The Community Exchange System - Reinventing Money

This is the unedited version of an article written for Digital Development Debates

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By Tim Jenkin

It became clear in the final years of the twentieth century and the early years of this century that the converging crises of global warming, resource depletion, loss of biological diversity, environmental pollution, systemic unemployment, increasing inequality, runaway debt and others were the symptoms of economic policies being pursued globally, and that they could not be solved with the same policies.

Capitalism, as the prevailing and predominant economic system obviously took the blame for these global problems. All that was offered as a replacement was socialism, which for many was not a replacement at all because it is just a variant of industrialism. It is clearly the industrial mode of production and the consumerist way of life it has engendered that is the earth's burden.

But is the true culprit industrialism? Is it not possible to have a non-destructive industrial mode of production, one that is not premised on growth and attendant consumerism? Many who have studied these macro questions have come to the conclusion that if the mega problems of today are to be tackled in a meaningful way, then human society's 'operating system' needs to change. As with computers, if the operating system remains the same then no matter what tinkering and improvements are made to the interface, the overall system will produce the same kind of results.

The 'operating system' of any society, beginning with the most basic hunter-gatherer and subsistence communities, is its exchange system. This is what determines the relationships among people in the process of obtaining or producing their means of existence, it is what determines what is produced, how it is produced and how it is distributed. Exchange systems have evolved with human society, but they have always provided the rules or 'operating instructions' of how the society runs in the economic realm.

This is as true today as it has always been, only today we call that exchange system the financial or monetary system. Money is just one of many historically recorded exchange systems. Today's debt-based money system is a fairly recent innovation. It is this debt-driven exchange system that defines today’s global economy. It provides the logic, the motivating forces, the imperatives and determines how its resources are allocated and how we relate to each other.

Growth is the over-riding imperative of our economies because there is always more debt than money, and so the urge to produce is based on survival rather than on peoples' need to consume. In order to keep the production engine going we have to be persuaded to consume, otherwise the money is not generated to pay off the (unrepayable) debt.

Monetary reform cannot fix this situation. That is just tinkering with the operating system. What is required at this crucial juncture of history is an entirely new operating system, a new way of 'doing' money, a new exchange system.

The 'new money movement' that is growing rapidly throughout the world is based on this realisation - that what is required to take humanity into the new era is a new exchange system. A new economic system will follow from that. Fortunately it is possible to design and implement new exchange systems, whereas it is not possible to do the same with entire economic systems.

Community Exchange

It was in response to this realisation that a group of monetary activists in Cape Town, South Africa, decided in 2002 to investigate the field of alternative exchange systems (otherwise knows as complementary currencies, social currencies, local currencies etc.) with a view to setting up an experimental local exchange trading system (LETS) in Cape Town.

LETS as an alternative paradigm in monetary thinking started in Canada in the 1980s and quickly spread around the world, becoming popular in western Europe, and in Australia and New Zealand in particular. The basic idea of LETS is that members of a local community get together and compile lists of what they have to offer and what they require, whether it is goods or services. These lists circulate and members begin to trade. Instead of using an exchange medium that serves as an abstract representation of value (money), a central register is set up where members record who did what for whom and who supplied what to whom.

Thus if someone supplied a bicycle to another, that would be recorded as a transaction in which a bicycle went from seller A to buyer B. A gets 'credited' so many 'points' for providing the bicycle while B gets 'debited' the same number of 'points'. The positive points now represent A's claim on the community, while B's negative points represent their obligation to provide goods and services to other members of the community. The aim of all participants is to keep their balances as close to zero as possible over the long term.

As no money is used in the these transactions, many people think this is barter, but in fact this is further from barter than transactions using conventional money. The buyer has no obligation to the seller whatsoever. The buyer 'pays' for what they have received by selling or doing something to/for someone else at a later time. This gets around the age-old problem of barter, which is the requirement for a double-coincidence of wants - a near impossible situation.

While in many ways this is similar to what money does, no currency is used or created here; only records are kept. If nothing is created then nothing needs to be distributed and nothing circulates. There can never be a 'money supply' problem in LETS. And because there is no exchange medium, the concept of interest falls away. You can't 'lend' a record; only 'stuff' can be lent.

Although it is not possible to borrow LETS points, it is possible for users to go into debit beyond their allocated limits. This is the same as receiving a loan from a bank, except that there is no interest. A user permitted to go into serious debit, to purchase a house for example, would have to work off that debit according to an agreed schedule. However, it would be clear that the ‘credit’ for this house is not a ‘loan’ from the system, but true credit from the community: the receiving of value before like value is returned.

LETS is a true exchange system, as is money. Both provide the same functionality: they enable indirect exchange, they provide a standard of value, they provide a unit of account, they provide a means to defer settlement, and many other things.

In order to enhance the simplistic LETS scheme, the Community Exchange System (CES) was launched in 2003 to take the LETS concept to a new level. Instead of using manual methods of distributing lists of offerings and wants, and recording transactions in ledgers or spreadsheets, a web site was set up where all of these things were automated and could be managed by the users. An online 'shopping mall' was created where users could advertise whatever it was that they were providing or required, in much the same way as advertising on eBay or Gumtree. Instead of having the administrator of the group enter all the transactions, everyone could access their accounts and enter their own.

The CES started with a single exchange group in Cape Town, which expanded rapidly and started to be noticed all over the country. Suddenly requests started coming in to establish similar groups in other parts of the country, and in that first year another six groups started up. At first these were stand-alone, without any trade between them.

How to permit exchange between these independent groups was one of the greatest challenges. Each group is an accounting entity in itself and all the recorded credits must equal all the recorded debits. In other words the entire system has to balance to zero. It is impossible for any credits to 'leave' a group to purchase something from somewhere else as that would upset the magical zero balance.

The solution was to use 'virtual users', which are like real users having accounts in all other groups. Thus if seller A in group A wants to sell something to buyer B in group B, the accounting would record that seller A actually sold to virtual user A in group A. Virtual user A, having accounts in all other groups, could 'step across' to group B (and be called virtual user B) and sell on to ultimate buyer B in group B. The accounting in group A would balance to zero as the credits from the sale by seller A would cancel out with the debits of the purchase by virtual user A; and the accounting in group B would also balance to zero as the credits from the sale by virtual user B would cancel out with the debits of the purchase by user B. The 'balance of trade' between the groups was measured by the figures recorded for the virtual users.

In the second year another five groups were started in South Africa. In 2005 the word started to spread abroad, and 11 former LETS groups in New Zealand joined CES to take advantage of the facilities it offered, in particular the ability to seamlessly network separate groups, something that had proved almost impossible when they were managed separately.

From that point on growth has been exponential, and today (November 2011) there are over 340 separate groups in 34 countries. Australia has the most (69) followed by the USA (64), Spain (47), South Africa (30), Finland and New Zealand (24 each). The trend is counter-cyclical with the fortunes of the global economy: as it turns sour, so the number of new CES exchanges increases.

The CES web site is just a tool for managing exchange groups, for keeping accounts and for advertising. Each group administers itself and has its own rules and conditions of use. This keeps the overall system democratic and provides the basis for a multitude of separate but interacting local economies. Some groups base their unit of value on the national currency while others use time.

While information about actual trades is private, any user can check the balance and trading position of any other user. The administration account of each group is open for public scrutiny. Transparency and openness promote honesty and discourage 'free riders'.

The long-term vision of CES is to democratise the entire network. Currently all groups are hosted on a single, central server but this is about to change with the installation of separate servers in some countries in order to host those countries’ groups.

This introduces new challenges, however, because information now gets distributed. If I in Cape Town want to enter a transaction against someone in Sydney, Australia, how does my group's hosting server know what to do with the data. Does my server have to be constantly updated with new information about remote groups every time a new one is created or a minor detail is changed? That would be an impossible situation, especially when there are many servers around the world and new groups are being added every day.

The solution was to create a central bridging server called Clearing Central. It keeps an up-to-date record of all groups in the CES network. When a transaction is entered by a user the programming determines if the buyer's group is hosted on the local server or not. If there is no record of it, it pushes the data to Clearing Central, which then does a lookup for the remote group, applies the relevant conversion rate, if any, and sends it on to the relevant server. The remote server receives the transaction data, applies it and sends back to Clearing Central a result code indicating whether the transaction succeeded or not. Clearing Central then passes this back to the originating server indicating whether it should confirm or discard the entered transaction.

The CES has been operating for nearly nine years now, and though it is still minuscule compared to the global financial system it has demonstrated that it is as versatile as the conventional money system, and in many ways much more efficient. It caters for fairly large volumes of trade, permits international trade, provides an extremely efficient means for 'tax collection' through an optional transaction levy, handles multiple conversion rates seamlessly and clears accounts instantaneously.

Consequences

CES is just one example in the field of alternative exchange systems, but it is the first and only global network of local exchange groups. Other systems operate in a stand-alone way or attempt to create one giant system for the world. Monolithic systems are inherently insecure, and are highly centralised. Should anything go wrong the whole world comes to a standstill, and centralisation gives the providers immense potential powers of control.

In the new era of declining energy and other resources, the global economy is inevitably going to have to contract. The debt-based money system looks increasingly unstable in the current low-growth situation and definitely cannot operate in a de-growth environment. A new exchange system operating something along the lines of CES is going to be required. Such an exchange system simply reflects the economic situation; it does not drive it. As interest is removed as a factor in exchange, the growth imperative is removed as well as the debt bondage that most of us live under. Extraction mechanisms such as speculation, derivatives, securitisation, hedging and other casino-like activities, that allow a parasitic class to skim off the wealth of society, are also excluded. The decentralisation of control and lack of opportunities to hijack the exchange system for private gain will return the ‘money power’ to ordinary people. No longer will those who currently control the financial system be the ones who decide where society puts it efforts and how it allocates its resources.

The realisation that money is information and not stuff is hugely liberating, because it means that a local community can create its own exchange system and not be dependent on the dysfunctional global one that is driving humanity to the brink of disaster.

This has all been made possible by our ability to share information on the internet. Local communities should jump at the opportunity to be able to define and control their own destinies instead of allowing financial institutions and governments to do it.

The CES web site is at www.community-exchange.org

December 2011

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