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The scale of credit

My understanding of money came initially through LETS and the beautiful, simple mechanism of mutual credit. Working from the principle of balance, mutual credit accounting begins and ends with no debts and no money. Money is just an imaginary intermediary that keeps account between all the members of society, enabling them to 'split the barter', giving and receiving with different people at different times, but always in balance.

It is tempting to view all money in those terms. From a mutual credit perspective, issuance is defined as an account going below zero, spending more than it earns. In the case of a backed currency, the negative balance is offset by a commodity in a vault. In the case of a fiat currency, there is no intention to return to zero. Both variations test the rules and intentions of a system, taking it away from a pure exchange function. In this and other ways, mutual credit gives us a lense to help us understand money systems, especially with social justice in mind.

But in reality the money system is fundamentally not about reciprocation, or just keeping account, and the LETS lense has blinded me to this all this time. I thought that money had been mistakenly commodified and bastardised by interest to become something very far from its true essence as a medium of exchange, but my recent reading has revealed otherwise.

I've got two books to thanks for this new learning, the very accessible Money, The Unauthorised biography, by Felix Martin, and the intense The End of Finance by Massimo Amato and Luca Fantacci

It seems to me now that credit creation takes place on a scale. At one end is the short term, low risk, small quantity and often local credit. At the other end is the long term, higher risk, and higher quantity credit, perhaps needed for international trade. Along the scale are different kinds of contracts and instruments, such as the LETS, the IOU, the overdraft, the mortgage, shares, and bonds. It is the credit at the big end of the scale that has always shaped and moved the economy. These 'harder' credit arrangements carry with them political power, the promises of riches through investment and often interest. The people engaging in these activities are not interested in exchange but in gain. In the days when the Rothschild bank lend money to the king, the object was Rothschild's commercial gain and the king's military triumph, no money creation took place. It was the original Bank of England which doubled up such loans, such that the king's IOU entered circulation for use as money, often never to return. The king nor anybody was the slightest bit concerned about the total quantity of money in circulation. At that time there were many other private bank notes and bills of exchange and other private instruments, not to mention hyper-local currencies for the tradesfolk. At that time, a recession was when all the silver had left the country and the nobles couldn't pay for luxury goods.

Now we don't have all those options, we have what Bernard Lietaer calls a monoculture of legal tender money. The quantity is determined as ever it by the big ticket credit items outstanding. Its not about how much the government borrows because all of our borrowing is legal tender through the banking system. Today's money supply depends not on monetary policy, but on how much banks feel like lending.

Now when there is a shortage money the tradesfolk are starving because they know no alternatives to legal tender. But history shows that they could utilise credit at the small end of the spectrum to create perfectly adequate exchange media which keeps the wheels turning even if it is hard to get rich from.

In the Irish bank crisis the country survived several months without money by circulating cheques many of which were approved by pub landlords. In Argentina's dollar crisis 2002 the economy switched over to a system of barter networks.

So what I've learned confirms (naturally) what I already suspected. Its no use begging the government to issue more money because we need money. Tradesfolk's needs do not factor into the thinking of a government with centuries of debt to manage. But what we absolutely can do, if only we knew how to organise, is create alternatives to legal tender, which is why, as the economy is dragged under the quicksand, perhaps never to resurface, we should pay ever more attention to LETS.

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