Sacred Economics: Money, Gift, and Society in the Age of Transition (41 page)

This kind of system has many applications. The above scenario exemplifies a small-scale, locally based credit system often called LETS. Since its inception in 1983 by Michael Linton, hundreds of LETS systems have taken root around the world. Mutual credit is equally useful on the commercial level. Any network of businesses
that fulfill the basic requirement that each produce something that one of the others needs can form a commercial barter exchange or credit-clearing cooperative. Rather than issue commercial paper or seek short-term loans from banks, participating businesses create their own credit.

In commercial barter exchanges, firms sell excess inventory and unused capacity for which there is no immediate cash market to others in the exchange for trade credits. The buyer conserves cash, and the seller builds up credits to use in future transactions. No idealist commitment to complementary currencies is necessary to motivate businesses to join; in fact, most exchanges levy a hefty fee for membership. Some six hundred commercial barter exchanges operate around the world today, involving some half a million firms.
¹⁰

A more recent innovation is mutual factoring, conceived by Martin “Hasan” Bramwell. Typically, businesses receive orders far in advance of receiving payment for those orders. To obtain the cash necessary to fulfill the order, they would ordinarily have to sell the account receivable at a discount to a third party (called a “factor”), such as a bank. Mutual factoring bypasses the banks and allows accounts receivable to be used as a liquid medium of exchange among participating businesses.

The most famous commercial mutual-credit system is undoubtedly the Swiss WIR, in operation since 1934, which boasts tens of thousands of members and trade volume of over a billion Swiss francs. As of 2005, its volume dwarfed that of all the rest of the world’s commercial barter rings combined.
¹¹
According to economist James Stodder, both the WIR and other commercial barter
exchanges exert a contracyclical effect, showing greater exchange activity during economic downturns, a fact he attributes to their ability to create credit.
¹²
This demonstrates the ability of complementary currency and credit systems to shield participants from macroeconomic fluctuations and sustain local economies.

In any mutual-credit system, members have access to credit without the involvement of a bank. Instead of paying money to use money, as in an interest-based credit system, credit is a free social good available to all who have earned the trust of the community. Essentially, today’s credit system is an example of the privatization of the commons I discussed earlier in the book, in this case the “credit commons”—a community’s general judgment of the creditworthiness of each of its members. Mutual-credit systems reclaim this commons by issuing credit cooperatively rather than for private profit.

Mutual credit is not so much a type of currency as a means of issuing that currency. In the dominant system, it is primarily banks that grant access to money by extending credit. In a mutual-credit system, this power goes to the users themselves.

The development of mutual-credit systems is extremely significant, for credit essentially represents a society’s choice of who gets access to money and how much of it. Mutual credit replaces the traditional functions of banks. People with a negative credit balance are under social pressure, and the pressure of their own conscience, to offer goods and services that will bring their account back into positive territory. But I’m sure you can see a potential problem with this system when applied on a large scale. What is to prevent one of the participants from running up a higher and
higher negative balance, in essence receiving goods for nothing? The system needs a way to prevent this and eliminate participants who abuse it.

Without negative-balance limits, a mutual-credit currency can be created in unlimited amounts simply by the will to make a transaction. This might seem like a good thing, but it won’t work if that currency is used to exchange scarce goods.
¹³
Ultimately, money represents a social agreement on how to allocate labor and materials. Not everyone can have access to enough credit, say, to construct a multibillion-dollar semiconductor plant or buy the world’s largest diamond.

More sophisticated mutual-credit systems have flexible credit limits based on responsible participation. Global Exchange Trading System (GETS; a proprietary credit-clearing system) and Community Exchange System (CES) use complicated formulas in which credit limits rise with time according to how much or how well one has participated in the system. Those who have fulfilled their negative-balance obligations in the past get a larger credit limit. This formula functions just like a conventional credit rating.

The real world, however, does not always conform to a formula. Different kinds of businesses have different credit needs, and sometimes exceptional circumstances arise that merit a temporary increase in credit. Some mechanism is needed to set these limits and to grant or reject requests for credit. This might require research, familiarity with industries and markets, and knowledge of the borrower’s reputation and circumstances. It could also encompass the social and ecological effects of the investment.
Whatever entity performs this function, be it a traditional bank, cooperative, or P2P community, must have a good general understanding of business and must be willing to assume responsibility for its evaluations.

New forms of P2P banking run up against the same general problem of determining creditworthiness over the anonymous gulf of cyberspace. One could imagine a system in which a database connects you, who have $5,000 you want to lend for six months, to a distant person who wants to borrow it for six months. You don’t know her. How do you know she is creditworthy? Perhaps some user rating system à la eBay could provide a partial solution, but such systems are easily gamed. What you really need is a trustworthy institution that knows her better than you do to assure you of her creditworthiness. You lend your money to that institution, and that institution lends it to her. Sound familiar? It’s called a bank.

Banking, like money, has a sacred dimension: a banker is someone who finds beautiful uses for money. If I have more money than I can use, I can say, “Here, Ms. Banker, please find someone who can use this money well until I need it back.” Decaying currency, described in
Chapter 12
, aligns this conception of banking with self-interest. It will continue to be a necessary function even when “better” no longer means “to increase my personal wealth.”

Whether it is through social consensus, formulas, or the decisions of specialists, there must be some way to allocate credit. Banking functions, whether implicit or explicit, will always exist. Today, a banking cartel has monopolized these functions, profiting not only from its expertise in allocating credit toward its most remunerative use but also from its monopoly control over the former credit commons. Ultimately, a new banking system might arise from the ground up, starting with small mutual-credit cooperatives that form
exchange agreements with each other. Convertibility among different mutual-credit systems is a hot topic in the field, with prototypes being developed by CES and the Metacurrency Initiative.
¹⁴
The challenge is to strike a balance between convertibility, in order to allow long-distance trade, and insulation of the members’ internal economy from outside predation or financial shocks. These are essentially the same issues that face small sovereign currencies today.

Mutual-credit systems reclaim the functions of banking for a local community, a business community, or a cooperative entity. They foster and protect the internal economy of their members, insulating it from external shocks and financial predation in the same way that local currencies do. Indeed, local currencies will never be able to expand beyond marginal status unless they have a credit mechanism that protects them from the speculative runs that numerous national currencies have suffered in the last twenty years. Local and regional credit-clearing organizations can exercise capital control functions similar to those that wiser nations imposed when developing their economies through import substitution. The most famous mutual-credit system, Switzerland’s WIR, provides a rather extreme model for this principle: once you buy into it, you are not permitted to cash out. On a local level, this would force foreign investors to source components locally. Less extreme but similar measures were applied by Taiwan, Japan, Singapore, and South Korea in the 1950s and 1960s, when they restricted foreign companies’ repatriation of profits.

One of the “imports” that local and regional governments can replace is credit itself. The above-mentioned Asian countries did this
too, keeping the banking industry off-limits to foreign banks through government policy and informal cultural barriers. On a regional or local level, and even without a local currency, governments can replace exogenous credit by operating their own public banks.
¹⁵
If we are to pay for credit, then shouldn’t that payment stay in the local economy? Today, state and local governments deposit tax proceeds with multinational banks that lend it wherever they can profit the most; indeed, in an era of banking consolidation they have little choice, as local banks have merged into larger ones. State-owned banks, exemplified by the Bank of North Dakota, can lend locally, finance local projects without having to issue high-interest debt on the bond market, exercise a contracyclical effect by lending during credit crunches, and keep banking profits local instead of exporting them to Wall Street. Publicly owned banks needn’t be driven by profit, and any profits they do make can be returned to their owners, the people, thus restoring the credit commons. These advantages pertain even in the present monetary system.

On the national level, public banking is little different from the power to issue currency, a power that the United States (and most other countries) has abdicated and given to a private institution, the Federal Reserve. But in theory, it could set up its own bank and lend money to itself, essentially printing money at zero or negative interest. Or it could bypass the banking system and create money directly, as authorized by the Constitution and enacted during the Civil War.
¹⁶
The currency proposals outlined in
Chapter 11
would
enable local governments to do the same, issuing money “backed” by the bioregional commons under their stewardship. Ultimately, political divisions may shift into greater conformity with biological and cultural regions. Regional governments will have more autonomy than they do today when they have the power to issue their own money.

The decision of how to allocate capital on a large scale is more than an economic decision; it is a social and political decision. Even in today’s capitalist society, the largest investment decisions are not always made on considerations of business profits.
¹⁷
Putting a man on the moon, building a highway system, and maintaining armed forces are all public investments that do not seek a positive return on capital. In the private sector, though, bank profit determines the allocation of capital, which is the allocation of human labor, creativity, and the riches of the earth. What shall we, humanity, do on earth? This collective choice is a commons that has been privatized and shall be restored to us all in a sacred economy. That does not mean removing investment decisions from the private sector, but rather changing the nature of credit so that money goes to those who serve the social and ecological good.

The reclamation of the credit commons will take many forms: P2P lending (described in the previous chapter), mutual-credit systems, credit unions and other cooperative banks, publicly owned banks, and innovative new kinds of banks such as Sweden’s J.A.K. Bank. In different ways, these systems return the power of money and credit to the people, whether mediated through grass-roots P2P structures as in mutual-credit systems, or through politically constituted institutions such as public banks. And since political
sovereignty is worth little in the absence of monetary sovereignty, reasserting local, regional, and (in the case of small countries) national control over credit is an important path toward the relocalization of economy, culture, and life.