Local Exchange Trading Systems: Experiments into the Origin and Nature of Money

By George Ryan

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Introduction - Need for Experiment:

Ecological economists appear to agree the constraints of the natural world should be included in economic analysis.  This world is subject to the first law of thermodynamics, a conservation law that allows the material inputs used, stored in, and discarded in economic activity to be accounted for.  Mankind uses another accounting abstraction, to place a human value on the energy and materials passing through economic systems; this is money.  .

In answer to the question, where does money come from, we are told that money in the modern world is created by banks making loans for people and businesses.  Overshadowing this source is the power some assert government has to create any amount of money it likes.  These explanations of the source of money appear incompatible with a conservation law for money. Yet if money has meaning in everyday life, it exists to buy goods and services originating in the natural world, and whose supply we best understand in terms of physical conservation laws.

To a physicist the test of all knowledge is experiment.  Just as the conservation of energy law was born out of experiments showing the equivalence of mechanical energy with heat, there is a need for more experiments to test the origins and nature of money as a tool for moving goods and services.

People have succeeded in exchanging goods and services in the absence of banks or functioning central governments.  Various kinds of local currency systems can be found in many parts of the world today. One version of these experiments, Local Exchange Trading Systems (LETS), started on Vancouver Island in 1983.  The simplicity of the methods used in these trading groups, and their disconnection from mainstream money systems make them ideal economic experiments for shedding light on the assumptions and theories about the nature of money and the institutions required to supply it.

Results:

The results in this article are based on an analysis of nearly 14 years trading in one particular Local Exchange Trading System (MaLETS) operating in the Mount Alexander Shire, in central Victoria, Australia.  Between February 2006 and October 2019,  this group now comprising 438 account-holders recorded 20,659 transactions valued at 200,177 pods (the local currency unit).  Home grown and home-made produce have been the main items traded, including fruit and vegetables, jams, knitted goods, and plants.  Around ten percent of the transactions have been for services such as gardening, housework, general repairs, massage and transport.

The fact that so many goods and services have been exchanged, and exchanged in a community extending well beyond any one member’s circle of friends, testifies that money is being used. Secondly it is clear the money used has come from inside the trading community.  In fact the results show that money comes into existence as a counter-flow to the movement of goods, through the simple act of recording every transaction as a purchase against one member and as a sale against another.  There is no evidence of members needing to borrow from anyone;  rather than based on any relationship of  lender and a borrower, the money in a LETS system is held in, or owed to the entire trading community.

It also becomes evident that the money created not only exists as positive balances but as negative balances; and both types of account balances operate to move goods and services.  The sum total of these balances is at all times zero. Money is a conserved quantity regulated by the ongoing transactions that create and extinguish it.  It can be shown there are four distinct money effects that can arise out of any transaction.  Money can be created; money can be cancelled or destroyed; money can be exchanged in positive balances; and money can be exchanged in negative balances.

The flow of transactions in MaLETS can be conveniently grouped into quarters, and the quarterly transaction totals examined according to the four different types of money referred to above.  The data shows that most of the transactions in a quarter have been carried on by using existing money;  exchanges of existing positive or negative balances making up about a half of all transactions.  After the first few years of the system, money creating transactions have been roughly equal to money cancelling ones.  The equality between the total of all positive balances and all negative balances as seen in such quarterly results defines a differential version of the money conservation law like the first law of thermodynamics, viz Money Created LESS Money removed, in any period = Change in Money stored in the System.

Money balances which make up the system’s store of money represent goods and services still to be bought. So both types of balances carry reciprocal obligations; for positive account holders, it is the obligation to buy; for negative account holders it is the obligation to supply. Thirteen years’ experience shows that it is essential for the success of a LETS system that the amounts in positive and negative balances be turned over

Comparison with Money in the Mainstreaming Economy

Using terminology from the banking system it is evident that a LETS group runs  a closed payments system for its members in the system’s unit of currency.

There are orders of magnitude differences between the numbers of transactions processed through national payment systems and the most active LETS groups. Moreover national systems need to combine several different payment modes, and the distribution and collection of cash.  Still, a personal bank statement and LETS trading statement are identical in construction, relying on the same payment system accounting where what is recorded on one person’s statement must have a mirror image on someone else’s statement.

When aggregate results from national payment systems are compared with those obtained from LETS systems, several conclusions can be drawn.

  • Total bank loans and deposits are the negative and positive balances seen in LETS systems, and should be shown as equal.
  • No justification exists for banks carrying a duplicate of every citizen’s account balance on their balance sheets.
  • The Savings and Investment Identity of national accounting, emerges as the equality between positive and negative balances in LETS systems, but rather than justifying savings it spells out a need for positive balances to be spent.
  • Charging interest on negative money accounts must perpetually expand positive and negative balances.
  • Perpetually growing balances are symptoms of dysfunction; a system inflicted with cancer, for which there is only one cure: positive money must be spent or confiscated to extinguish negative balances.

George Ryan holds a PhD in physics from LaTrobe University (1997). Earlier he graduated from Melbourne University with degrees in Law (1976), Commerce (1976) and Science (1987). While initially practising as a lawyer George spent the decade between 1987 and 1997 in the Physics Dept, LaTrobe University. He and his family moved to Castlemaine in 1996, then to rural property in 2006 and now run a sheep farm on 1200 acres. George has been a member of Mount Alexander LETS since 2006 and has been the group’s transaction manager for eight years.

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