Complementary Currencies/BoK EN - Local Exchange Trading Systems (LETS)

General Description

LETS (Local Exchange Trading System or Local Employment and Trading System) is the running of a bookkeeping system intended for ordinary citizens and the economically excluded. Douthwaite and Wagman give a clear description of what LETS is: “(…) the common feature in all LETS is that members trade with each other using a monetary unit of their own devising and the system’s organizers keep records of all transactions, usually on a computer, so that it is possible to spot members who are taking more value out of the system than they are putting in” (1999:17). LETS logically have many similarities with barter. However, whereas barter is essentially a commercial organization and intended for businesses only, LETS is an association intended for ordinary citizens and usually voluntarily run by active community members on a not-for profit basis (Greco 2001: 89). Barter can thus be perceived a business to business (B2B) solution, whereas LETS is a consumer to consumer (C2C) solution.

Purpose

LETS are designed to strengthen the local economy and to empower the community (members) simultaneously (Seyfang 2002: 3). LETS reinforce the economy by addressing two failures of the mainstream monetary system; it provides an abundant medium of exchange and it creates a currency that cannot leave the area (Seyfang 2004: 7). By exchanging goods and services with local currency, members (theoretically) save on the expenditure of official currencies increasing purchasing power. LETS currency is at the same time abundant as credit is simply created with every transaction. With LETS, credit is never in short supply. Especially in the absence of official currency within a, region, town, district or city, it is believed that LETS initiatives will revitalize local economic activity.

By increasing personal economic relations, improved cohesion among LETS members and a sense of community is expected. Besides, a LETS mainly attracts people that in the mainstream economy are excluded from participation (e.g. the unemployed). LETS credit enables people on the margins of society to offer goods and services that are not valued in the mainstream market economy. Becoming economically active they consequently have an opportunity to reconnect to their communities. Additionally, it enables them to get access to products and services they otherwise would not have.

Design Criteria

Support Medium In a LETS a bookkeeper simply keeps track of all the transactions taking place among its members. Hence, no paper and coins carrying value are involved. All participants start an account with a balance of zero. An online platform contains the existing wants and offers within the LETS. Afterwards, two members initiate a transaction. The parties in a transaction negotiate the price as they ordinarily would for a cash transaction (Greco 2001: 90). Traditionally, the payment is made using cheques, which are send to the bookkeeper. Alternatively the transaction is reported to the bookkeeper by mobile phone or e-mail. Nowadays, transactions often take place over the internet. The account of the buyer is subsequently debited and the account of the seller is credited by the corresponding amount. That means that the total of credit within the LETS (positive balances minus negative balances) always adds up to zero. As opposed to ordinary currency, LETS currency is thus created by the members themselves and not by a bank or government. Hence money is never in short supply and inflation-free.

The seller, having a positive balance on his account once the transaction has taken place, can use the credits to buy goods or services. In some cases local currency notes can be withdrawn from a positive account balance, just as is the case with withdrawing ordinary money at the bank. Tucson Tokens, the name for LETS credit in Toronto, are an example (Greco 2001: 104). The account is debited with the withdrawn amount involved. The withdrawn currency notes circulate as means of payment until a receiver deposits the banknotes to his or her account. The advantage of using banknotes is that it encourages self-regulation: a bookkeeper is not required to keep track of the transaction, reducing the workload (Douthwaite & Wagman 1999: 18; Seyfang 2004: 8).

Function (Medium of Exchange, Store of Value, Standard of Value)

As the name itself already reveals, Local Exchange and Trading Systems serve the function of exchange in the first place. No interest is charged or paid, so there is no incentive to hoard credits, and exchange becomes the primary objective of LETS-credit. For ease of use, the value of LETS credit usually equates with national currency (Seyfang 2002:3). Hence, the standard of value for measuring the merit of products and services in a LETS, often reflects the price in Euro’s or Dollars.

Issuing Procedure

LETS-credit is created with every transaction taking place in the system. All participants start with zero trade credits. With every transaction the account of the buyer is credited and the account of the receiver is debited by the same amount. The trade credit itself is not redeemable for ordinary currency, it isn’t backed by any good or service, nor is there collateral involved. Having a positive balance means that one can lay claim on products and services in the community. Having a negative balance simply means that one has an obligation and a promise towards the community to deliver goods or services in the future.

Funding and Cost Recuperation

To finance the cost of operating a LETS, an annual or monthly fee in ordinary cash and/or LETS credit is often charged Greco 2001: 91). The fee should pay for expenditures such as the bookkeeping, recruiting of new members, the use of computers and the advertising of supply and demand for products and services.

Implementation and Origin

The term ‘Local Exchange Trading System’ originated with Michael Linton who in 1983 established the Comox Valley LETS in Courtenay, British Columbia. Courtenay experienced high levels of unemployment and economic hardship after the Timber Mill (providing most of the employment for its residents) closed (Lietaer & Hallsmith 2006: 30). Introducing the Green Dollar, as a new complementary currency, enabled residents to continue economic activities despite the lack of conventional dollars. Although the LETS attracted considerable attention, it eventually collapsed as result of Linton’s heavy indebtedness within the LETS system (Douthwaite & Wagman 1999: 18). Unlimited indebtedness is one of the main flaws in the implementation of LETS. Buyers having a negative balance are obliged to deliver services or goods in order for their account to return to a positive balance (Douthwaite & Wagman 1999:17). To prevent high levels of indebtedness (that is taking more from the system than contributing to it), some systems have imposed a debt-limit. It is striking that such a debt-limit often lacks, neither is there an instrument to force or an incentive to lure accountholders out of debt. For this reason, massive long-term indebtedness of some accountholders has often occurred. Consequently many LETS collapsed as trust by other members waned (Douthwaite & Wagman 1999:18). LETS are usually transparent, meaning that member’s balances are no secret and participants can constantly check the account balance of any other participant. Additionally, account balances of the members are regularly published by the bookkeeper. Because LETS exist locally on a small scale, group pressure often prevents indebtedness. Additionally, participants are obliged to settle debts in ordinary currency when ending their account . Nevertheless, a LETS organization cannot legally enforce a participant to end his account or to return to an account balance of zero. Publishing account balances seems not to be the solution and is moreover, controversial, as not all members are willing to publicly announce their private financial situation. Collateral or an enforceable repayment schedule could solve the problems of indebtedness in LETS.

It should be noted that LETS is not invented to avoid taxation. Every member participating in a LETS is liable to the state for taxation, both income tax and VAT. This is especially the case with providing professional services using LETS (Lietaer 1999: 139). LETS activity is part of the formal economy. Nevertheless, many (local) governments acknowledge the importance of LETS for improving the economic and social conditions of the participants. Tax relieve, governmental support, subsidies or similar stimuli are therefore not uncommon (Lietaer 1999: 135-140).