To understand what money is and how it works, it is not enough to know its history, for pure money has only recently been made.1 Though this initially sounds ridiculous to the reader, my assertion is not that pure money did not exist, but that humankind had not created goods which served the functions of money without being quite useful for other purposes, until the previous century. Confusion has arisen over the definition of money for multiple reasons, and until it is clear what money is and what it does, one cannot begin to ask the question of how to refine it or make it more successful. Money has performed many purposes and served many masters besides that which its essence demands of it.

It is quite difficult for man to spontaneously create something which is purely money, used solely as a medium of exchange and without other intentions such as serving as an investment or store of value. This does not hinder an understanding of money at all, however, and should man never have created pure money, it would not necessarily have been a negative thing. Just as pure copper was too soft for shields until it was combined with tin to form the alloy bronze, so is it likely that without alloying money with other substances, money will not be practical to implement. Even that which I have called pure money undoubtedly has impurities in it. This should be expected. However, the alloy is not merely money and by only by appreciating the alloy process can men can create and control their own economic smelters to accomplish their goals and serve their own purposes.

Defining Money

Macroeconomists have several measures of money, called M1, M2, M3, and L. M1 contains money immediately available for making transactions: currency plus chequing accounts.2 The remaining measures contain financial instruments that can be converted to elements in M1 with varying amounts of ease, and are counted as part of a broader concept of money with lesser liquidity, meaning that they cannot as conveniently be used in payments. As liquidity decreases, the amount of interest borne by the financial instrument increases. By using a liquidity definition of money, they follow the lead of Friedrich Hayek, who saw the term 'money' not as a thing but as an adjective to describe something's usefulness for a specific purpose of exchange.3

But money is not an adjective; it is a thing, however abstract. The liquidity approach to defining money is quite helpful for governments and statisticians, as it defines the money supply as elements over which they have some understanding and control. It is a basis that guides federal monetary policy, which they hope to use to control the nation's economy. Unfortunately the prior correlations between these money measures and economic performance appear to have fallen of late as a result of financial innovations, leading to the creation of new measuring tools to better relate these numbers to real-world economic activity. A relatively new index called "Money, Zero Maturity" (MZM) was created in the late 1980s and has replaced M1 in much modern analysis because:

Since early 1994 the level and growth of M1 have been depressed by retail sweep programs that reclassify transactions deposits (demand deposits and other checkable deposits) as savings deposits overnight, thereby reducing banks' required reserves.4

I suspect that a fundamental reason why private credit systems and alternative exchange programs are not being added to new money measures is that to redefine money so as to incorporate their information would require much greater effort on the statisticians' and economists' behalf to record and evaluate the contributions of these groups, many of them quite small, to national productivity. In some cases the statisticians and economists measuring and reporting activity in one program might be expending more effort than the members of that program. It might also introduce questions of reliability as some groups sought to represent their economic activity in the most desired light possible, possibly skewing their reported numbers or measuring activity levels differently than standard measures under the guise of being special cases, so it is understandable why from a statistical reliability standpoint these elements might be excluded from the liquidity approach to money.5 Nevertheless, when considering the potential of alternatives to the current money system, it becomes clear that the element which most individuals seek in their money is to be busily transacting with it.6 The arguments for and against these alternatives generally have little to no relation to the liquidity approach, and so I have adopted the transactions basis instead.

With that understanding, treasury bills, savings deposits, and mutual funds should not be counted as money unless it can be shown that there is a community which actively uses them in trade for goods or services. That they are stores of value which can be converted to money much easier than other stores of value like Chippendale furniture or Ming vases makes them very disposable investment instruments, but does not make them money, any more than one should call a silkworm a moth merely because it can become one after a cocooning process and other insects cannot. Those items appearing in M2, M3, and L that do not appear in M1 are not actually being used as transactions money. They are merely alternatives to federal currency and serve different purposes, sacrificing liquidity in some cases for the opportunity to earn interest.

So what is money? It is simply the good whose intrinsic value to its possessor is found in its ability to be exchanged for other goods. Former Belgian Central Bank executive Bernard Lietaer defines money as follows: "Money is an agreement, within a community, to use something as a means of payment."7 Lietaer expressly uses the phrase 'means of payment' rather than 'medium of exchange' so as to include gift transactions in non-Western communities; I do not consider the power to bestow gifts to be a necessary function of money proper.8 Even with the proliferation of gift certificates and gift cards whose horrid purpose seems to be to declare the exact monetary value of a friend in the gift-giving process, this still remains a secondary ability of money. In any case, the distinction may not be relevant for the scope of this document's distribution, and the more familiar term "medium of exchange" shall be employed accordingly. Ultimately, money is not a physical thing but a concept or label applied to an item by one man and swiftly removed by another. Our previous chapter has talked about what money has been. It is now time for us to put on our thinking caps in place of our wallets to know what money is.

Money is an agreement. As previously discussed, the concept of money arose to facilitate transactions as opposed to barter. Just as you cannot point to where the number two comes from, there is no physical requirement for what money is; it is a concept conferred by persons, and these persons are not necessarily the makers of that money. You can mint all manner of coin and print all types of paper certificates and guarantees, but until another person declares it valuable in exchange, it is not money. Cows and potatoes may be money or food; paper currency may be money or wallpaper. Nothing is money until at least two persons agree to use it in exchange. The origin and nature of that agreement varies: in places it is forced by one party, as embodied in the government's creation of legal tender,9 and elsewhere it is chosen by several or all parties involved, as with Tenino's bark money, an interesting story indeed. When the bank in Tenino, Washington closed its doors, its chamber of commerce printed $6500 of scrip on spruce bark which circulated by community decision to much publicity until federal currency returned to the region. Because it was so unusual, under $100 was redeemed for federal currency; collectors were offering a 140% premium for this scrip.10 The decision may be carefully thought out and contracted or merely asserted and unconsciously accepted, such as federal money tends to be. Sometimes other qualifiers as to the structure of that agreement enter, such as in periods of extreme inflation when the value of that agreement to provide money in exchange for goods or services is extremely time-dependent.

For money to be an agreement implies that money arises out of social relations. That is to say that it is a creation of humans in interaction. The existence of trees or sunshine does not depend upon the presence of multiple humans; money comes out of community. The structure of that community can vary greatly due to a number of factors.

Membership in the community may be granted quite freely, as with federal currency, or may impose various explicit entrance agreements. Credit card companies require a demonstration of creditworthiness before granting admission to their money system; babysitting co-operatives may decide that their members must have children of babysitting age.11 Membership in each of these communities is restricted to persons who show the capacity to earn enough of the traded currency to pay off debts incurred in that currency; one rarely thinks about the community that exchanges federal currency as imposing restrictions, but any individual without possession of that currency is generally barred from purchasing goods and services until such time as he can take possession of some of the currency. As a way of describing the variety of outlets for expenditure of a currency, I shall use the term "general-use currency" to describe one acceptable for a large percentage of one's needs and wishes on a daily and monthly basis, and "restricted-use currency" to describe one applicable to few or none of one's needs and wishes.

Membership may be limited in other ways than the demonstrated ability to work. It may be based explicitly upon residency requirements, such as Berkeley BREAD which requires that members live in the San Francisco Bay area; local residency requirements are implicit in other Ithaca HOURs-type programs because possession of the currency outside the region of exchange effectively alienates one from the vast majority of possible trading activity. One may be required to commit to certain stated values regulating minimum levels of involvement within the community or shared values, like the local currency SonomaTime does.12 It is conceivable that currencies might restrict their usage not only by region or values but also by age or social culture. However that community is defined, the make-up of its membership will help determine how money is implemented.

Lastly, any money system requires something to be a medium of exchange. It can be shells, service credits, or silk; cows, coins, or computer credit. The medium chosen should merely be quantifiable and divisible into fine enough elements to sustain all transactions between all participating members of the community. If it cannot be used for all transactions, a second currency will be necessary for the unaddressed transactions. In either case, the choice of the medium will have dramatic impact on the nature of market interactions. Heavy exchange media such as animals or metals encourage local economies to become more self-sufficient than lightweight ones, for which the expense involved in transferring great value across long distance is much lower. Each medium possesses its own specific features advantageous to certain purposes and disadvantageous to others.

Further, the choice of medium could serve to include or exclude individuals from the market economy. Some monies have different admission rules for those wishing to be buyers versus sellers using the money, choosing to be financed by fees from primarily one side or the other, or adding certain infrastructure requirements to one side. Credit card companies require sellers accepting credit cards to have an infrastructure for reporting transactions and keeping records, which may include carbon receipts or electronic point-of-sale devices, while consumers are merely asked to carry a small piece of plastic. Because of the start-up costs associated with accepting credit cards, teenagers do not tend to take payment for lawnmowing or babysitting services via Visa or MasterCard.

Measuring Money

If money is created to do something, namely serve as a medium of exchange, there must be ways to measure its success. Just as we can define types of agreements and communities, we need to describe the way or ways that money facilitates that exchange and be able to evaluate the success of various realisations of money at facilitating exchange. To conceptually consider the value of a particular money for transacting, we must consider the expected value from that transaction. There are two elements which need considering in determining how good a money is: how little it costs to use in the transaction and how much positive benefit the transaction provides. This is not a time for absolute measurements; possible though it might be to calculate an exact usefulness, such a form of a utilitarian perspective does not provide any additional value beyond a system of relative measurement. This system would determine between two monies which provided the greater overall value. Two elements have been elucidated as components of that value, each of which can undoubtedly contain subcomponents. The exact weighting and formulation of the relation between these two shall be left for each individual to decide; only the idea shall be presented herein.

One common measure is the velocity of money. Defined as the total value of all transactions divided by the value of money in circulation for a given period of time, it gives the average number of times that each piece of money has changed hands. The traditional formulation of it is MV = PY, where M is the money stock, V is the velocity of money, P is the price level, and Y is the total output of the economy. Now that function which something does easiest, one expects it to do the most often: nail guns build houses and crowbars take them apart. The reverse would be unexpected, being much more difficult. Therefore, since monies throughout history have held additional functions besides serving as media of exchange, if a money is best suited to use in exchange, it should have a higher velocity than if its best use is not in exchange. Those with the highest velocities, all special conditions aside, are closest to pure money since their use is most commonly as exchange media. For proper mathematical consideration, this statement should be properly qualified: those monies whose use is most often percentage-wise, by some to-be-determined metric, as a medium of exchange are closest to pure money.13 To use money velocity as a proxy for this presumes that when money is not used in exchange, it is used to serve some other means.

To use velocity also presumes another element: there exists in some respect a fixed quantity of the money stock. This is not always the case. Community economist Thomas Greco writes that "money has a beginning and an ending; it is created and it is extinguished."14 Money is issued by someone to acknowledge a transfer of value from someone else, who uses it to obtain value from someone else, and so forth until eventually it is presented for redemption by its creator for something of value. For mutual credit systems such as LETS, money is created simultaneously as a debit for one person and a credit for another at the time of a transaction.15 The money stock, if measured as the number of credits available for redemption within the system, grows every time someone with a debit balance makes a purchase from someone with a credit balance and shrinks every time someone with a credit balance purchases from someone with a debit balance. Whereas in a paper- or commodity-based currency, the payment of all debts would not affect the size of the money stock since the currency is not retired from circulation, in a system where money is created from lines of credit, whether limited by the central regulating authority of the monetary system or by the other members of the system, the payment of all debts could render the measured money stock as zero. Basing monetary velocity upon the sum of all extended credit lines would presume that individuals on average plan to fully use their credit on some occasions, and so this measure too is troublesome, especially since some mutual credit systems do not define bounds for individuals' credit. If money is created for a one-time use and then redeemed, and for future uses more money is created and then redeemed by the issuer, velocity has no meaning: there is no factor affecting the individual's choice to use this money as a transaction medium instead of as a store of value or interest-bearing investment.

One other element ought to be considered with regards to why monetary velocity is a very troubling measure to apply to alternative currencies competing with a dominant currency. Hayek puts it best when he says:

In a multi-currency system there is no such thing as the magnitude of the demand for money. There will be different demands for the different kinds of currency; but since these different currencies will not be perfect substitutes, these distinct demands cannot be added up into a single sum.16

The velocity theory of money presumes that there exists one money, and that it circulates on average at a certain rate in accordance with the cost of goods. Even if we were to declare that the prices of all goods rose and fell together in order to make one price level, this theory is far too simple to handle a multi-currency world. Though it may through some theoretical form be able to discuss the aggregate effect of numerous monies combined against the aggregate goods and services of an economy, it does not possess the detail to describe the effects of increasing the quantity in circulation of one form of money when in competition with others. The substitution effects and other interactions between them are not discussed by the velocity theory, so we must consider other measures of success and usefulness in our monies.

If velocity is not always applicable, we need to consider more fundamental characteristics of money so that we may design successful currencies or predict which currencies will succeed. After all, it is possible that monetary issues would not succeed, for "money simply does not exist until it has been accepted in exchange. Hence two factors are necessary for money creation: a buyer, who issues it, and a seller, who accepts it."17 If no person were to accept it, an issue would fail. Acceptance is a primary element which deserves consideration, as does the predictability of the money's value.

In fact, questions of acceptance may help explain monetary velocity. Local currency may circulate faster than federal currency not out of any altruistic love or value for the community, but because individuals consider federal currency better from an acceptance standpoint since it can be used anywhere, so they use will their local currency whenever possible, holding their federal currency for places and times where local currency is not accepted. This would suggest that they give federal currency more intrinsic value at the prevailing exchange rate. Gresham's law that bad money drives out good money should not apply to two fiat currencies, as the only reason that one money should drive out another money is if that second money has a greater use value elsewhere. Without a recoinage or trading mechanism by which one can convert one money to another at one rate and convert back at another rate, profiting off the difference, Gresham's law is really non-applicable. Silver quarters left circulation not because the zinc-filled quarters were "bad money" but because, with 0.18 troy ounces of silver each, silver quarters were worth more as silver than as quarters even when silver traded at $2 per ounce.

All other things being equal, persons will prefer monies with predictable value. Predictability has as its opponent uncertainty, and uncertainty in contracts can lead to a massive reduction in the level of economic activity. One source of uncertainty comes if one does not know if others are willing to accept it in exchange. If persons cannot be reasonably certain as to the value of their money, they will desire at all times to hedge against loss unless they are extreme risk-takers. As a result, they may choose to not engage in economic activities that would previously have been marginally profitable. Hedging against fluctuations in value can be quite costly, both to a community's total economic output and to individuals who miss opportunities to invest prudently because of their hedging activities. Thus, given the choice, such individuals will prefer a money of predictable value.

This is not to say that they will demand one of stable value. Their choice of currency could be found to depreciate by fifteen per cent per annum, but if it did so in a manner around which they could plan their lives, such that they could reflect that depreciation in their contracting for future goods and services, it could be preferred to a currency with little or no expected long-run depreciation but large uncertain swings in value. It seems reasonable to expect that, given a choice between a fully stable money and one whose value depreciates in general accordance with a known schedule, persons would prefer the former ceteris paribus unless they expected to make additional profit by exploiting a discrepancy in financial savvy between themselves and others. Those who know themselves to be less financially savvy would be all the more inclined to choose a stable rather than merely predictable money for the same reason.

Caution Against Misplaced Precision

We must be careful when judging from external appearances as to which elements should be considered money, much like Supreme Court Justice Potter Stewart who said he could not provide an exact definition for pornography but he knew it when he saw it. The problem with any exact and precise definition for a human creation is that human ingenuity has a way of blurring the lines. For example, stored value cards should not be judged money if they are not accepted for services or goods from multiple independent individuals or businesses. Thus the stored value cards being created by banks for parents to give their children in order to regulate their spending habits are money since they tend to be accepted wherever credit cards are welcome. Prepaid phone cards which permit a certain quantity of telephone service or gift cards to a local video rental franchise are not money since they are, like most gift certificates, accepted by only the issuing company for services albeit perhaps multiple transactions; they are merely IOUs marking that future services have been contracted for and must merely be fulfilled; all money transactions have previously taken place and no more money will change hands, unlike the other stored value cards earlier mentioned. Yet both can assume the same appearance nowadays.

A Value Governor

To introduce economic efficiency into a monetary system, it is common to have a central co-ordinator watching over the production and distribution of the money, and working to guarantee its value. Although some non-fungible monies, like cattle, may not require or be best suited to such a co-ordinator but rather have their values established in the middle of the exchange process, an established and trustworthy organisation or individual protecting the value of the money would reduce greatly the cost of transacting by standardising one element: the value of the exchange medium.18 That co-ordinator would be expected to receive an income from his labours since he is, if properly performing his duties, performing a service to all the community members.

In ancient days, it was commonly the sovereign's or the goldsmith's assumed responsibility; the measuring, valuing, and stamping of gold or silver to certify its worth required a massive capital investment in metalworking tools, and therefore could not easily be done by all. Nowadays that function is assumed by different persons in different monies. The government guarantees federal currency and MasterCard and Visa authorise credit card transactions; stores require photo identification to accept cheques while every member of a LETS has at least theoretical access to the system of accounts by which they can make their independent decisions whether to deal with other members or not. In all these cases, however, it can be seen that it is generally given to the issuer of the money to ensure its value; differences arise because of the varying rules governing who is permitted to issue money across systems and who bears the risk in the event that the person receiving the goods from the vendor does not make good on their commitment to transfer value.

Implementing Other Monies

Oddly enough, in all the literature I have reviewed on alternative private currencies and mutual credit systems, one private money has gone undiscussed: the credit card. Perhaps this is due to the pervasiveness of credit cards; they can be to consumers like water to a fish. Perhaps too the scale of the project is too gigantic for proponents of local networks and human-scale, rather than global-scale, interactions. In either case, the concept of the credit card represents the most successful to-date implementation of an alternative transactions currency, being accepted now where paper currency and personal or corporate cheques are either not welcome or prohibitively laborious, permitting transactions to be conducted over the telephone or the Internet. The ubiquity of the credit card in personal, commercial, and international transactions may make it invisible to consideration, but it clearly is money, used as a medium of exchange by agreement of a community. That those who use it for purchases are not permitted to pay off their credit card balances by charging them to other cards but are asked at monthly intervals to get rid of their debit balances by means of authorising a bank transfer of funds through personal or corporate cheque is not a problem for a transactions approach to money, but only for the liquidity approach. From this viewpoint, credit cards serve merely as an agreement to defer payment until the future, at which point actual money in the form of a cheque changes hands. Credit card transactions are not seen as creating any new money but instead adding to the number of ways in which claims can be made against that money.

The one element preventing credit cards from being pure money is the ability to carry a debt balance. In this situation, credit cards are not used as transactions money since intentionally deferring payment is not a necessary function of, and even a hindrance to, exchange, for which decision the credit card company rewards its users with finance charges. Nonetheless, credit card companies have been much more successful issuers of money than many persons. Their alloying of a medium of exchange with a program that is profitable for them works, and works quite well.

Alchemists failed to turn lead into gold from their misunderstanding of how elements were made. Much more recently, scientists have been able to change individual lead atoms into atoms of gold, but the expense and effort that would be needed to change merely one gram of lead into gold are so immense that the gold market has not taken any downturns from the news, nor are business plans promoting lead-to-gold conversion attracting funding from serious investors. Similarly, the effort and situation required to make some local currency ideas work is enough to not give them serious consideration for monetary alloys in today's world.

As will be discussed in Chapter Three, individuals have sought to place a tax on holdings of currency to speed its circulation, thus alloying the exchange medium with an anti-hoarding element. The likelihood of such a money working today is quite low and would require extreme circumstances to be embraced by any community, small or large. From the perspective of an individual, any local currency with a tax on holding is an inferior currency to the current federal currency, which lacks such automatic taxes. For the community as a whole, a successful local currency may be beneficial, even economically superior to federal currency.19 It is one thing, however, for men to believe a program benefits their community and another to believe it benefits them individually. As E. C. Riegel writes, "A would-be issuer must, in exchange for the goods or services he buys from the market, place goods or services on the market. In this simple rule of equity lies the essence of money."20 The government does provide goods and services, though in a far different manner than private industries which bill separately for each individual user or individual product provided. The use of federal money therefore has benefits for communities in aggregate and some value to their use.

How to Obtain Value

Currencies of paper or non-precious coin, not being able to provide for any of man's needs except by exchange, must have their value established in one manner or another.21 This value is generally established by convertibility with either desirable goods and services, a first-order valuation, or by convertibility with other currencies, a second-order valuation.22 To maintain the stability of that currency's value can require a great deal of effort in fighting off inflationary tendencies. In the case of small issuers who have little-to-no track record and little to lose to guard against the abuse the power of the mint, it can be especially difficult to establish confidence in the money if it is not directly backed by some desirable item of stable value, whether goods, precious metals, or a more reputable currency like the United States dollar. They need a way to signal their commitment to maintaining value in the currency if they are to avoid capital flight.

A currency board can be one way to establish a measure of trust and value in a currency. The issuer guarantees to exchange the currency which they are placing into circulation at a fixed conversion ratio with another currency on reserve whose value is supposed to be relatively stable. Potential users of the issuer's currency can then display confidence that if the currency's purchasing power in the region of its acceptance is to fall, they can exchange that currency without suffering a huge loss from devaluation. This declaration of value can turn into a self-fulfilling prophecy if the issuer maintains enough of the reserve currency to meet all tests of confidence in the system. It is not always undertaken, however, because the restrictions on issuance can prevent issuers from monetising debt and paying for expenses incurred through an inflation tax.

With value stability easily within reach for a currency with a fixed exchange rate, and acceptance likely to follow where confidence in that stability is established, it would seem odd that so many currencies today choose to float in value rather than pegging themselves to each other or to tangible goods unless there are certain benefits to being floating that are not found in fixed currencies. Like the old adage that declares, "One man's trash is another man's treasure," the factors which to one individual are abhorrent may to another be attractive. Those elements which provide security to a currency do so by restricting its flexibility, forbidding actions that the currency co-ordinators or users may desire. Some of those benefits need to be considered here.

Operation of a currency board severely limits the ability of the issuers to adjust the money supply to aim for specific targeted unemployment levels or rates of inflation. If a currency board attempts to issue more money than is backed, it runs the risk of its users realising that the source of their confidence and trust in the money's value has been lost. In the event that the currency's backing is its sole source of value, there has been a decrease in the value of each unit of currency since the equal balance between currency issued and backing held by the issuer has been disrupted. By Gresham's law, therefore, the community in aggregate will seek to hold the more valuable money and get rid of the less valuable by returning it to the issuer in exchange for the stable currency which backs the local issue. In extreme cases, this becomes a bank panic and collapses the local issue, toppling the issuer with it.

In contrast, the issuer of a floating currency may have the ability to adjust its value to suit the purposes of the community members or his own desires. He can alter the interest rate or quantity of money in circulation to attempt to spur economic activity in the short run. Given that many wage contracts and other price schedules will be fixed in nominal terms to the local currency, he can expect the elasticity of the community's prices overall to a change in the money supply to be less than one in the short run, enabling him to realise his vision.

Another vision of any money issuer may be one of declaring political and monetary independence and self-sufficiency. It is difficult to assert that the region is not in need of outside assistance if the currency itself is pegged to an outside money. The hope, perhaps, is in part to create a regional standard off which other communities will derive their value. A successful independent currency may be a source of pride to a community, and may be presented as such in promotion of the idea by the issuer-to-be. In light of other potential values to the issuer, however, this reason must be carefully examined to determine if there is not some more tangible reason behind the currency's creation.

A floating currency can be quite profitable to its co-ordinators since it permits the issue of unbacked currency. Though this action does nothing to increase the real wealth of the community, it puts more of the power to command wealth in the hands of those with the newly-printed currency. As a simple example, if an economy has eighty dollars in circulation, twenty of which are in the hands of the currency issuer, and the issuer prints twenty dollars more for himself, he has monetary command of 40% of the resources in the community, whereas he previously had command over only 25%.23 As sellers realise that there is more money out there but the number of available goods has not changed, prices can be expected to rise 25% to equalise the two, in effect taxing everyone for the issuer's benefit. This need not be seen as a selfish action on their part; it may be initiated by the buyer who has money but finds all goods sold at the currently-listed prices, and offers more than the going price to obtain the goods he desires, acting in just as "selfish" a manner as the seller could ever be said to be.

In either event, this inflation tax, often referred to as hidden because it may take time for community members to recognise its existence, is one way governments can pay for their expenses. If this power is abused however, community members may seek to use a different medium of exchange to protect the value of their transactions by reducing the information costs associated with understanding the current value of the local currency. In times of severe price instability, they are at least likely to adopt a different, more stable currency as their unit of account, such as Israeli merchants did following the OPEC oil shocks and Yom Kippur War of 1973, pricing goods in American dollars and updating the posted exchange rate between dollars and shekels at least daily.24

Though floating currencies can lead to great messes, they can also show great benefits. Economic historian Jane Jacobs points out that floating currencies, though less stable and more effort, provide information regulating export and import industries which may be more valuable than the additional costs.

Today we take it for granted that the elimination of multitudinous currencies in favor of fewer national or imperial currencies represents economic progress and promotes the stability of economic life. But this conventional belief is at least worth questioning in view of the function that currencies serve as economic feedback controls.25

Jacobs goes on to argues that, given the necessary trade-offs between depth and quality of information and the ease with which that information is obtained and conveyed, it would be preferable to have currencies reflect more precisely the value of specific regions' production. As a currency fluctuates in value, the holders of that currency will see their purchasing power for imported goods rise and fall, making imports more affordable relative to local goods during boom times and less affordable relative to local goods during times of local recession. This decreased affordability during down times will shift consumer preferences at the margin to buying locally, boosting the local economy and correcting for the slump. Simultaneously, goods produced locally would become less expensive to other communities, encouraging them to purchase from the community suffering a downturn. Jacobs speaks in particular of cities, since she holds that economies revolve around cities as production units, and that nations are not good economic units for measurement but merely arbitrary lines. Her words are often cited by those in favour of local currencies, though ironically her proposal expects local currencies to facilitate extensive inter-regional trade to correct for local unemployment, while most local currency promoters prefer to speak of self-sufficiency and semi-closed local economies.

Jacobs is correct that a currency will fluctuate in value along with the perceived aggregate worth of the claim on goods and services that it represents.26 A local currency should be representative of the economic health of a local community, just as a national currency should be representative of a nation. A national currency is not representative of a local community's economic health; it is no more designed to do that than a local currency is to detail one individual's financial situation. Her declaration that value is better measured at the local community level belies numerous unstated assumptions about how value is and should be measured. One could just as easily propose currencies for individual neighbourhoods or apartment complexes, even individual homes by repeating Jacobs' arguments about designing proper feedback controls that trigger appropriate corrections. The challenge for Jacobs is to show, not only that the feedback a community would receive from its own currency is valuable to create a balance of trade, adjusting exports and imports by virtue of changes in the exchange rate, but that the value to the community from such a development would outweigh the costs of implementing it. Human mobility today is in general much higher than in the ancient Italian city-states she cites as examples of reasonably self-sufficient community economies. If every metropolitan region were to have its own floating money to provide these feedback controls, the relative price changes for goods from other regions would add calculations of uncertainty to the financial expectations of every individual. If persons have to add great fluctuations in the value of their currency to the potential hassles and unexpected expenses of travelling, this will hinder more than the tourism industry given our current demand for products assembled in factories across the nation, from big-ticket items like automobiles and furniture to smaller items like clothing and paper. Price instability could be a sought-after outcome only for those who seek to profit off the variations by speculation and those who seek to discourage the layman's confidence in the market.

With floating currencies, if some members think a money is overvalued and expect the money to lose value, they will work to get rid of it either by exchanging for a more stable currency or desired goods and services before it undergoes that correction. With free exchange, persons will choose to hold the money that they think offers the greatest benefits for the least effort and expense. While this gives alternative currency promoters an opportunity to try and best the national systems in place, keeping track of fluctuating values in multiple currencies may be seen as an unnecessary hindrance to merchants who have priced their goods in one currency except when the alternative currency represents a sufficiently large percentage of their business, such as one finds in towns along Canada's border, where the daily exchange rate is posted at every bank and places in between. Even then, as compensation for the effort involved, some businesses charge one rate for converting United States dollars into Canadian dollars and another rate for the reverse process. This slight discrepancy may also represent a shield against the possibility of being used as a source of profit by speculators and currency traders that find a slightly different exchange rate down the street and wish to exploit the differential; this internalised price differential prevents such activities from distracting from the merchant's regular business.

Interest: Internal Feature or Unwanted Accessory?

Something needs to be written about the charging of interest. Many local currency promoters and activists pride themselves on their currencies' lack of interest; they cite ancient historical examples as arguing against interest or even for demurrage.27 They then turn and cite statistics that prove nothing but serve only to shock the layman into repulsion with what previously seemed a most natural concept: that money has a cost to it. Unfortunately, it is in this area that they are most likely to be shot down simply because they have fallen prey to several fallacies concerning key elements of the situation and thus cannot properly identify the problem which needs a solution.

I pick on Thomas Greco not from any ill will but simply because his are the clearest examples of this misunderstanding I have encountered. In Engine of Destruction: Money, Usury, and the Growth Imperative, he notes that a dollar, earning 10% interest annually over the life of the United States, would be now over $190 million, shocking the common man who can easily find a dollar in his pocket but can only dream of $190 million. He further notes that the federal government's "debt has been growing exponentially,"28 suggesting that it has been skyrocketing. Something shrinking in half every year is mathematically growing exponentially; that exponent is 0.5. The national debt is not falling at that rate, but for lack of a number to pin it down, the declaration that debt "has been growing exponentially" is a meaningless yet loaded phrase which alleges to the layman that the situation is out of control, especially out of his control, and perhaps was carefully designed by some scheming individual who sought to destroy the world and end up rich in the process. One could respond, with no more political bias, that some of that government debt is owned by church-going grandmothers and the interest payments help fund their prescription drug payments. The fact that interest is compounded and thereby grows exponentially is often misrepresented by individuals outraged that some principle of theirs concerning fairness and equality has been violated because two other individuals have freely entered into a contract which involves compound interest. It seems quite a silly subject to be irate about, that freely contracting individuals might choose this form of compensation for the lender.

Greco, among others, alleges that "our economic system is based on illusion, debt and usury,"29 suggesting that interest and usury are one and the same. In fact the distinction between interest and usury is important for consideration. While Judaism and Christianity are opposed to usury, Jewish and Christian scholars have defined usury as unlawful interest, referencing certain prohibitions against specific types of interest charges.30 By redefining usury as any interest charge at all, modern writers do a grave disservice to lenders, ignoring the risks they take and costs they incur in lending their capital to others. Gesell for one wrote a carefully constructed story in which it appears that the charging of interest is villainous and exploitative; a careful reading and thinking reveals several reasons why an interest charge is not only reasonable, but necessary for lending to occur.31

There are four main factors which explain why interest is charged. Contract design and alternative opportunities for investment ensure that interest is a necessary concept while inflation and protection against default determine the level of interest; their relevance is best presented in reverse order.

If lenders were always fully assured of the complete return of their money, one component of interest would drop out. Called a risk premium, it is a calculation of the likeliness that the borrower will default on his loan and fail to repay the lender, either by purposely cheating the lender with no intention of repayment or fiscal negligence, spending what he cannot afford to repay. If a lender makes 105 loans of $1,000 each, and only 100 borrowers repay him, he has lost $5,000 and will not choose to remain in business long unless he has a strong altruistic streak or is permitted to charge interest. At five percent interest, he makes up for his losses and breaks even, charging $50 per person for the convenience of having additional money resources available to them temporarily.32 The lender would probably rather not have to charge that risk premium, preferring to lend solely to persons who are guaranteed to repay, a fact which led one man to quip that "Banks only lend you money when you don't need it." Not possessing perfect awareness of who will repay and who will not necessitates an interest charge. It is the ease and availability of unsecured credit from credit card companies which accounts for the high interest premiums they charge.

The second component of interest is inflation. Local currency activists' disgust with the inflation tax as a way of monetising debt must be separated from their view of charging interest. The first is a government action while the second is a response to compensate for that inflation. The two must be separately considered in their proper scopes and proper places; to throw a fit at your mother for feeding you cod liver oil after you caught cold from playing in the rain would be to put the blame in the wrong place. If inflation is at three percent a year and a lender charges zero percent interest, he will automatically lose three percent of the value of his money each year even if all his borrowers are perfectly trustworthy. If he charges three percent interest, he will appear to be making three percent on his money but the real interest he receives after considering actual inflation will be zero. Now if inflation turns out to be higher than expected, he may have a negative real rate of return even though he is charging a positive nominal rate of interest. This happened in the 1970s when inflation unexpectedly surged and lenders were locked into contracts with low nominal rates of interest. This is a risk that lenders must take unless they and the borrowers agree to adjustable-rate loans. Just as we would not wish the borrower to suffer by facing exorbitant rates of interest, so too can we never ethically insist that the lender suffer harm or loss when an alternative to compensate him justly for his loss exists. Thus protection against expected inflation must join protection against default in making up the size of interest charged.

Interest is warranted conceptually by two items, the first of which is the availability of unfunded alternatives. By declaring a willingness to pay a positive return on an investment, a borrower states that his project is worthy of the allocation of scarce resources. Some local currency activists bemoan the scarcity of federal currency, claiming that more could and should be printed and easily distributed, forgetting temporarily that such a unilateral action on the part of the government would only result in increased inflation, which would make the argument for charging interest all the stronger. Further, though some attempt to polarise the debate along wealth lines by declaring that individuals with small real wealth deserve a break from massive corporations with huge vaults bulging with money, they ignore temporarily that banks, though having lots of money, are accountable to every individual depositor, many of whom may possess as little wealth as the dispossessed examples who are supposed to be deserving of a break, and cannot in good faith give out their money with abandon. Unfortunately for them, there is only one way out of this combination which, though it is growing more common in the high tech industry, has yet to catch on in the consumer loan business.

The potential solution is to consider contracts such as Islamic banks use. Prohibited from charging interest (riba) by divine command, they use a loan scheme based on the Murabaha lending model. As one writer noted, "In practice Morabaha financing is similar to normal cash flow based and security collateralized financing."33 The lender provides the buyer with a commodity, disclosing the cost he incurs and adding a certain percentage or lump sum for profit on top, resembling the concept of simple interest. However, since the lender engages in trade, this is seen as a real risk, making the additional mark-up legitimate under Islamic law. Under Islamic law, capital is not regarded as costless but neither is it given a prior claim on productivity by means of interest. Profit-sharing (mudaraba) is another common method wherein the borrower agrees to return the borrowed principal and a pre-agreed proportional profit share, though it is not fully resolved within the Islamic community as to whether profit-sharing is the best resource-allocating mechanism. Further, Islamic banks can purchase properties and resell them later at a higher price through deferred-payment sales (bai'muajjal), one way of handling mortgages. Islamic law declares this not to be interest, since it is a business transaction and not a financial one, though this looks like an end-run around the question.34

Profit-sharing has also been observed in the high technology sector wherein individuals and companies make large investments in companies in return for an equity stake in the recipient of the money. The investment then pays off in proportion to the company's success, theoretically making up for the possibility of total failure and a zero return on investment with the chance of great success and returns of several hundred percent, amounts that would have been considered usurious if contractually demanded without regard to the company's success.35 This is possible for businesses because monetary profits can be calculated and easily divided into fungible piles. If this were to apply to consumer loans such as mortgages, it remains unclear how a bank would live in thirty percent of your house, or whether it has rights to use your pool on weekends. Following the resolution of these questions, the implementation of contracts with fixed mark-ups or profit-sharing elements could assuage both the abolitionist's demand for the death of interest and the businessman's need to make a living.

As a result of all this, we can safely say that interest is not an essential element of money proper; it is at least theoretically possible to conjecture a society without inflation, with complete trustworthiness and altruism, and equitable profit-sharing contracts. However, it is just as theoretically possible to conjecture a successful economy based purely on socialism; both work as long as no human possesses impulses toward self-love and self-preservation, the matched team of impulses which have defined humankind from its start. Therefore, absent a redesign of the human will or the adoption of profit-sharing contracts as standard operating procedure in the Western world, interest is the best solution to ensure allocation of money towards useful and productive ends.

Information Costs

Another factor affecting the success of a competing currency is that of information costs. The primary value of a defined money standard over barter is the increased guarantee of acceptance in assorted markets rather than being forced to rely on a double coincidence of wants to be able to exchange successfully. One complicated barter organised in Greenwich, New York, involved a wheat dealer who wanted shoes and shirts. He sold the grain to poultry growers to feed their ducks, taking some of the ducks and eggs in payment, then traded these with Greenwich restaurants for meals for the men and women making his shirts and shoes!36 How much simpler it would have been if that barter transaction from the 1930s could have been performed with money? One challenge of barter is that there is not one standard unit of account from which to calculate the value of everyone's goods or services offered for exchange.

The decrease in information costs that comes with the adoption of a fungible money to govern marketplace transactions may disappear with the issuance of a second currency if it is not universally accepted. Individuals using both currencies, or using the less-accepted currency if one is dominant, face additional information costs in determining the value of their money in transaction.

One way that currency issuers have sought to decrease this barrier is by producing directories of individuals who will accept the new currency. This may also provide free advertising to vendors, decreasing the disincentive of going to the effort of supporting a second system. As well, many alternative currency issuers find ways to provide signage for vendors to post in reasonably prominent locations declaring their acceptance to the potential buyer who is either debating whether to enter or which method of payment to use. Credit card companies are perhaps the most successful at having their logos posted on cash registers nationwide where they are accepted. Nonetheless, this additional currency increases information costs through questions of acceptance. A second and closely related increase in information costs is from determining the confidence or trustworthiness of the issue, whether fully or partially backed, or floating. This element has been previously discussed and is only repeated here for the purpose of acknowledging that competing currencies raise information costs in numerous directions.

Simultaneously, competing currencies may decrease information costs in some respects if they are able to serve as signalling devices for viewpoints or business practices that the consumer desires. While it may require additional effort to find merchants accepting these currencies, the knowledge that a specific merchant accepts the unusual currency you carry with you may provide information that you would have to glean elsewhere, thus saving you labours. By agreeing to be a member of that currency-accepting community, the merchant may be stating that he values that community's business or is willing to invest in the community, as some local currencies declare. Alternatively, it may give the consumer certain assurances about the quality of the goods and services, much like a Better Business Bureau sticker, Automobile Association of America sign, or a plaque proclaiming membership in the local chamber of commerce. It may also make clear the merchant's assent to a specified returns policy and resolution process for payment and billing disputes, as most credit card companies have insisted upon to provide their members the service of protection against fraud. Sometimes, as with the credit card example, such guarantee may only explicitly apply to transactions undertaken with that money; a declaration to value community investment usually is a statement of values not affected by the means of payment chosen.

Becoming a member of a specific community may greatly decrease transactions costs through measures of trust. In a gigantic anarchistic market, it is possible for an unscrupulous individual to purposely cheat another or to make no attempt at reparations in the event of unintentional failure to perform; the market is large enough for the individual to avoid encountering the person he cheated or that person's associates and colleagues without prohibitive effort. In a smaller community, it may be made clear that if anyone is thinking about reneging on a contract today that they'll "never work in this town again." In the musical Guys and Dolls, it is the community's familiarity with each other that permits Big Julie to tell Sky Masterson when he is out of cash, "I'll give you my marker." This IOU is no blank cheque; failure to pay will put him out of the industry, because the community is small enough and each individual values the trust of the other members that they will inform on the cheater, destroying his reputation for all future transactions. Similarly, there exists in New York City a Jewish gem merchant community whose members may contract with each other for the delivery of millions of dollars of diamonds, sealing the verbal agreement with a handshake. Their reputation and good name provides the guaranty for the value of the contract. Trust, therefore, is a viable element of value, and if a community can establish trust amongst its members, exchange may more freely occur. Further, if contracts with a specific form of money carry with them incentives for self-enforcement, they can create trust between otherwise untrusting and untrustworthy persons. The consequent reduction in transactions costs may make that money a preferred medium of exchange.

Society's Money

Lastly, money acquires social conventions governing or guiding its use at times. A designer of a currency may desire to make it instil greater civic responsibility in its users. After all, if a problem in a community is widely known, social pressures may be able to be applied to encourage participation in a proposed solution. Often this is done by working to portray those who do not participate as cold, heartless, selfish, or in possession of other such vices. Community spirit is rewarded and encouraged by sloganeering and similar propaganda events whose ultimate intention is to eliminate the free rider problem so prevalent in community-wide relief efforts. If every member of a town buys war bonds save one who invests elsewhere for a much higher return, he will still see the benefits of community investment while avoiding the costs of his participation.

By organising an active campaign to instil pride in participants and shame in those not participating, a community can hope to increase the costs and decrease the benefits of being a free rider, thus providing economic incentive for the free rider to cease his abstention from the program in question. Either monetary punishment through economic boycotts or civic fines, or non-monetary punishment through such forces as shame, ridicule, or personal accusation can be used to compel others to join the cause. One Depression-era issue from Berkeley, Calif., had the following inscription: "Keep this money working to keep your neighbor working,"37 implying that those who refused to use it were selfish and unconcerned with the welfare of their fellow man. This system only works as long as a significant proportion of the visible and active members of the community support it, however; a small band of activists without a groundswell of community backing them will have a difficult time enforcing social investment for lack of a credible threat to punish non-participants. How hard this will be to encourage in a new monetary system must be judged on an individual basis; if community cohesiveness is quite low, the possible advantage to the community of a currency as a cure for social ills may need to be greatly discounted or even written off as non-existent.

There are many elements that need to be considered when designing a new money. Though all one needs in theory is a suitable unit of account that can be easily exchanged, the underlying factors that buttress that money are varied and possibly difficult to instil, especially when combined with the numbers of possible interests or values which money issuers have attempted to alloy with money. Speaking of scrip usage from 1714 to 1907, Grinstead and Wissler write, "In no case did the system of emergency currency last long beyond the passing of the immediate crisis which called it forth, although in a few cases the founders originally had an idea of making it permanent and took steps to that end."38 The effort to maintain an alternative currency is great, which makes the history of alternative currencies all the more interesting.

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1 "Pure money" is a term of my own creation and should not be equated with "fiat money,"though pure money is one type of fiat money, as shall be made more clear later.

2 Traveller's checks are also considered in M1, but their size is inconsequential compared to these other two items.

3 Friedrich A. Hayek, Denationalisation of Money: An Analysis of the Theory and Practice of Concurrent Currencies (London: Institute of Economic Affairs, 1976), 47.

4 Federal Reserve Bank of St. Louis, Monetary Trends, April 2001, 19.

5 The double-counting of transactions recorded both in the private group's system and already-reported measures would be one concern.

6 That some desire to be engaged in transactions in the future rather than spending it all in the present does not defeat this idea; as stated later, the elements which serve as money are alloyed so as to have a second purpose of storing value until such time as active transaction is desired.

7 Bernard Lietaer, The Future of Money (London: Random House, 2001), 41.

8 Hayek is even more critical linguistically, saying that "the definition of money as 'means of payment' is, however, purely circular, since this concept presupposes debts incurred in terms of money." Cf. Hayek, 46.

9 Even then, it is not money until someone else believes the government and accepts it in some form of exchange, coercive or not.

10 Lawrence Hall Grinstead and Willis Wissler, Barter Scrip and Production Units as Self-Help in Times of Depression (Columbus, Ohio: Bureau of Business Research, 1933), 27.

11 Co-ops tend to have reciprocity as a core value. If being paid in credits exchangeable for hours of time babysitting is the community's designed form of compensation, the admission of an individual who could not use the community's services would be appreciated perhaps for their altruistic tendencies, but members would have to find a way to reward that person using extramarket forces, and thus the market might break down. In addition, membership in a babysitting co-op may be intended as a market signal to locate other individuals of similar lifestyles for friendly companionship, which loses signal strength if restrictions on entry are not imposed.

12 Some of the exact wording from their policies is included in Appendix One.

13 To define and support one metric over others would be a paper in itself, requiring both theoretical models and practical examples.

14 Thomas H. Greco, Jr., New Money for Healthy Communities (Tucson, Ariz.: Thomas H. Greco, Jr.: 1994), 8.

15 Local Employment and Trading Systems (LETS) will be discussed in Chapter Three.

16 Hayek, 65.

17 E. C. Riegel, Fight from Inflation: The Monetary Alternative (Waterford, Va.: The Heather Foundation, 1978), 15.

18 Even if individuals or communities as a whole determine the value of individual cattle in exchange, there is still room for a Chief Inspector of Hides and Certifier of Weights of Cows, from whom standardised tables could be created to help individuals value their mooing money.

19 An economic function to this effect, the Return on Spending variable, will be discussed in Chapter Five.

20 Riegel, 16.

21 It is possible that one could use these items to provide for needs apart from exchange, such as constructing a shingled roof out of pennies, or to burn dollar bills for warmth but this would be to cease using the paper and metal as currency.

22 Its stable guaranteed value relation to man's ultimate wants and needs as found in goods and services is twice removed for it requires two exchanges: one for the other currency and one for real goods. That the conversion rate be fixed is not necessarily essential; that some conversion process exist is. Once it is not accepted in exchange for something else, it ceases to be money. Convertability with commodities like gold is either second-order or third-order, depending on whether one can exchange the commodity for the goods and services desired or must first sell that commodity for a different exchange medium.

23 He went from $20/$80 to $40/$100. That he will soon spend the money into circulation for goods or services is irrelevant.

24 In the mid 1980's, Israel's government introduced a new currency pegged to the dollar and a number of monetary regulations to arrest the runaway inflation, which peaked at over 400% per annum.

25 Jane Jacobs, Cities and the Wealth of Nations (New York: Random House, 1984), p. 158.

26 Even a currency with declared and trusted fixed convertibility ratios will fluctuate in value, though it will fluctuate in parallel with the item or items to which its value is pegged. If a new money called a CORD is redeemable for 128 cubic feet of wood, its value (by which I mean its usefulness in exchange) will rise and fall in tandem with the scarcity of the supply of wood relative to its demand.

27 Demurrage and its origins is discussed in Chapter Three.

28 Thomas H. Greco, Jr., Engine of Destruction: Money, Usury, and the Growth Imperative (Tucson, Ariz.: Thomas H. Greco, Jr.: 1997), 3.

29 Ibid., 2.

30 Frederick Nymeyer wrote in the February 1957 issue of Progressive Calvinism on the Old Testament laws forbidding usury, saying, "The general rule was that interest was all right, but a special restriction was applied to Hebrews." Available [Online]: <> [11 April 2001].

31 That story can be found in Appendix Two.

32 Much more complicated scenarios could be created concerning partial repayment and compound interest or legal actions and the cost of recovering the money as a creditor; the concept does not change. No businessman, lenders included, goes into business with the express purpose of losing money.

33 Morabaha Description (n.d.). Available [Online]: < /murabaha.htm> [26 March 2001]. The English spelling of this Arabic word is not entirely consistent.

34 Mohamed Ariff, Islamic Banking (n.d.) Available [Online]: < /economics/islamic_banking.html> [26 March 2001].

35 I exclude stock market activity from this because, apart from initial public offerings, most stock transactions do not provide cash flow to the company from whom the stock is granted.

36 Wayne Weishaar and Wayne W. Parrish, Men Without Money: The Challenge of Barter and Scrip (New York: Putnam, 1933), 43-44.

37 Ralph A. Mitchell and Neil Shafer, Standard Catalog of Depression Scrip of the United States (Iola, Wisc.: Krause, 1984), 36.

38 Grinstead and Wissler, 27.