“There ain’t no such thing as a free lunch.” That’s a well-known adage that goes back a long time, but it was popularized by famed economist Milton Friedman and expressed in his 1975 book titled, There’s No Such Thing as a Free Lunch.

But the abuses of political money by national governments, central banks and the banking establishment and the consequent separation between the financial economy and the real economy have made it appear that there may be a free lunch after all. But we must not allow ourselves to be misled. It may not be immediately apparent but there is always a price to be paid when fundamental principles of reciprocal exchange are violated.

There have been many in the alternative currency and exchange movement who seem to think that this principle does not apply to their proposed schemes and the landscape is strewn with the wreckage of their folly, but the lessons from that experience are yet to be learned. Political currencies have the power of governments and huge financial institutions behind them and are able, through legal tender laws and taxation, to compel the circulation of their currencies and hide the ill effects of their malfeasance. Private and community currencies however must stand on their own merits without the crutch of legal compulsion and must therefore demonstrated their superiority in enabling the reciprocal exchange of goods and services in the marketplace.

Any would-be innovators in this realm must therefore understand the fundamental principles of currency, credit, investment, saving, and the exchange of value. That is a rather vast territory that I have been writing and lecturing about for a very long time. In this post I wish only to state explicitly the fundamental principles that must underlie the design and implementation of any private, community or complementary currency.

Principle #1, the essence of a currency: A currency is a short-term credit instrument of the issuer.
Currency is created when a provider of real value accepts it in payment from issuer, and it is redeemed and destroyed when the issuer accepts it back in payment for the goods or services that they provide. It may change hands many times between issuance and redemption.  

Principle #2, Currency circulation: The circulation of a currency is driven by the issuer’s obligation to accept it back.

Corollary #1.a.: To be sound, credible and effective, a currency must be spent into circulation by one or more trusted issuers who are ready, willing and able to deliver valued goods or services that are in regular demand, and to accept the currency back as payment.

Corollary #1.b.: A currency that is issued in such a way monetizes the value that is inherent in the goods and services that the issuer is ready, willing and able to sell immediately or in the very near future. In other words, it takes the value that is inherent in those real goods and services and converts it into a form (currency) that can be used to make payments.

Definition: Liquidity is the ability to pay, i.e., to meet immediate and short-term obligations.

It has long been recognized that the issuance of private, non-governmental currencies is not only possible and desirable, but also necessary if true freedom and government “by the people and for the people” is to be achieved. It is entirely feasible that any community can create its own liquidity (means of payment) by monetizing (in the form of its own currency) the value inherent in the goods and services produced within that community.

This is not a new idea. Arthur Kitson made the same point 125 years ago:

To the average man, a currency that has not the authority or stamp of government is inconceivable; and yet there is no good reason why communities should not create and control their own currency without the aid or intervention of governments, just as they incur debts or liabilities without such aid or intervention. —Arthur Kitson, A Scientific Solution of the Money Question (1895), p. 279.

#     #     #