6. Interest and inflation 


For those involved in a new LETS scheme there is little point in building up credit unless you spend it reasonably soon because you don't earn any interest on it. Most of us have known the continuous devaluation of the purchasing power of money for so long that the idea that inflation is not a necessary condition of money seems strange. In countries with very high inflation rates people don't save money; if there is temporarily more money available than needed they look for things to spend it on which can be resold later. In countries suffering lower inflation rates, say between 1 and 20 percent, few would save much money for long unless it earned interest at more than the prevailing rate of inflation. Neither inflation nor interest are necessary conditions. LETS money does not earn interest by its very nature; I will now explain why it need not suffer from inflation either.

The conventional explanation of inflation is that it results from too much money chasing too few goods and services. To some extent this depends on the psychology of workers and merchants; if everyone were willing to take real cuts in profits and wages then a temporary increase in the money supply would not necessarily result in inflation; but everyone knows that increases in the supply of old kinds of money are permanent and workers and traders will not voluntarily respond to exhortations to accept lower returns. With modern governments being elected on promises to tax low and spend high, the resulting deficit cannot be prevented from entering the money supply. Issuing longer term bonds in preference to banknotes has bought time in the past, but this has gone on for so long that the problem is now greater and its solution more drastic. True, high interest rates will prevent some of the public deficit from being re-circulated for a while, but we are now suffering from the long term effects of our debilitating addiction to public deficit financing. The resulting economic stagnation and consequent unpopularity will not be endured for very long by any government, so more money is printed and the usury is temporarily reduced in the hope of buying the next election; consequently we are stuck in a vicious spiral of high interest and unemployment followed by inflation.

LETS type currencies can be used to address this problem by spreading the debits, on which the circulating currency is based, between many business owners and other individuals who can be expected to repay them. Those of us who are involved in LETS systems which are receiving encouraging help from our local authorities must be careful that we do not let them spend LETS which we have neither given nor paid them, otherwise inflation will creep in by the back door. So long as charities, public agencies and banks are prevented from taking on the debit on which the currency is based and we do not allow too many individual members to vanish into the wide blue yonder with large unsecured debits, then the LETS currency supply can be controlled. 

The role of the LETS system, as a voluntary agency which exists to maintain the accounts of its members and thereby controls the circulation of a currency, is similar to a bank in some respects and a public agency in others. The LETS system should not go into debit to its members if it wants to maintain the credibility of its currency; this requires that the total credits are balanced by debits which are unlikely not to be repaid. 

If one of the members defaults, the bad debit may need to be written off by payment from a service or general insurance account which may temporarily go into debit for this purpose, but the cost of bad debits and administration will need to be paid for by some or all of the members one way or another. For a charity, spending more than it is given involves going beyond the authority vested in it by its donors. This may seem a little harsh, but involvement in a charity does not give its guarantors or staff any right to issue more money than they could issue as private individuals; if they want the charity to spend more than its current donations temporarily, there would be nothing to stop them going into debit on their own accounts to secure this spending. 

The same principle needs to be established in relation to state spending in excess of the taxes which we are prepared to vote for. (It goes without saying that the state can also legitimately spend revenues obtained from services which we are willing to pay for directly.) If the distribution of this authorised public revenue can be carried out more efficiently and more in accordance with the wishes of the taxpayers ( I will propose how this may be achieved in a later chapter ), this sensible restriction need not result in any essential public service being underfunded. That is not to say that any public service will ever be perfect but there is little purpose blaming the government for the nature of reality.

Some LETS currency units are based initially on the value of the relevant old currency; others are based on the minimum, average or common wage paid for an hours work. Basing the currency unit on an old currency has the advantage of making it easier for people to set realistic prices initially and helps businesses offering price options involving a percentage in LETS. The disadvantage is that if buyers and sellers expect this parity to be maintained, it is unlikely that the value of a LETS currency will be stable when an old currency depreciates. If those in credit see the value of what they have done in the past depreciate, this will limit the total of goods and services they will sell to others for the purpose of savings, which in turn will limit the contribution the LETS currency can make to the local economy. Beating inflation requires a monetary standard, for much the same reasons that reliable weights, measures and quality standards are needed to maintain an orderly market. If prices can be maintained with only minor increases or decreases over a period of many years then these small changes become very important information to those involved in buying and selling about relative scarcities and abundances within the economy. If inflation results in such great changes that this information is lost an economy operates less efficiently and consumers and producers are more exposed to exploitation because greed becomes less obvious. Prices are simply measurements of economic value, but they convey less useful information if these measurements are made against a constantly shifting scale.

Time spent doing something for someone else costs the same to whoever provides it. It can be measured easily and precisely, and the economic value of a typical hours work is such that the division of a currency unit based on it into a hundred parts allows the smallest and largest likely transactions not to be impeded by the limited range of numbers which can easily be understood or represented on existing machinery for handling prices such as tills etc. Basing the currency unit on the minimum hourly wage has the following advantages:

  1. Traditional socialists are likely to be concerned about the existence and purchasing power of a minimum wage. Basing the currency on it will give them an incentive to defend the purchasing power of the currency unit.
  2. Traditional conservatives will be concerned about sound money. In order to achieve this they will have to defend minimum wages.
  3. This standard is more likely to slowly improve the purchasing power of the currency unit than depreciate it. Over many years, productivity and expectations of the purchasing power of minimum wages will rise.
  4. Using a currency unit based on a commodity such as gold can cause a slump in trade whenever there is an increase in the value of this commodity relative to wages. Basing the currency standard on wages, however defined, avoids this problem, because the money supply will be limited only by what people creditably promise to do for each other rather than by the availability of a single commodity or basket of commodities or other products.
A standard based on the minimum hourly wage needs some further clarification. Not every job need be paid according to the standard. For example, when you are charged an hourly rate for work on a car at a garage, you are paying for more than one person's effort, because the management and receptionist need to be paid as well as the mechanic. You are also paying to cover the capital and depreciation costs on the building and tools and other overheads such as electricity etc. Some work also initially involves training which justifies less than the hourly rate of a fully skilled worker. A babysitter needs to be present for a certain time, but if the children are well behaved or asleep the sitter may be happy to work for less than the nominal minimum hourly rate because he or she is not fully engaged in this work and the parent may not be able to afford the hourly rate anyway. Some jobs are unpleasant or dangerous or require such scarce skills that a premium will be charged and paid for them anyway. However, by defining the monetary standard as the minimum that should be paid to an adult fully skilled at doing the job and fully engaged in doing it, this will place some moral obligation on the part of the purchaser to offer this minimum and on the provider not to exceed it. 

At the expense of making initial LETS or mixed currency transactions slightly more difficult to calculate, it is worth adopting a minimum hourly wage rate as the basis of the currency unit. This will help guarantee the stability of this currency because a new political consensus can be built around its base value. If the decisions concerning how public finance is to be divided between the various services which compete for it can be delegated to the taxpayer, politicians will no longer have any incentive for financing state expenditure through public borrowing or by increasing the money supply in order to devalue the standard by which the public debt is measured.


Version #001 20-12-94

Written by Richard Kay  rich@driveout.demon.co.uk