25 February 2008

Understanding Complementary Currency

Here is a good introduction into the understanding of what a true complementary currency is. I'm quoting Tom Greco's post from the CC Open Collective Skype channel.


[3.Feb.2008 04:59:16] Thomas H. Greco (USA) says: A recent email exchange prompted me to write the following, which i think may be helpful to some of those on this chat:

Because of legal tender laws, the "dollar" has come to have two meanings -- (1) as a medium of exchange or payment (a currency), and (2) as the standard of value measurement or pricing unit.

An alternative currency must eventually decouple from both "dollars" but the more urgent need by far is decoupling from the dollar as a means of payment.

As I've pointed out in my books, an alternative currency that is issued on the basis of a national currency paid in (e.g., sold for dollars), amounts to a "gift certificate" or localized "traveler's check." (See Money Understanding and Creating Alternatives to Legal Tender, Chapter 14, pp 145-163). It essentially amounts to prepayment for the goods or services offered by the accepting merchants. As such, it substitutes a local, limited use currency for a national, universal currency.

That approach provides some limited utility in encouraging the holder of the currency to buy locally, but the option of redeeming the currency back into dollars without penalty raises the question of how many times it will mediate local trades before being redeemed and leaking back to the outside world.

To truly empower a local community, a currency should be issued on the basis of goods and services changing hands, i.e., it should be "spent into circulation" by local business entities and/or individuals who are able to redeem it by providing goods or services that are in everyday demand by local consumers. Such a currency amounts to an i.o.u. of the issuer, an i.o.u. that is voluntarily accepted by some other provider of goods and services (like an employee or supplier), then circulated, then eventually redeemed, not in cash, but "in kind." In this way, community members "monetize" the value of their own production, just as banks monetize the value of collateral assets when they make a loan, except in this case, it is done by the community members themselves based on their own values and criteria, without the "help" or involvement of any government, bank, or ordinary financial institution, and without the need to have any official money to begin with.

This is what I mean when I talk about liberating the exchange process and restoring (some part of) the "credit commons" and bringing it under local control. In this way, the community gains a measure of independence from the supply of official money (dollars) and the policies and decisions of the central bank (which in the US is the Federal Reserve) and the banking cartel. That is the primary mission
that needs to be accomplished if we are to transcend the destructive effects of the global monetary and banking regime, devolve power to the local level, and build sustainable, economic democracy.

With regard to the second meaning -- the "dollar" as a measure of value, we need to understand that a standard becomes established by common usage. We in the United States are accustomed to valuing things in dollar units. We know from our everyday shopping experiences what the value of the dollar unit is in terms of the things we buy and in terms of our own earning power. Any new "language of value" will have to be translated into the dollar "language" that we already understand. How we measure value is a separate question from that of how we create our own payment media. In the process of monetizing local production as
described above, we can choose to give our credit unit any name we wish, but it makes sense initially to define the value of that unit as being equivalent to that of the national currency unit. In the exchange process, large balances will not be held for long so the debasement of the dollar unit through will result in only slight losses for users of the community currency.

It is when we begin to hold long-term claims denominated in our own new value unit that we will need to define it in concrete, objective terms to avoid following the dollar into the abyss of worthlessness.

The US dollar was originally defined as a specified weight of fine silver, then later on, gold, but those objective definitions were obliterated by laws that made paper currency "legal tender" that must be accepted in payment of "all debts public and private." So now the value of the dollar unit of measure of value depends entirely upon the value of the dollar currency, but the value of the dollar currency is
continually declining as more of it is issued on an improper basis, particularly on the basis of government debts that will never be repaid and that bring no concomitant value into the market.

A stable value unit will then need to be defined in terms of some commodity or group of commodities that are commonly traded. Such definition will then provide the "Rosetta stone" that enables us to relate, from day to day and minute to minute, our value unit to the old dollar language. That process is explained in my first book, Money and Debt: A Solution to the Global Crisis, Part III and Appendices.


Examples of Complementary currencies that still depend on the conventional national currency are the Chiemgauer or Berkshares. Examples of true complementary currencies that do not depend on a conventional currency are LETS, Timebanking and CES.

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