Regional Economic Development Through the Organization of Local Trade Exchanges

Regional Economic Development Through the Organization of Local Trade Exchanges — draft of February 13, 2007

Thomas H. Greco, Jr.

Throughout the world today, local communities are struggling to maintain their economic vitality and quality of life. The reasons for this are both economic and political, and are largely the result of external forces that are driven by outside agencies like central governments, central banks, and large multi-national corporations. In brief, decisions made by others outside the community have a huge impact on life within the community. Be this as it may, it is possible for communities to regain some measure of control over their own welfare and to ameliorate the effects of those external forces by employing an approach that is both peaceful and based on private voluntary initiative.

I propose that groups and organizations that seek to promote healthy, sustainable local economies should make it a priority to organize regional mutual credit clearing associations. As these associations develop and grow, they will provide their regions with the strength and vitality that is necessary to attain a measure of self-reliance and maintain a high standard of living.

The possibilities inherent in such a plan should not be judged by past experience with exchange alternatives. Just as a modern jet passenger plane bears little resemblance to the Wright Brothers’ first airplane, so too will the proposed exchange structure be quite unlike any LETS system, community currency, or commercial “barter” exchange with which people might be familiar. It will be engineered and built to carry heavy economic loads within local bioregions and be operated according to sound business principles.

This will be a multi-phase project.

Phase I

The first phase would look to be quite conventional and similar to “buy-local” programs of the past. It would begin by organizing solidarity groups that include ALL sectors of the constituent communities, particularly the locally owned and controlled businesses, municipal governments, the non-profit sector, and social entrepreneurs and activists. Out of this must come a general willingness to do the hard work necessary to move together toward greater regional economic self-sufficiency. The first major project would be the launching of a “buy-local” campaign in which the economic bases and business relationships within the region will be clearly mapped. The administrative office would then assist businesses in finding local sources for the things they buy and local customers for the things they sell.

Phase II

Unlike conventional buy-local initiatives, this project would quickly move to implement the second phase, which would be to provide an alternative means of payment. This payment alternative is known as direct credit clearing. It involves a process in which a business’s accounts payable are offset by its accounts receivable, and would be organized under a mutual credit clearing union. Direct credit clearing is a process very much like the one used by banks to clear checks drawn upon one another, and the mutual credit clearing union is analogous to a bank clearinghouse.

Working capital in the form of conventional money is always scarce and expensive for most businesses. Mutual credit clearing is an extension of the common business practice of selling on “open account,” but it is done on a more organized multi-lateral basis which has the effect of sharing the risks and enabling a participant’s sales to pay for his/her purchases without the use of any third-party credit instrument such as conventional money.

As a member of a mutual credit clearing exchange, a business can have an interest-free line of credit, it will be able to acquire the things it needs without the use of cash, and because it accepts payment in the form of exchange credit, will be a preferred source of supply for others who are members of the exchange. In the credit clearing process, a member’s sales pay directly for its purchases.

In allocating lines of credit, it is important, especially in the beginning, to allocate the greatest share to “trusted issuers,” i.e., those that have the largest sales volume and whose products and services are in greatest demand within the local region. This is the key to maintaining a rapid circulation of credit through the system and avoiding defaults. The value and usefulness of the system credits must be demonstrated beyond doubt.

Like any network, this clearing system will become more valuable and useful as it continues to expand and a greater variety of goods and services become available within the network. By way of example, one may note that the first fax machine was very expensive but useless. As more fax machines were deployed and connected in an expanding network, the fax became more valuable to ALL users, even as prices plummeted and quality improved. The same will happen with clearing networks, but it is essential that a network be properly designed and operated from the very start.

Phase III

The third phase of the program is the joint issuance by the members of the clearing association of credits into the general community. This is done by the association members buying goods and services from non-members using some form of uniform credit instrument, which all association members are obligated to redeem, not for cash, but for the goods and services that are their normal stock in trade. Now, that provides a sound regional currency based on the productive capacity of the region’s leading enterprises, a currency that can circulate among any and all. The availability of such currency to supplement the flow of official money insulates but does not isolate the local economy. Just as a sea wall protects a small boat harbor from the turbulence of the open sea, a sound regional currency provides a measure of protection from the turbulence of the global economy and centralized finance.

This externalization of credits from the clearing association into the general community can be achieved using any of several available devices. They may take the form of paper notes, coupons, or certificates or they might be placed on stored value cards like the gift cards that are so common and popular these days, or they could manifest as credits in accounts that reside on a central server that would be accessed by use of a debit card.

Phase IV and Beyond

As the effectiveness of this general approach becomes manifest, additional refinements and adjuncts will suggest themselves and be added in later phases. One particularly useful refinement, as local clearing networks become interlinked across national boundaries, will be the definition and use of an independent, non-political unit of account based on a concrete standard of value. Trade credit units originally defined as being equivalent to the dominant political currency unit, like dollars, pounds, yen, etc., will shift over to a value unit that is objectively defined in terms of valuable commonly traded commodities. Such a unit will facilitate trading across national borders by obviating the need for foreign exchange, eliminating the exchange rate risk, and will be immune to the inflationary and deflationary effects that beset national currencies.

The remaining design details and implementation strategies need not be described here. Suffice it to say that all of the necessary science is well established and all of the major system components are readily available. With a modest amount of funding, such a system could be quickly launched and will reach critical mass within a short period of time. But each such initiative requires adequate start-up funding and local champions who are passionate about the project and willing to dedicate themselves to its implementation and success.

# # #

Thomas H. Greco, Jr. is a community and monetary economist, educator, writer, consultant, and former tenured college faculty member who, for more than 30 years, has been working at the leading edge of transformational restructuring. His special interest is monetary and financial innovation. Among other books and articles, he is the author of, Money: Understanding and Creating Alternatives to Legal Tender (Chelsea Green Publishing Company, 2001). He can be reached via his website, which contains a large volume of text and visual material related to these topics.

February 13, 2007

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