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

----

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 Peter Luiten on August 19, 2009 at 11:32

Thanks for your reply, Craig. I agree it's vital that LETS be philosophically sound; however I don't think the saving I propose is unsound.

The goal of the LETS saving is simply to have points available to spend in the future. In no way does the saving tie up the points themselves.

By way of illustration, let A, B, C have nil balances.

A buys from B. A's trading balance is -100 points, B's 100 points.

B chooses to save the points rather than spend them. (You'll recall I argue that there is no need to make the earning or spending of LETS points a matter of obligation.)

C borrows B's savings. C's loan balance is -100 points; C's trading balance is 100 points.

Now A's debt can be repaid. C buys from A.
A, B, and C now all have nil trading balances again.

B's savings balance is 100 points; C's loan balance is -100 points. This situation reflects a normal LETS transaction.

In due course, C will repay the loan, the term will expire and B will uplift (and spend) the savings.

B's saving has not made it the least bit harder for A to repay A's debt.

LETS have the potential to transform the world. But to reach that potential, they must allow characters like B who have no immediate use for their earnings to support the projects of characters like C who need what they cannot immediately earn.

Permalink Reply by Christoph Hensch on August 19, 2009 at 11:53

I like the way how you explain things, Craig. And I completely agree. Especially the implication that LETS points do not represent wealth. Wealth is what can be achieved by using LETS points to trade.

There are two challenges with LETS:
- it works well with small amounts, and we haven't quite figured out how to deal with large amounts
- it works well on a short time horizon, but we haven't figured out how to organise a LETS that works over a human life time.

Looking at the big picture, we all go through different phases in life, and in relation to LETS that looks as follows (very much simplified): first a phase where we spend without earning, then a phase where we have the capacity to earn more than we spend, and then we likely end up in a phase where our earning capacity is eclipsed again by our spending needs. Therefore arises our tendency to wanting to 'save'.

Now, since it is correct that 'saving' keeps LETS points out of circulation and threatens the balance of the exchange as well as the perceived value of the points, ways need to be found to put 'saved' points back into circulation.

One way I could see this happening, is by putting 'saving' points into a form of 'Term Deposit', where the points are locked away for a specific period of time, and then in turn are made available to lets say a capital project that requires more points that the ordinary account limit would allow. While the points could be directly lent from member to member, it might be better to have some sort of 'credit union' inbetween, that makes sure that the 'borrower' repays the units in time before the 'Term Deposit' expires.

In this case, the 'saver' keeps ownership, yet the unit themselves are still circulating and allowing those in debit to earn. It goes without saying that all of this happens interest free. Because LETS points are created on the fly as needed, no JAK-Bank like savings and loan system is needed.

Permalink Reply by Craig on August 19, 2009 at 12:30

Ah, that's not entirely the system I expected. Can I get more clarification on some points?

When B makes a loan to C, then C has a "loan balance". What is this? A new account? Does each loan generate a new account, or does C have one account for all loans?

Also, B now has a "savings balance". Again, I gather this is a new account, separate from the normal account you're calling "trading balance". I gather that a savings balance account is used for all savings. So, if B made the same arrangement twice, they would use the same savings balance account? That right?

And finally, I presume that these accounts exist in the same "system" as regular trading accounts, they just get used for special purposes. Is that right?

Permalink Reply by lee0007 on August 19, 2009 at 13:09

Gentlemen, while your conversation below is a bit beyond me I'd be interested to learn you option on a different sort of trade system. I'm on a team facilitating a marketplace that allows people to trade time (as the measure of value where 1 hour = 1 time credit). It will allow trading within small community groups and on a nationwide basis. Time measures the value on the exchange of members talent and skills. I'd be interested to hear what difficulties you percieve a system like this might face - because it seems to me that as long as we have time to share then we have a universal measure of value to trade with each other.

Permalink Reply by Christoph Hensch on August 19, 2009 at 14:43

Time is a good measurement for people's services. It's easy and it is straightforward.

However, once you attempt to trade goods, then it becomes more tricky. At this point you probably need to assign a dollar (or other) value to the time credit. That in itself will open a whole can of worms. If you are interested, I could go on and share with you my own concept I'm working on ...

Permalink Reply by Peter Luiten on August 19, 2009 at 15:06

Craig, I wrote earlier about trading accounts overflowing into savings accounts. To make things clearer, I'm proposing that each member have two LETS accounts only: a trading account and a savings/loan account.

The trading account is the regular LETS account: it deals with what Christoph refers to as small amounts on a short time horizon. The savings/loan account is for the larger amounts over a human lifetime scale.

All B's savings would appear in B's savings/loan account and contribute to a positive balance. All C's loans would appear in C's savings/loan account and contribute to a negative balance.

The two accounts exist in the same overall LETS points system. They are distinct however; for example, the savings/loan accounts may not necessarily have the same administration as that which oversees the trading accounts. The people deciding who may borrow and when and on what terms are actually the savers themselves or a body representing them. This body is the credit union to which Christoph refers.

Christoph, though I agree with everything else you say, I find your last sentence perplexing. LETS points are created on the fly as needed when trading, but they cannot be created in the same way when saving or borrowing. All the points that go into a savings/loan account as savings have already been earned in a trading account. The administrators of this pool of savings will certainly need a rigorous accounting system.

Permalink Reply by Craig on August 19, 2009 at 15:33

Thanks Peter,

I think I've got a handle on how your system works now. I think though that much of my earlier criticism still applies. I'm going to breakdown your example scenario and give some comments inline.

Step 1
A buys from B
Trading Accounts: A(-100), B(100), C(0)
Savings Accounts: all 0

Step 2
B Saves
Trading Accounts: A(-100), B(0), C(0)
Savings Accounts: A(0), B(100), C(0)

** At this step, all accounts sum to zero, but all trading accounts sum to -100. There is something special about savings accounts I think. Not on paper (they're just accounts), but B is clearly trying to stash some points away for a rainy day here. Otherwise, why move them into the savings accounts. At this point, doesn't B have a definite feeling of not wanting to trade those points? Doesn't that mean that it's very hard for A to earn her points back (with all my previous criticisms on the affect of that)? It's very lucky that in your example B decides very quickly to put his savings back "into play", but it doesn't seem like that would always happen.

Step 3
C borrows B's savings
Trading Accounts: A(-100), B(0), C(100)
Savings Accounts: A(0), B(100), C(-100)

** What is C's motivation for this transaction. He borrowed B's savings? Why? C had a balance of 0 already, and could have just spent some points. Instead, C now has a positive trading balance (which isn't required for a lets transaction), and a negative loan balance which would need to be repaid eventually anyway. I realise that this is a simplified and contrived example, but even in a more realistic example, how would this benefit C? Is it so that C can borrow an amount much bigger than the trading limit imposed by LETS, and thus make a huge transaction (on credit)?

** What's A's motivation for this transaction. She still has her 100 savings points. This transaction didn't change her account values at all. If I'm understanding your example correctly, the points in A's savings were used to "allow" C to acquire a positive trading balance and a negative loan balance. One way of looking at it is that C borrowed from his own saving account, and the transaction was in some way secured by A. I presume that since A "lent" the money, it can't be lent out again until "paid back", despite the fact that A still has the points. I may be getting this step totally wrong, please correct me.

I'll stop there actually. I have some questions about the next few steps too, but I want to make sure that I've gotten it right so far.

Craig

Permalink Reply by lee0007 on August 19, 2009 at 15:41

Kia Ora Chris,

Thanks for the quick reply, I'm happy to hear "easy & straightforward" :-) because we are strictly a service marketplace - no goods - intentionally so to avoid any monetary valuing of people's time and tax obligations that goods may entail (still awaiting formal response from IRD). I would love to hear more about the concept you are developing, please tell...

Permalink Reply by Peter Luiten on August 19, 2009 at 16:19

Craig,

Step 1 is fine.

Step 2: Of course B is stashing points away for a rainy day. Of course B doesn't want to trade those points. However, feelings and motivations are quite irrelevant here. We are devising a system that works regardless of anyone's feelings and motivations, especially regardless of anyone's sense of obligation. It's easy for A to earn her points back because C is prepared to buy A's goods (with the points borrowed from B). B doesn't necessarily put his savings back into play quickly. B's savings are always in play, even though B puts them on term deposit for 25 years. While they are nominally in B's savings account, C is spending them freely buying from A.

Step 3: You're right: C wanted to borrow because he wanted to buy something which cost more than the credit limit in his trading account. He may want a house built and needs to pay the builder. If C pays the builder in large amounts, those points may never go into C's trading account at all. They are likely to go from B's savings account through C's loan account straight into the builder's trading account.

In the next paragraph you speak of A but I'm guessing you mean to refer to B. However to avoid confusion I won't answer till you can clarify this.

Permalink Reply by Craig on August 19, 2009 at 16:25

Yes, sorry, I meant B above. Eg:

** What's B's motivation for this transaction. She still has her 100 savings points. This transaction didn't change her account values at all. If I'm understanding your example correctly, the points in B's savings were used to "allow" C to acquire a positive trading balance and a negative loan balance. One way of looking at it is that C borrowed from his own saving account, and the transaction was in some way secured by B. I presume that since B "lent" the money, it can't be lent out again until "paid back", despite the fact that B still has the points. I may be getting this step totally wrong, please correct me.

Permalink Reply by Peter Luiten on August 19, 2009 at 16:45

Craig,

Step 3: I presume you are speaking of B's act of lending rather than B's act of saving. B basically wants to have points to call on at some future date, but the only means of doing this is by entering an agreement with the whole LETS community that savings pooled are available for others to borrow. The savings community is motivated to lend to C because C's borrowing enables trade to continue and C to be housed.

B certainly cannot lend the same points twice. The points in question are not available to B until the term matures. The story is much as it would be with term deposits with standard dollars. Though the funds are nominally in B's account, others have the use of them in the meantime.

Permalink Reply by Craig on August 19, 2009 at 16:56

That's not sounding totally crazy. ;) I need to ponder this for a bit I think.