Michel Bauwens asked me to summarize a discussion that started with a question, posted by Richard Douthwaite, a UK-born economist and activist who lives in Ireland. Douthwaite posted on the Feasta forum, asking whether the alternative electronic payment system that is being readied for implementation in Dublin and Kilkenny, Ireland, is in danger of being taken over and captured by private interests, such as a large retail chain, once it is started. The question gave rise to an interesting discussion on the ins and outs of credit-based complementary currency and the credit commons.
I will introduce the discussion by including some of the wider view that isn’t quite obvious from reading the discussion.
Feasta is concerned that the Irish economy may suffer badly from a lack of liquidity, since European economic and monetary policy puts certain spending constraints on national governments. So it is promoting Liquidity Networks (see brochure) to overcome the monetary bottleneck by supplementing official EU currency with local credit that can circulate electronically to promote local economic activity, even as official Euro currency is becoming scarce.
According to the Liquidity Network FAQ, that credit is similar to what elsewhere has been established as paper-based local currencies, LETS etc. but it is electronic, depending on internet access, mobile phones or POS (Point-of-Sale) machines used to process credit cards. A particular feature of the proposed credit “currency” is that local authorities co-operate with local business and consumers to make it work. Local Councils will issue the credits or “Quids” to pay businesses for work performed and staff salaries, after which the liquidity can circulate in the community.
What makes Quids acceptable in the community is the fact that the local Council will take them back in payment for local taxes and fees. There are also bonuses to be had for helping establish the circulation of the new local means of payment. The issue of the new currency would be in the hands of a “governing trust”, but things are still in the planning stages. As you will see from the discussion, things are still far from settled. So this is the background against which to see Richard Douthwaite’s question: Will big business privatise the monetary commons again?
Specifically, Richard points out that…
Initially, it is very important for the establishment of an LQN [a Liquidity Network] that the big retailers come in. If they have to be given big bonuses to convince them it’s worth the trouble that setting up a parallel accounting system and training their counter staff involves, so be it. But once they are in the system, there is no need for these bonuses to continue as they will stay within it provided that they consider that their leaving it would cost them a significant amount of trade. So, once the traders have got over any teething problems, a greater proportion of any bonuses given out could go to ordinary people, with the smaller users getting relatively more.
If we get a system working well in Kilkenny, it will attract a lot of publicity around the world. What is to stop a commercial company – Zapa even – taking the idea up and rolling out systems itself with no local trust running each in the interests of the local community?
‘Geoff’ agrees that this is a concern.
I have been concerned all along that LQN looks so much like the kind of money they are already familiar with, that they are sure to find ways to hoard and abuse it. I think the solution might be to issue credit on a different basis, not with the only goal being to increase liquidity and trading volume. I think it’s fair for communities to express additional criteria for access to their credit commons (and to any other commons, for that matter). Access could be based on how much good someone is doing in various ways within the community, contributing to forms of common wealth that the community wants to enhance, contributing to improving the health/wealth of various commons that the community cares about.
‘Emer’ stresses the importance of the commons in the approach to currency, citing the work of James Bernard Quilligan, adviser to several high level decision makers. He says:
James Bernard Quilligan writes usefully on money as a commons. His system is rather too elaborate and too far ranging for our purposes – but it situates the complementary currency debate smack bang in the Commons discourse where I believe it has a natural home. I suggest that the LQN should recognise common ownership through a distribution of units to residents using the local government voters register, either cash or electronic, replenished by a rusting algorithm within the whole system.
‘Dan’ does not agree with Quilligan, and states:
In my view a monetary system which truly represents a commons is one which should be able to accomodate both positive and negative interest rates, since anything else favours one sector of the commons over the other (i.e. borrowers over savers, buyers over sellers, or vice versa).
According to a second intervention by Richard Douthwaite,
… the idea that quid can be given away in the circumstances in which local liquidity networks are likely to be launched is mistaken.
. . .
The quid will have no value unless people are prepared to accept it in exchange for goods and services. As a result, the algorithms we are planning to use will give any new quid required to those people who are expanding the amount of trading they are doing in the system – it is they who are creating the need for the new money. Thus, if I agree to take an increased proportion of my salary in quid, or my business is doing more and more business in quid, I will be given a bonus by the managing trust as my reward for helping develop the system.
I can see no room for giving quid to people to spend purely because they happen to live in the community.
‘Phoebe’ comes back to the original question, saying:
In our currently highly connected world, any good idea that is potentially profitable will be exploited by business, that is what they are supposed to do. To prevent business taking over, we can seek to put controls in place but since this would be government controls, that is not likely to protect the commons, we can try and create friction in the system to discourage business, but they are likely to override that, so that leaves us with trying to make it really easy to setup a money system, giving communities a chance to compete with business.
. . .
Is there a monetary model that allows a number of different money systems to interact and share a common grid? Suppose you have just one ‘money’ card and that holds your euros, quids, coops, supervalue points etc. When you go to pay you can choose which unit to use or let the system automatically works out which is the best deal, and using a ripple like system, every transaction is eventually settled. This could allow both business and community to start their own competing money systems, each choosing to reward it’s users as they choose.
‘Emer’ then clarifies:
There will have to be an initial distribution of units to traders and indeed some mechanism for them [to] get more units if they need them. The distribution of free units to residents is over and above that issue – an add on – but an important one. It would only ever represent less than 5% of the total units in existence at one time. It will be like cash is to the current debt based money system.
. . .
I suggest that the Liquidity Network has a greater chance of success and rapid expansion and replication if the commons aspect of exchange credit is built into its DNA. I also suggest that this fundamental controlling concept will tell us how to manage the credit units expansion/contraction in the system.
How ?
1) The LQN should be defined as a exchange credit commons owned not by (or for the benefit of ) traders but by all citizen/residents equally in the project area. Ownership/benefit according to use is like grandfathering emission rights in the ETS which Feasta correctly condemned. Just because the atmosphere is used mostly by industry and utilities does not mean it is their property. The same could be said of the enclosure of the land commons in the 14-16Cs; taken from the commoner and freehold given over to barons who required (it was argued) ownership rights to reliably raise and provision armies to defend the kingdom.
2) Like the annual land tax which Feasta campaigns for, a rent for use of the exchange credit commons or LQN should be charged. This equates to a negative interest rate on credit sitting unused in an account. This rusting aspect would invigorate the network businesses, spurring quick payment to settle accounts.
3) This rent (less modest expenses to run the system) in turn should be paid to the rightful beneficiaries of the commons – all residents equally in the LQN area. This can be paid in scrip / notes with a die-by date. The notes can be exchanged as notes without going into the IT system but only for so long. By using them in shops, they would be transformed into virtual credits and given a new lease of life in the accounts of business members. Therefore there is an incentive to get them out of cash into a form where they can be tracked.
4) Residents should also be able to opt to have their credits issued electronically. It should be made impossible to convert electronic credits back into scrip again. Scrip will then only ever be a small percentage (less than 5%) of the total and therefore never an accounting problem.
5) If more credit is needed – as evidenced by appreciation of the unit against a real measure of value – more scrip should be issued equally to residents – not to businesses. Business should have to earn them from customers as in the real world. But as there will be sufficient units burning a hole in the pockets of residents, that should not be a problem.
6) A real measure of value or yardstick should be identified, say a unit of electricity, against which the LQN would fluctuate and be monitored by the Trust acting on behalf of beneficiaries. This would allow for an exchange rate between LQN based in different areas.
‘Dan’ says to this:
Emer,
there is no non-debt cash in the current system. Its all (including cash in circulation) government debt since it all shows up as government or central bank liabilities. That makes cash unequivocally debt, not money. if it were the latter it wouldn’t show up on any balance sheet as a liability.
. . .
The reality of modern economies is that they are wholly credit economies, and in practice have been so for a good deal longer than we might imagine. If that is the case then credit rating is the essential bit of economic machinery.
After a question of ‘Fabio’:
What do you mean by a “self determined request”?. I understand this to work in the sense that transactions get rated by users, and that new units allocation would be done based on this reputation “currency”. In fact, this would also include some of the original LQN approach, in that more trade would increase the probability of good reputation, while also including qualitative elements and not only quantitative (compare with ebay, where big traders get trusted more easily, provided their rating is reasonably close to 100% positive).
‘Dan’ adds:
… there is in my view only one way a non centralised LQN system can work, and that is by having new quids lent into existence by system participants at their own risk.
* Participants make the decision of such new lending according to assessments made available by the common credit rating system.
* Lending participants take the full credit risk, and as such may only lend like this when they have sufficient equity in the system to absorb some losses. (Whether the credit bears interest of positive and/or negative sign is a design choice. Interest is not required or precluded.)
* Because the system is P2P with no intermediary there is no need for any kind of clearing process.
* The system as a whole can be viewed as a single fractional reserve bank (LQN) in which :
– credit extension results in a new quid debt liability immediately re-deposited back into the LQN
– only those with LQN equity may extend credit. LQN equity does not earn a dividend.
– a lender suffering default takes the loss from his personal equity capital account
– all individual capital accounts are aggregated and compared to total outstanding quids to assess system leverage. New credit extension by any lender will be prevented when system leverage exceeds specific limit.**
– individuals have individual leverage limits based on past history (velocity, successfully completed loans, successfully completed borrowing etc)
– new users may need an initial small float of equity if they are trading partners or contributing to promoting the network.
– LQN participants form nodes in a network like facebook or linkedin. As they complete transactions with other nodes connections are formed. credit rating can be based on a nodes connection status – with each connection having velocity and credit worthyness attributes. Many algorithms could be developed to leverage this network information. Each node is therefore a node through which wealth and trust flows. from this information on connectivity, velocity and quality, the ratings of each node for lending (e.g. permitted leverage) and borrowing can be determined, and the result could be different depending on how you ‘connect’ to that node which is being rated.
Chris Cook then joins in, saying:
I think that when it comes to the provision of liquidity – ie the credit needed for the circulation of goods and services and the creation of productive assets – then the key understanding is that the source of this credit is the individual (either alone or collectively as an enterprise: public or private).
It is possible to monetise this ‘trade’ credit if a system can be built where an IOU issued by an individual or enterprise is accepted by another. Such a monetary system requires accounting records; a Unit of measure or Value Standard; probably, but not necessarily, units of generally acceptable ‘money’s worth’ or currency; and most of all, what I refer to as a Framework of Trust.
The Swiss WIR has a central issuer – the WIR bank – of a complementary currency which is not the ‘fiat’ Swiss Franc, but is its equivalent in value. In other words, the Swiss Franc is indirectly the Value Standard for transactions. Proprietary barter systems, such as Bartercard and Ormita, which incorporate credit are also complementary currencies in precisely the same way.
The reason why the WIR is still around after 75 years is that the framework of trust relies upon security taken over business assets, which are available to meet debit balances in the event of default.
The architecture I advocate does not have central issuers at all, but uses clearing and settlement algorithms to ‘net out’ balances wherever possible. ie obligations may be used in settlement of other obligations.
. . .
I believe that the ‘Guarantee Society’ concept I advocate is the best way to create a framework of trust. This requires (in addition to the system) only an agreement between participants that they will mutually guarantee bilateral credit.
Finally, ‘Mike’ offers some important observations on the concept of ‘debt’:
A defining term in the LQN concept is ‘debt’. This loaded word habitually conjures up a negative response. The concept of debt however, when taken out of the context of exploitative banking practices, has a neutral and independent meaning. To illustrate, in the expression “I owe you a debt of gratitude”, or “I am forever in your debt” the word debt is genuine and useful. Indeed, human inDEBTedness is a natural state, since “no man is an island” and the give-and-take of everyday human interaction requires indebtedness at every turn. I think the LQN has until now been equating ‘debt’ with ‘debt exploitation’ and should examine this again.
The following may appear simplistic, but its important to get the fundamentals right.
In simple bartering, debt occurs where an exchange remains incomplete. e.g. unless you and I exchange items at precisely the same moment in time, a moment of debt or indebtedness will occur. Debt occurs naturally in most transactions. Into this scenario we now introduce the Promissory Note, a very practical invention, since it allowed a flexible time gap in the exchange process. When the promissory note is accepted by a third party in a further exchange, it becomes money. i.e. Money is a circulating promissory note (or token, coin, number, etc)
Many theorists in the field of alternative currency accept the theorem: Debt = Bad. When Paul Grignon used the title ‘Money as Debt’ for his DVD on the history money, he meant it as pejorative, implying Debt = Bad. This is misleading, since it is: ‘The exploitation of debt by private or partisan interests = Bad’. Debt itself is a natural occurrence in human transactions. A promissory note is a token acknowledgment of a debt. So, far from being a pejorative equation, “Money as Debt” is actually correct and philosophically sound, because Money = Debt.
Into this scenario, introduce the idea of private banks as the sole source of promissory notes, and the idea that a single limited / manipulated and controlled commodity (i.e. gold) as the sole backing for money, and it is easy to see how debt, by association, has earned such a bad name. But this must not cloud our reasoning. We cannot simply magically issue promissory notes: such a project – however well intentioned – is conceptually unsound; and (like the social creditor’s plane never got of the ground) its manifestations will flounder. The general public have a common wisdom and instinct and are rightly hesitant and suspicious when asked to accept money issued of out of nothing, backed by nothing, (however well intentioned the authors)
If this simple analysis is correct, the notion of ‘debt free money’ is self-contradictory and therefore invalid. If money is not in essence a promissory note, it is not money. Money which is ‘debt free’ is worthless paper. Debt is part of natural exchange processes at every level; it provides money with the dynamic ‘tension’ which defines it.
‘Debt free’ money can only succeed by piggy-backing onto an existing debt based system, since it has no dynamic tension of itself. How long such ‘debt free’ money might survive independently is a only a question of time.
But if debt is a natural, necessary phenomenon, debt exploitation is the unnatural and unnecessary cause of our woes and the curse of our epoch. We must replace exploitation with a balanced emphasis on the social commons, and carefully measured issuance for the common good, balancing individual debt with collective debt, and using various forms of money destruction in balance with money creation in order to maintain a healthy dynamic tension in the overall system. Furthermore, money must be democratised, with structures put in place for local budgetary control and representation at neighbourhood and community level, district and regional level. This is the key to the systems long-term functioning stability.
In conclusion, the problem is not debt but the exploitation of debt for private ends. We must begin with the fundamentals i.e. putting people and collective values back at the centre of the system, and issuing credit where it is solidly backed by trading record, trading reputation, real collateral and/or community taxation.
Although I have quoted liberally from the discussion, there is more and some might prefer to go to the original (located here) to get the full picture.
Pages I visited while making this report:
The discussion: http://www.feasta.org/forum/viewtopic.php?t=910
Richard Douthwaite: http://en.wikipedia.org/wiki/Richard_Douthwaite
Feasta Homepage: http://www.feasta.org/
The Feasta brochure: http://theliquiditynetwork.org/wp-content/uploads/2009/11/Liquidity-Brochure-V4.pdf
Liquidity Network FAQ: http://theliquiditynetwork.org/faqs-2/
Onthecommons on Quilligan: http://onthecommons.org/content.php?id=2585
UISCE Ireland: http://www.uisceireland.org/
“Local Councils will issue the credits or “Quids” to pay businesses for work performed and staff salaries, after which the liquidity can circulate in the community. What makes Quids acceptable in the community is the fact that the local Council will take them back in payment for local taxes and fees.”
Jct: Payment of taxes is the holy grail of community currency engineering.
“I also suggest that this fundamental controlling concept will tell us how to manage the credit units expansion/contraction in the system.”
Jct: Unfortunately, they want to control the expansion/contraction of the number of chips in the game rather than let it be a simple function of the collateral pledged. A perfect system with the suggestion to run it wrong.