local currency as long as we don't understand conventional national currency. Local currencies do provide way more than a barter system (that is a misnomer anyway, because nobody barters in a local currency system - barter is a one-to-one exchange that doesn't involve currency at all!)

As I've explained here, local currency of the mutual credit kind only works if we are ready to modify the paradigm of our thinking and culture. The social infrastructure was eroded by the use of conventional bank money with interest. It was eroded because in the general belief in myths like the 'trickle down economy' or the need of unrestricted economic growth. This is an opportunity to advance the way of how we view the world. The is life beyond the 'more is better'!

Once we understand the way how conventional money is created by banks, as loans with interest, then we start understanding the role a locally issued currency could take on. Credit Unions certainly have a role in the rebuilding of a local economy, however, Credit Unions are not involved in the money creation process. Credit Unions will take a huge step forward when they start offering interest free savings and loan products.

A local currency, based on a mutual credit system, could be backed by locally produced ethanol, and in fact, could be backed by any locally produced goods and services. A local currency is the ultimate 'buy local' campaign.

The problem is indeed the solution - however, I notice that most people unfortunately do not see where the problem lies with the economy and the financial system.

Permalink Reply by Richard on May 2, 2009 at 20:16

Hi Christoph,

Thanks for the reply and also for the link to your "Understanding Zero" piece. An interesting perspective.

I guess I threw my two cents in because obviously one of the big issues for transition is to find alternatives to the current degrading economic systems we find ourselves immersed in and i thought I would voice my concerns around local currencies.

I think I have a pretty good handle on how the financial systems work and what are wrong with them. By no means do I advocate continued economic growth, Iv'e been banging on about stable state economics for a long time now. There is no doubt that we obviously need to find ways to empower the consumer at the local level once again, I just think Local Currencies are too insular and not casting the net wide enough. As you say they are not for everyone.

To me that empowerment means the consumer realising at the local level that they do actually hold some power and can collectively utilise the conventional dollars they earn to rebuild their commuities.

By creating social infrastructure like credit unions it actually gives the opportunity to not only buy locally but also to invest locally. The return on that investment does not necessarily have to be associated with interest derived growth. It could come from collective investment in local industry like renewable energy infrastructure that brings a solid and steady return. Investment in wind generation take a lot of upfront capital but once paid for you are literally pulling returns out of thin air.

The returns do not have to be simply a financial return either. Those investing could see the jobs that are created by helping to finance local industry as the return. Such social infrastructures could give validity to the notion of the triple bottom line.

But a Credit Union also enables the community to easily trade outside of the community for goods and services that can't come from within. No community can completely sustain itself, trade is essential and that is where utilising the existing currency allows a community to get better leverage than from a "Zero" system

Economy is part of the glue that actually holds the wider society together and i guess I come from a place of transitioning what we have into some thing sustainable. I am certainly not saying "it aint broke, so don't fix it." What I am saying is that instead of chucking the whole system away, we the consumer should take back the keys and re-engineer what we have so it runs a whole lot better and in my opinion such infrastructure as credit unions are the way to do it..

Cheers
Richard

Permalink Reply by Christoph Hensch on May 2, 2009 at 21:29

Hi Richard,
don't misunderstand me. Local credit unions would have a big role in setting up and running local mutual credit currencies. What else is a credit union than a mutual credit society?

Also, the term 'local currency' might be slightly misleading. That is why we usually talk about 'complementary currencies'. Complementary to the conventional bank created interest money. Such a complementary currency could be worldwide, by the way.

The Community Exchange System (CES) is a platform on the Internet that allows already today for locally run complementary currencies to interact with each other worldwide. There are about 15 groups in New Zealand (5 more are set up but inactive) using this system, which now has participating communities in about 18 countries. One way of looking at such a currency system is to view it as a holarchy. Deirdre Kent explains the concept beautifully in her book Healthy Money Healthy Planet (see http://le.org.nz).

In other words, with a local currency we are not condemned to trade only locally. Just the accountability between different communities and countries is different than in the current system.

cheers,
Christoph

Permalink Reply by Peter Luiten on August 5, 2009 at 16:16

Craig, I have come very recently to this discussion but the issues are of course as current as ever. I really appreciate your description of some of the problems involved with LETS and your insight that it is a complex and revolutionary venture. I agree with everything you say about the need to keep zero at zero.

However I question an assumption you describe as being built in to LETS: that it hinges very much on the psychology of each trader's feeling of obligation. It may well do in many LETS communities, but this is not the way a system can ever become sustainable.

You say LETS constitutes an agreement that when your balance is negative you have an obligation to earn points, and when it is positive you have an obligation to spend points. You outline the effort you put in to enforce these obligations and to generate the pressures under which participants would conform to these obligations.

In my view this assumption is as great a factor in contributing to the downfall of a LETS system as any zero shift. Any administrator trying to run such a system is pushing boulders uphill: it is no wonder that organisers get burnt out and systems founder.

In my view there is no need to make the spending of LETS earnings a moral or peer pressure issue. Traders already have a quite sufficient spending incentive: the need to keep dollars in their accounts for the end of the month when mortgages and other bills are due. The demand for dollars is such that any goods or services that can be bought with LETS earnings will be bought with LETS earnings.

Similarly there is no need to make the earning of LETS points a matter of obligation at all. The widespread demand for dollars means that it is easier to earn points than to earn dollars. Thus any trader needing more spending power will through normal market forces find themselves earning more LETS points.

It is also the LETS earning and spending limits themselves which force traders to spend or earn accordingly. The limits are so low that a constant flow from negative to positive balances and back is assured.

Consequently, in my view, there is no need for traders' balances to be public knowledge. It is not others' concern if, having entered a credit agreement with a defined limit, I owe a little bit or a bigger little bit within that limit. The knowledge can be interpreted as contravening legitimate privacy - one more factor in LETS' failure to find mainstream acceptance. What is important is that the system recognises and responds when a trade threatens to breach a credit or debit limit, much as an EFTPOS terminal can say 'Transaction declined' without revealing the purchaser's balance.

In short, a successful LETS requires careful management of the system itself rather than careful management of individuals and their trading schedules.

Permalink Reply by Craig on August 5, 2009 at 17:14

Thanks Peter, that's probably the most sensible response anyone has ever given me to this concern of mine. I like your general approach that the system needs to motivate it's participants through what is basically self-interest. I agree that privacy would be better than the lack thereof, but I don't entirely see a solution to all the problems that this represents. I wouldn't recommend any system that needs terribly complex technology to run, so I don't really see how to implement payments failing as you suggest.

Permalink Reply by Peter Luiten on August 18, 2009 at 22:43

Craig, I'd be interested to know whether you have experienced problems with people going and staying beyond their credit limit, and to hear whether and how they were resolved and what strategies you have seen implemented or wanted to implement to prevent people leaving the system with debt.

Meanwhile I have an idea for dealing with the other side of the limit problem - that is, when members earn more than their limit - without undue fuss. Each member's trading account could overflow into a savings account. The group's savings accounts constitute a pool from which members may borrow for large-ticket items. Savers charge no interest and borrowers pay none.

You wrote that LETS is a wealth transfer system, rather than a wealth storage system. LETS savings accounts mean members can enjoy the benefits of wealth storage with no loss to the wealth transfer principle. The transfer continues because savings are available to borrowers.

LETS points in a savings account are like term deposits. Savings are not generally available to the member until the end of the term. If a member voluntarily transfers points into a savings account, the member can nominate the term. If a member's trading account goes over the earnings limit however, the LETS administration can (automatically) transfer the excess into the member's savings account with a default term (eg 3 years).

Groups in New Zealand are beginning to implement the saving and borrowing principles used by the JAK bank. I won't go into details about those principles in this post. The point is that though they were designed with conventional currency in mind, they are wonderfully applicable to LETS.

Permalink Reply by Craig on August 19, 2009 at 9:31

Savings in LETS sounds to me like it would have a whole bunch of consequences that perhaps you don't intend. It wasn't me who originally said that LETS is a wealth transfer system, not a wealth storage system, it was Michael Linton. I'm not shy about challenging conventional wisdom though.

However, I am concerned about what LETS savings means. A positive LETS balance is supposedly an "obligation to spend", matched in the system by an equal amount of "obligation to earn" help by other people. Imagine we had a LETS group of only two people (silly I know, but easier to explain), being you and I. If I had a balance of 100 points, then you would by necessity have a balance of -100 points. This means that you have agreed to do 100 points worth of work for me at some point in the future. In a larger group, you would have agreed to do the work for "someone", and I would agree to accept the work from "someone", but the idea is the same.

So, when you store wealth in LETS, you're storing IOUs from other people. They aren't specific IOUs from specific people, just general ones from whoever has taken on the obligation. In other words, someone (or some set of people) are indebted to you. If you store a large number of LETS points, then you've stored a large amount of debt (from other people). Debt in LETS is not regarded as a bad thing per say, because we don't ever charge interest on it. It's just a promise to do something in the future. However, if people promise to do too much in the future, they are perhaps being a little unwise.

We generally regard saving as a good thing, but if a few members of a LETS group save too much, then they have probably caused other members of the group to be in more debt than is wise. Furthermore, the people who are saving are trying to store the wealth for a period (that's what saving is), and so are less likely than usual to spend it straight away. Thus, some people in the LETS group are not only in debt, but they are not given a fair opportunity to work the debt off. There will always be plenty of people in this category if saving is allowed/encouraged, because since the points have to sum to zero, obviously only about half of the people in a LETS group can save while the other half must be in debt, causing an unusual power imbalance.

The effect of being in debt and having difficulty spending it is presumably going to be that you would be more desperate than usual to earn (providing people take the system seriously). Perhaps desperate is too strong a word, but you will have an obligation to earn, and you will be finding it harder than usual, because some of the people who are in a position to pay you are saving their point instead. When people are desperate to earn, they often drop their prices. You might *try* and fix the value of the LETS point to some other unit of measure, like the NZ dollar, an hour of labour (or here in Motueka it's a free range egg), but that's only a suggestion. If I am feeling very pressured to earn, I'll accept less than this value. So, apart from all the other problems, lets saving might cause deflation.

What is the goal of this LETS saving? Surely it wasn't just to make others indebted to you for a longer period?

I think that you're trying to mimic wealth storage in the real world, expecting it to work the same with LETS. For example, if I chop wood all through summer, and store a nice big pile of wood ready for the winter, I have stored wealth. The chopped wood is of greater value for me than it was in it's natural form (up to a point of course, being the amount I need to burn). So, I have applied my labour to generate "wealth" and store it.

In this example, once I have stored the wealth it has no adverse effects on myself or others in order to "be" wealth. It's just wealth in it's own right, and one could say that I've increased not only the sum total of my own wealth, but also the sum total of wealth in my local community (presuming that everyone considers chopped wood to be wealth).

When a LETS transaction occurs and points are transfered from one person to another, by definition, no wealth got created. The sum total of wealth in my community has not been increased, there is nothing for me to "store". I can of course store my LETS points, but that only creates inequality. I can't store wealth unless wealth actually got created. The only way that I can think of to use LETS for wealth storage is if we use the good and labour exchanged by LETS to generate wealth. Ie, I bake you a cake and you chop me some wood, for an exchange of LETS points. Both the cake and the chopped wood are real wealth that have been added to our community.

I'm not adverse to using abstractions to represent real wealth. I'm not adverse to saving representations of wealth if those representations do in fact represent real wealth. If our saving simply means that someone else in our local community is in debt though, the problem becomes not merely one of general ethics, but in fact a community that runs a LETS system is generally small enough that an large upset in the group will come back and bit me sooner or later.