UK Local Exchange Trading and Complementary Currencies
Development Agency

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Theory of Complementary/Community Currencies

How a LETS works

Units System Fred Sue Joe
+25        
+20        
+15   xxx    
+10   xxx    
+05   xxx   xxx
0  
-05 xxx   xxx  
-10 xxx   xxx  
-15        
-20        
-25        
Units System Fred Sue Joe

A LETS operates by Mutual Credit. A group of people come together and agree a name for the currency (or they may decide to use Hours). They create a directory of Offers and Wants to let each other know what they are willing to trade and can contact each other at any time. Organisers may also hold social events to encourage members to meet up.
The currency is created as credits move from one account to another so new members may spend before they earn.
The sum of all accounts is always zero at any one time. No interest is charged or paid for accounts which are "in commitment" or "in credit".
The diagram illustrates the end-point of a series of transactions: Fred did a task for Sue who paid him 20 units. Joe sold vegetables to Fred for 5 units. Then Sue did 10 units worth of work for the organisation, which was paid out of the system account. (Apologies if this is difficult to follow - a moving diagram would help).
The System Account - and any special accounts which the organisers may create to facilitate the operation of the scheme - are funded by means of set fees charged to all members and/or commissions or donations. The sterling costs of running the scheme may be supported by joining/ renewal fees or fund-raising. Each scheme requires intelligent and administration and outreach if it is to flourish in its particular local context.

Organisational Model: LETS in the UK are usually run as unincorporated associations. The original LETSystem was modelled on commercial barter, and fees were commission-based, but these systems have not endured in the UK. Some schemes have picked up the idea of "brokering" as one of the administrative tasks in a well-managed scheme but this would tend to have a "pastoral" rather than commercial motivation in most LETS groups.

Counting Members' Time as Equal in Value: Many LETS members prefer to work for an equal rate of pay and many schemes are either constituted on this basis or suggest a standard rate to be used "when members wish to trade on an equal basis". The idea of a standard rate is crucial to the notion of a central hub for intertrading between schemes. On the basis of the standard rate, currency to be moved to another scheme is translated into hours at the standard rate for that scheme, and when received by another scheme, it is translated back into currency at the standard rate for that scheme.

Supervision of Traders: The proposition of the original LETSystem was that transparency and community pressure would prevent people from taking advantage of the system. The earlier paper-based models did not give feedback often enough to the members, but web-based systems which instantly show members' balance of account and also allow for qualitative feedback provide more sensitive management tools, and many groups are now taking advantage of LETSlink's programme of hosting online systems for member groups.

Keeping Trade going: The problem of high earners failing to spend is also a challenge, and the idea of "demurrage" whereby currency not used actually shrinks, by means of a sort of "reverse interest" has often been mooted by theoreticians. To work properly the fees taken would have be proportional to the amount saved, and this could be built in as a configurable option in web-based systems. Meanwhile, continuing to charge administrative fees to fallow accounts achieves much the same result, although in less equitable way.

Working in the Community: Many well-developed schemes have a community fund in order to take care of needy members of the community. Members can donate into this fund, and/or it can be supported by the system account. This principle is now recommended to support community-based volunteering and activist projects. This enables organisers to "drive" the scheme in a positive way, to counteract the tendency for formal trading to lapse in mature schemes, when members become well-known to each other and tend to adopt "altruistic" behaviour.

For further discussion on these themes see Archived Papers.

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