“Our funding kit is fractal; it works better when you break it”
Is the title of a blog post written by Kevin Jones on Oct 3, 2014 about a new local funding theory and practice being developed.
This is my attempt to break it.
Neighborhood Economics and The Tool Kit
Kevin and colleagues have designed a tool kit that is intended to reach small, rural, underfunded communities that don’t traditionally have (or want) access to bigger forms of capital (VC, equity, debt, etc). The discussion is currently taking place on the blog for the upcoming Neighborhood Economics Conference. Kevin describes this movement as:
Neighborhood Economics is about when we all come and realize our impact and start using a new story to run our economy; starting with community and dropping the metaphor of empire, with the market as its ravening wolf bringing the best stuff back to the few. Instead, we bring our whole, messy selves to the enterprise of living together and thriving on this planet together.
He created a Slideshare on how such a tool kit would launch in Asheville, NC. It shows 4 interwoven programs that are meant to modularly fit into existing or newly created social groups. The modules are a mix of new and proven ideas but the common denominator is that they are all imagined in a 100% Federal Reserve Banking System.
How a model depending on the Federal Reserve Banking System is not sustainable
One of the factors challenging our economy, and creating many of the problems the Tool Kit is meant to address, is the design of the Federal Reserve Monetary System itself. An interest-bearing, privately held currency system that was designed to funnel wealth upwards to the already wealthy leaves little in the hands of people at the community level to get by in many cases, let alone, invest in each other. The inequality that we see today will only become worse. Ideas that seek to correct this balance, by using the mechanism that created them, are ultimately unsustainable.
(I’ve packed a mountain information in about 100 words there. The purpose of this blog post is not to explain the inequality built into the existing monetary system but to propose an alternative for the Tool Kit under the assumption that the current monetary system is inherently unstable and not an adequate base for community economic activity. I HIGHLY suggest you watch The Crash Course by Chris Martenson for further explanation of my position if you don’t grok it already).
My fractalization of this idea is to take the existing Tool Kit modules and run them in a parallel currency type: mutual credit.
What is Mutual Credit?
The simplest expression of mutual credit is an IOU network. A group of people can trade amongst each other without exchanging a dime, but just by keeping track of what is owed. It works as long as the participants return to zero (on average) before leaving the system. The hallmark of a mutual credit system is that the balances of all the users should add up to zero – which is to say that when all the debts are paid off, nobody owes anybody. Matthew Slater in Shareable
According to Thomas Greco (author & thought leader in alternative currencies), in a mutual credit system, the members empower themselves to do the same thing that banks have done for years. Members create their own money in the form of credit but save the cost of interest, while distributing the money themselves according to their own needs. In this type of system, having a positive balance proves that value has been delivered to the community while a negative balance indicates that a member has received that much more from the community than she or he has delivered. A negative balance thus represents a person’s commitment to deliver that much value to the community sometime in the near future.
While mutual credit can be illustrated simply as a circle (below), when many circles intertwine and overlap, a web of transactions can provide a robust local economy.
Types of Mutual Credit
Globally, many people connect with the idea of mutual credit as LETS systems, which stands for Local Exchange Trading Systems. These are community trading systems and come in many different varieties. They tend to be filled with individuals trading handmade goods and services rather than businesses.
In the US, due to IRS rulings and regulations, mutual credit splits into two unique forms rather than the general purpose LETS systems seen around the world.
1-Barter Exchanges. These are mutual credit systems designed specifically for businesses to participate in and all sales in Trade Dollars are taxable. As part of the Tax Equity and Fiscal Responsibility Act of 1982 declared barter exchanges function as “third-party record keepers” of financial transactions. The medium of exchange created by barter exchanges, Trade Dollars, are not technically an alternative currency but an accounting hack which creates liquidity out of maintaining community record-keeping of accounts payable and accounts receivable.
2- Time Banks. These are a volunteer or charitable form of mutual credit. The IRS has passed rulings on the tax exempt nature of Time Banks. This means that people on fixed incomes, such as seniors, can participate without jeopardizing their benefits.
Because of the stark tax reporting differentiation between these two types of mutual credit, they are similar in form and function but do not exist in the same transaction. There is no exchange between them. It is possible to maintain memberships in both types of networks (I do!) but the services offered must be appropriate to the nature of each network, as defined by the IRS. For example, I offer open space facilitation as a taxable activity in a business network and I coach people on how to run their own open space meetings in my local Time Bank.
(One of the best resources on this is Money Soup: A Legal Guide to Bartering, Giving, and Getting Stuff Without Dollars, by Janelle Orsi of the Sustainable Economies Law Center. For a deep dive> pdf link)
Why Mutual Credit?
In the US, because both forms of mutual credit have the a history of IRS rulings outlining how activities are to be accounted for, participating in them is known, scalable, and easy (enough) to explain. Trade Dollars, the business mutual credit, can be widely used by local businesses.
While new alternative currency ideas may be sexy, I have seen in my decade of monetary reform work that the willingness of a Main Street business to accept a new currency often comes down to the owner’s ability to communicate their participation in a currency to their bookkeeper or CPA.
So a business may accept $5 worth of x local currency here and there but big transactions don’t happen if they can’t be accounted for correctly in the books. Having a taxable medium of exchange is ironically the thing that makes possible large enough transactions to lead to meaningful local economic development.
The 1099B issued by barter exchanges is boring paperwork but everyone in the US knows how to account for it in their books and taxes. There is no accounting barrier to using a business mutual credit medium of exchange.
It is a de facto alternative currency, that can be used immediately by anyone, without worry of unforeseen tax or legal consequences.
What does the Local Funding Tool Kit look like with a Mutual Credit Module?
Mutual Credit Equivalent:
Zero interest “loans” are the main way that business exchanges get Trade Dollars into circulation. Small Business Example: A new soup company that delivers to homes and offices, uses all local, organic input. Soup Company joins local business exchange and is given the ability to spend up to $20,000 worth of Trade Dollars to get their business started. Their account balance is currently 0 and only goes negative when they spend. What do they spend on?
- website (bought locally)
- graphic design (bought locally)
- print material (bought locally)
- signage (bought locally)
- social media consulting (bought locally)
- produce (bought locally)
- meat/veggie Stocks (bought locally)
Did you notice there isn’t a lot being spent on marketing and discounting? Because when the business exchange determined the ‘credit line’ that the soup business was allowed to have, they were looking at current demand among the buyers in the systems. The exchange brings the customers to pay off the expenditures of the soup company.
In addition to being the same zero interest loan, the business exchange goes further and becomes a sales agent for the business they are helping.
I should note that business exchanges charge small fees (usually percentage based on completed transactions, often a mix of cash and Trade Dollars) but this could be viewed as comparable to any origination fee a zero interest loan might produce or even a win since the exchange functions as a purchasing and sales agent that would otherwise cost money even with a zero interest loan.
The amount of ‘credit line’ allowed to a new business could be vetted by other users of the exchange, or in other words, the peers of the new business owners.
Mutual Credit Equivalent:
Business Exchanges charge service fees in both cash and Trade Dollars to cover their overhead and facilitation costs. An exchange owned cooperatively by its users could agree to allocate a portion of each cash fee into a fund that they collectively manage.
Instead of charging interest in cash, the fund could decide to charge interest in goods and services which are put into the Marketplace (or anything else their creativity allows).
This would also shift from an us(recipients)/them(givers) paradigm to a WE. The fund could also incorporate the cash of donors but the decision making power could be shared since the receivers are also the donors.
The pool could fund startups in the local economic ecosystem that have global supply chains which are not possible to fund entirely with local Trade Dollars. A coffee company in North America has a supply chain which is inherently non-local. They could do all their local spending in Trade Dollars per the above example, and use the no/low interest cash from their peers to do more ethical/sustainable/green/etc purchasing per their mission.
Mutual Credit Equivalent:
Similar to the Donor Advised Fund Pool, cooperatively owned exchanges could decide to allocate portions of Trade Fees collected into grant or Giving Circles to fund community projects without expectation of return.
Instead of the user/owners getting a rebate like I do at my co-op grocery store, they could vote to allocate profits in the system to social good by a number of mechanisms.
For example, when I buy a ticket to see any show at my local theater, I am always charged a $1.50 extra as a restoration fee which goes towards their preservation fund. By decision of the users, every arts related transaction in a business exchange could automatically send $1.50 Trade Dollars to the local Arts Council. A small fee from every transportation related transaction could go to a fund that supports a local X-prize to build an electric car charging network.
Mutual Credit Equivalent:
Kids could participate in the local community TimeBank and allocate the Hours they’ve earned at certain intervals to community projects which need Hours to launch.
The community projects could be funded by both forms of Mutual Credit. The kids could supply the donation of Hours necessary for volunteer labor and the business exchange Giving Circle could provide Trade Dollars necessary for supplies.
Because Time Banks also accept “requests” it could be used as a mini-kickstarter for kids (and adults) to vote on projects they wish to see manifest. If one of the kids thinks it’s a great idea to have a mural on a local eyesore wall but there is no community group offering that, the kid could post a request for “Mural” and people could allocate the Hours they want to it as a proxy for voting. When enough Hours are collected to complete the project, the Hours are awarded. With some governance models and instructions, kids could effectively manage the creation of projects and awarding of Hours to volunteers leaders and participants themselves.
How do the cash economy and mutual credit modules work together to make the Local Funding Tool Kit go even further?
It is not currently possible to run a Mutual Credit business exchange completely in Trade Dollars because our local economies don’t provide everything we need to perpetuate local economies. Even if one was to get ALL of their supplies and labor locally in Trade Dollars, it is currently impossible to pay local, state, or federal taxes in any alternative currency (and other necessary items are unattainable as well: postage, transportation, conferences, online services, etc).
It was a bit offtrack to present a module could be developed that was 100% mutual credit exclusive for the Tool Kit at the current time. In actuality, the best solution would be a blended transactional system. We can use the cash we have to help build the system that will replace it. Transactions can then exist in both worlds as long as is beneficial and/or necessary.
Federal Reserve Notes are the old economy. We need to hospice them and use them to their highest power, which is creating economies that can exist without them. Just like carbon-heavy electricity was used to build solar panels, we can use cash to build truly local economies with local monetary policy set by the people who use it.
We can end being consumers of other people’s capital and become producers of our own capital.
Kevin says in a blog post that the Local Funding Too Kit should feel like giving. I think it should feel like empowerment. Not a hand up/hand out relationship but a co-creation and true partnership.
Is this possible? We’re already doing it in Vermont.
We have working prototypes of both kinds of Mutual Credit. Our code is already open source and our models are improving to the point where they can be shared.
The Marketplace is our business mutual credit network. In cooperation with Vermont Businesses for Social Responsibility, a local membership organization that promotes sustainable business practices, we have launched a statewide business exchange. Our users have modeled the types of exchanges that exemplify the new economy. Proof of concept has been established.
We’ve recently expanded the TimeBank model to extend beyond neighborhood sharing into an entry step into the New Economy by embedding it into a women’s entrepreneurial start up environment.
We use an open source software that we help develop and maintain to run both models. We are in the beginning stages of forming two cooperatives: one for the Marketplace to become user owned and one for the software to link together all the business exchanges and Time Banks using it to build and maintain it.
The Big Picture
Imagine if what we were doing in Vermont was combined with the Local Funding Tool Kit. And it happened in Asheville. Then it happened in Louisville. It happened wherever there was a Hub or a BALLE chapter. Then imagine all of these networks were connected in such a way, by governance and technology, that made transactions possible between them.
Instead of using Federal Reserve Notes to connect us, over which we have no control, we can finance our own Neighborhood Economies into existence with what we already have.
We can create a national, independently owned, fractal, neighborhood economic system. We can create a system that capitalizes and rewards people doing regenerative work instead of extractive work.
Monetary policy and creation can be done in our own neighborhoods.