|How local money works|
Kissing debt money goodbye
Any pair of intertrading businesses - you and I - could come to a mutually beneficial agreement:
Each of our trading accounts begins at zero. When I buy from you, no money changes hands: your account is credited and mine debited; no matter how much we trade, the combined accounts’ total remains forever zero.
Minimal-cost trading is an attractive proposition. We’re unlikely to ditch our current accounting arrangements for new ones, however, until we appreciate the commercial liability debt money represents.
Money is bank credit. It represents debt. It not only originates as a bank loan but is actively on loan and attracting interest as I handle it. To keep using debt money is to pay for a lifelong overdraft.
When I buy with money I am buying from suppliers who must repay more than they borrowed - and who must get that extra out of me by loading the bill. I fund their interest obligations - by working harder, increasing my own prices, or borrowing it myself (and paying yet more interest). When I sell for money I am asking my customers to borrow it before I deliver. Whatever it costs them in interest costs me in lost custom. Money exacts a ransom from everyone it touches.
New Zealanders pay over $40 billion in interest every year - more than 20% of our GDP. Until we kiss money goodbye for a mutually beneficial alternative, we’ll keep kissing it goodbye for nothing.
A reciprocal credit agreement is far less costly than debt money. Trading accounts constitute a business currency, designed to ensure that both parties are treated fairly. In marked contrast to normal bank lending practice, reciprocal agreements avoid selling credit or creating it at either party’s expense.
I issue credit in order to sell my stock. When I have goods worth, say, $300 to sell you, I create the means for you to buy them by buying $300 of your work. No cash changes hands. You accept my credit as payment on the understanding that I’ll accept it back when you buy my goods.
The credit I issue - the credit I create when I buy from you - represents $300 more liquid buying power between us than was available before our agreement. Its significance is that it revives trade that was dead for lack of money - and does so without incurring any interest cost or embedding any long-standing debt.
The value of my current stock of goods and/or services naturally limits both the credit I can reasonably issue and the credit I can reasonably expect in payment.
Our agreement is workable only when we impose credit and debit limits on each account, on the principle that a business may properly issue credit - by spending - up to the value of what it has ready (or almost ready) for sale. It serves no good purpose for me to create more buying power than you need in order to buy my goods and services, or for my account to have credit and debit limits with a different absolute value.
If a business is meeting an ongoing demand for its goods and services, a useful measure of what it has ready (or almost ready) for sale is its monthly turnover. My account is credible when we agree to limits not far removed from one month’s current average turnover through the account.
My credit limit is a precise measure of the money I am displacing by our agreement. Since money represents a continuous flow of wealth away from my community, my credit limit measures my continuous contribution to the restoration of local wealth for as long as our agreement is in place.
A credit agreement need not be limited to two parties. A town or a whole region of intertrading businesses may use a single agreement, each business issuing and redeeming credit according to its capacity, its prosperity spreading as more join the circle and the turnover of each expands.
Every credit group starts as a small entity; regional agreements take time to develop. An effective agreement is not so much a matter of the number of participants as of the width and depth of the trade they represent. A functional business credit community comprises a wide range of suppliers - retailers, wholesalers, manufacturers, producers and employees - supplying a wide range of goods and services in everyday demand.
Parties to an agreement seek to form complete credit circles. Only by being able to spend my account with my suppliers can I afford to accept the accounts of those I supply.
Empty windows on New Zealand’s main streets display the impact of bank credit. Among its effects is that every town’s chief expense is interest. The bulk of a paypacket vanishes before it’s received. The leakage reduces trade to a trickle; traders are for much of the week their shops’ sole occupants.
It is hard to imagine a trading currency less trade-friendly than one that is subject to interest. Banks’ suction power on $money is far greater than any ordinary trader can hope to match. The cost of money means that customers are loth to spend any more than they must.
In marked contrast to communities dependent on interest-loaded finance, credit circles are not short of buying power. A reciprocal credit agreement grows like new skin around a trading region, sealing up the cuts through which wealth had been pouring out. As its own credit begins to displace bank credit, the region retains more and more of its own wealth.
Local trading is revitalised as a direct result of a credit agreement’s terms. Each new account increases the group’s purchasing power. Credit limits stimulate accounts into constant circulation. Participants are assured of a reliable income because the agreement constitutes a closed trading circle. Accounts constitute a powerful demand for local goods and services. The net effects are increased turnover, steady profits and reduced debt for all participants.
When my account approaches its credit limit, the desire to earn more obliges me to buy, so I order and pay for supplies more promptly than I used to. When your account approaches its credit limit, I benefit from your early orders and prompt payment. Our prices are kept down and our trade is busy.
Money is always in such high demand that it typically leaves local goods and services on the shelf. Local credit accounts have the opposite effect. Even when I have money, I spend my account first and tend to buy where my account is accepted.
There is no competition for accounts from outside the agreement circle. Of the traders prepared to accept accounts, retailers draw more local customers, suppliers sell more of their product locally, contractors pick up more local work, employees increase their job security, and the unemployed find paid work sooner.
With accounts to spend, customers who had been putting off buying are suddenly ready to buy. The marketplace - never short of buyers or sellers but only of money - begins to flourish. New jobs are created and existing jobs kept local. Unemployment, debt levels and trading costs fall; wages, turnover and profits rise. A new dynamism characterises regional trading.
Turbo-trading kicks in as complete credit circles afford participating suppliers – employees, retailers, wholesalers, manufacturers and producers - all the liquidity they need.
A trading account handles day-to-day business. A useful credit agreement also provides for traders’ need to accumulate interest-free purchasing power to fund major items and investments. If I wish to save beyond my normal credit limit, I can transfer part or all of my account into a group credit savings pool.
If my account exceeds my credit limit, the excess automatically “overflows” into the pool. If I wish to access credit beyond my normal debit limit, I can dip into the pool.
A credit savings pool works in exactly the same way as a money savings pool (see Savings Pools). Savings and purchase funding are similarly interest-free, repayments similarly matched by concurrent contributions, and funding applications similarly evaluated by the group members.
Many credit savings pools can coexist; businesses party to a local or regional agreement can choose whether to save into a common pool or smaller select pools for particular purposes. Each credit savings pool may require an administration fee of its members in addition to any fee they may pay as parties to their credit agreement.
A credit agreement forms a closed payment system. Credit accounts can’t be spent outside the business circle. For all that their membership of a credit agreement boosts their business for this very reason, members still require a money income to pay for taxes, bank debt and supplies imported from outside the district.
Many member businesses attract both member (reciprocal credit) and non-member (money) custom. While an agreement is still gaining traction within a district, a business’s non-member custom may easily supply its money requirement. As the credit circle enlarges, more and more goods and services that were formerly imported come to be supplied from within the circle. During this time, members’ reducing need for money tends to offset the reducing money component of their income.
As an agreement becomes widely established, however, the remaining non-member custom may no longer be enough to meet these businesses’ need for money. There are other member businesses, notably employees and some producers, whose customer base is too small to produce a workable reciprocal credit/money income balance. A suitable credit agreement allows all members in these circumstances to pay one another in part in $money.
A reciprocal credit circle needs to fund operating costs, including the services of (at least) an administrator.
Whatever governance structure it chooses, a successful circle will take care to:
o adopt inclusion and reciprocity as fundamental principles;
o adopt adequate management procedures and controls;
o establish clear agreements with and provide ongoing support for its members;
o actively broker credit relationships and involve the wider community.