Civil Credit and Civil Money

(from THE NEW ECONOMICS Column in Country Wisdom News, February 2012 issue)

Right around now is a great time to be interested in alternative economic thinking! The uncertainties and injustices we are all going through have created a lot of motivation for new thinking and new directions of action. A lot of smart people are getting involved and working for change.

One of the key areas of economic activism nowadays is the world-wide trend toward local currencies and mutual credit networks. It’s impossible to say exactly how many of these there are, but it’s in the thousands. True, not all are successful or long lasting. But what is significant about these initiatives is that ordinary people are taking practical steps to create systems that localize their economic lives, build community, and raise awareness. In this column, I’d like to step back and discuss the basic ideas of civil credit, and related to that, civil money. This is by no means merely an intellectual exercise, as I am currently working with an intrepid group of cohorts to create a mutual credit network right here in the Hudson Valley that could be linked to a local currency.

Let’s think about credit. In an exchange economy, we provide goods and services to each other on a reciprocal basis. It is perhaps a feature of civilization that we are in some cases willing to receive compensation at a later time. That is called credit. The basis of this is trust, but the trust is not just personal. We also trust that there is some sort of accountability, whether it is by social convention or by law. This applies to money as well. When someone hands you a dollar, why do you believe it is worth something? We could say that money and credit are “trust-based” social technologies. Even with the basic levels of trust and accountability that people have out of their basic goodness, it has become clear to a lot of folks that the complex financial systems that have evolved are not basically sound. They are unstable, they are rigged, and are unjust in many ways. One type of reform effort these days involves taking the fundamental principles of money and credit, simplifying them, and integrating them with modern communications technology.

If we possess fundamental economic freedoms (something not to be taken for granted) we have the right to exchange goods and services and to enter into contracts. Libertarian writers such as E.C. Riegel have made the point that if we have these rights, we have the right to create money independent of government, or for that matter, the business establishment. Ah, but what is money, and how is it created?

Let’s take a very simple scenario: if I do a job for my friend Jim, and he gives me an IOU for that work, it would be possible for me to trade that IOU with someone else for some other good or service. This would mean that Jim would repay that debt to the other person, not me, since they gave me something in exchange for the credit represented by the IOU. The IOU is actually the simplest form of civil money. The IOU represents a credit for the person who has it, and a debt for the person who issued it. All paper money involves this credit/debt relationship, and please keep in mind that credit and debt are really the same thing—just from different perspectives. Notice that civil money was created by civil credit: I extended credit to Jim by giving him something he needed in exchange for a scrap of paper, a piece of paper that represented, however, his willingness to pay me back. Now, in this simple 3-party exchange, the IOU would be torn up (oops, recycled) at the end, and the “money” would disappear. There are a lot of lessons in such simple scenarios, and as an aside, I often feel that people could progress more in their understanding of economic matters by contemplating things like this than by listening to diatribes on the Federal Reserve or the budget deficit. But I digress.

Now, even without computers and the web, which make things very convenient, it would be possible to create a mutual credit system with a large number of participants and with no “money” at all. It would simply be a matter of keeping track of all the transactions. Systems like LETS and Time Banks do just that using a web-based accounting platform. So called “second-generation” mutual credit networks increase the sophistication of such systems by putting careful controls on accounts to reduce risks of default and to ensure that the network remains valuable to users over time. It is important to see that these systems are examples of civil credit. The participants are extending credit to each other on a community basis.

OK, if you’re with me this far, you’re a geek (that’s a compliment) and let’s take it another step. We’ve been thinking of creating a local currency for our area for some time. But how do you do that? Do you just print up some bills and say, “This is money.” That’s a fail, as they say these days. Money has to have a basis of issue. Some local currencies, like the Berkshare in nearby Massachusetts, are issues in exchange for dollars. You buy them for U.S. dollars, and you can convert them back to dollars if you want. I argue that the actual economic power of such a currency is very limited, despite the community-building aspect of the whole thing. Why not issue a local currency that is really civil money? Here’s how it would work: At any given time in a mutual credit network, some accounts will have a positive balance, some negative. Those with positive balances can redeem that credit by getting goods and services from other members. By why not also let them redeem that credit by being issued ( . . .drumroll . . . ) paper money? Such a local currency would be tradable with anyone who agreed to accept it, not just network members, which extends the convenience of the system for members, and builds community awareness. Why is this type of local currency more powerful? Because it is based on goods and services already delivered. It is truly credit based. The money is actually created by the delivery of goods and services, and becomes a circulating asset in the community.

This is all still a work in progress, and if you’re interested in learning more about such a system, participating in it, or (especially at this point) getting involved with organizing it, please be in touch. By its very nature this is a community project, and it won’t happen any other way.

see also: hudsonvalleycurrent.org