2. An introduction to Local Exchange Trading Systems


A Local Exchange Trading System (LETS) association is simply a group of people who exchange goods and services amongst themselves. Examples of the very many goods and services which are traded include organic vegetables, second hand cars, bricklaying, child minding and computer consultancy. In order to facilitate their many and various trades, the members of a LETS association create a currency which circulates amongst themselves and exists solely within the accounts of their association.

Money is often defined as being the medium of exchange. It is also a measure of value, as agreed between buyer and seller; in a similar manner hours are used as a measure of time. The act of measuring value for the purpose of quoting prices and then agreeing sales of goods and services also results in measurements, or information about the creditworthiness, credit and debt held by the parties involved in the exchange. So money is not just the medium of exchange; it is also information about credit. For example, when I go into a shop with a five pound note, the writing on it indicates that the Governor of the issuing bank has given me an IOU for the stated amount. 

This credit used to be based on known weights of valuable metal. The un-creditworthiness of governments and the economic inefficiency of digging gold from deep in the earth so that it could be reinterred inside a guarded bank vault (and other technical reasons which I will not explain here) ended the custom of retaining some returnable commodity for the purpose of redeeming the circulating IOUs. Technically the promise to pay is cancelled by exchanging a banknote at the issuing bank for any coin or token claiming itself to be the sum involved, rather than a promise to pay it, and deemed by the government of the day to be legal tender.

In a society which enjoys freedom of expression and association, no laws can prevent a group of people from choosing to form an association and recording and distributing information about credit relating to the sales of goods and services between individuals within this group. Every credit worth describing as such must be based on an equal and opposite debt or debit for which there can be a reasonable expectation of repayment. However there is nowadays little reason why all or part of the sum total of these debits should represent borrowing by the state; e.g. during bank strikes in the past, people have continued trading by circulating IOUs issued by local businesses and individuals whose standing in the local community is sufficient that their credit is accepted by others.

So within a LETS association an agreed currency unit circulates; the credits result from sales while the debits result from purchases. Repayment of the debits involves cancellation of the equivalent credit, and the money supply fluctuates according to need. There is no requirement for interest in this scheme of things, but there may need to be occasional provisions for debits which are both inadequately secured and cannot be repaid and also to pay for the costs of administrating the system. One way or another, these costs are shared by the members of the association. The advantage of using an agreed money unit within a larger group is that the credits can be accepted by anyone in the group and repayment of debits does not require a direct exchange; the debit can also be redeemed by selling something to anyone in the group.

Before the availability of cheap and powerful computers, the regular compilation, update and circulation of information about credit within an association of more than 30 to 40 trading members without using physical money tokens such as notes and coins would have required an unwieldy bureaucracy. Smaller LETS associations can do this job using a card index, but the fact that the first LETS system started together with the availability of the cheap personal computer in 1983 is no coincidence. Historically therefore, the credit used in old money systems was most conveniently circulated using physical tokens except for large amounts where the expense of clearing cheques was accepted in return for better security. 

LETS associations use cheque or automated money transfers and avoid using physical money tokens for the following reasons:

  1. If all transactions go through sufficiently open accounts all members can know the creditworthiness of everyone else.
  2. It avoids the high costs of manufacturing notes and coins which are difficult to counterfeit. 
  3. In some countries there are legal obstacles to anyone other than the government issuing banknotes. 
  4. The fact that a LETS currency only exists within the accounts of an association makes it impossible to steal. 
LETS type currencies do not need to circulate solely within local communities but they work best with individuals and businesses where the people involved recognise mutual economic interests before they set up a LETS association.

For some the key reason why many LETS associations are getting established is because this enables these communities to take control over their own economic development from distant central bankers, governments and global market forces. Why should a community suffer unemployment if it has unused local resources capable of meeting local needs ? For others the most important reason for starting a LETS association is that a local currency is more likely to encourage sustainable development. It makes it easier to reuse, repair and recycle things in preference to wasting them. LETS currencies are not called "green" for nothing.

There are those who compare the ethics of the western banks in their dealings with the third world unfavourably with those of a back-street loan shark. LETS, however, as an interest-free money system is an opportunity for fairer economic relations between rich and poor. For most people however, the key benefit is being able to draw on the skills and resources of others in exchange for their own when they know they can't achieve this using a conventional currency which drains too quickly away from regions of high unemployment.

Whatever advantages LETS has to offer, very many people are getting involved. Because the rate of growth is so fast it is difficult to present accurate figures; most information is quickly out of date. In Australia, the largest LETS association has over 1000 members, while in England, the number of LETS associations known to LETSLINK UK grew from 40 to 190 in the first 11 months of 1993. No doubt the average size of the more established groups increased as well; the Stroud group being the largest with over 300 members by summer 93.


Version #001 20-12-94

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