Tag Archives: credit

There ain’t no such thing as a free lunch: Principles of Credit, Exchange, and Finance

“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.

Addendum 1: This may help to further clarify the matter:

Credit is given and received in each transaction as follows: a seller gives credit to a buyer when he delivers real value in exchange for the buyer’s promise (his/her currency or i.o.u.) to reciprocate at some time later. The buyer reciprocates when he/she later becomes a seller and accepts his/her previously issued currency as payment.
ReciprocityCircuit

Addendum 2: One of my correspondents on LinkedIn replied to my post saying this:

During high interest phases, credit clearing so clearly offers many benefits. In the current low or no interest phase these seem to be less obvious. Unless the community currency can avoid inflation maybe? But in a way inflation helps productive businesses to repay their debt. So where do you see the biggest benefit now?

That comment highlights some common misconceptions which I answer as follows:

Interest savings are a minor benefit of direct credit clearing. The BIG benefit is that it makes buyers and sellers independent of money and banks. This is especially important when money is made scarce, as it usually is for small and medium sized businesses (SMEs) who are often not able to get credit from banks, and when they do it is on onerous terms: high rates of interest, burdensome repayment schedules, pledge of collateral, and the inclination of banks to foreclose and force liquidation of assets rather than help a business through a difficult period. Credit clearing provides a friendly independent source of liquidity that is limited only by the value produced by businesses that are part of the credit clearing circle.

Regarding inflation, it is never a good thing for SMEs or for most consumers. Inflation “helps productive businesses to repay their debt” only if the business has sufficient market power to raise prices of the things it sells and/or to keep the cost of inputs like labor and materials low. That may be true of big corporations that dominate those markets, but not for SMEs who get caught in the squeeze and are unable to raise their prices enough to keep up with inflation or to prevent their costs from rising.

The corporatocracy would like us to believe that the effects of inflation are the same for everyone but they are not.

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Thomas Greco’s Latest Interview–March 3, 2017

Here is my latest interview on Primo Nutmeg. Discussion topics include alternative currencies, credit, central banks, the Federal Reserve, Austrian economics, the gold standard, bitcoin, geopolitics, and the relationship between U.S. foreign policy and the global system of money and finance.

Money & Debt: John Green’s Crash Course

In this engaging fast-paced video, John Green explores important questions like: What is money? What is it for? How and why did it evolve? What is the relationship between money, nation states and slavery? And perhaps, most importantly, where do trust and credit enter the picture, and what role do they play in today’s world?

How does mutual credit clearing enable moneyless exchange?

Here’s and excellent, short and sweet description of how mutual credit clearing works to provide interest-free liquidity. From Bartercard New Zealand…

Competing currencies essential to freedom

This appeal by Congressman Ron Paul is perhaps the most important proposal by an American politician in the last 100 years.
I’m glad to know that Congressman Paul is not limiting his proposal to gold and silver currencies.

The most liberating means of payment is “mutual credit clearing” through independent non-bank associations of businesses and individuals.

Of course, the credit in such accounts needs to be denominated in some objective units, which could be specified weights of gold or silver, but better still, would be an “index unit” based on a “market basket” of basic commodities that are widely and freely traded.

My four books on the subject, and my websites, provide coverage of pertinent concepts and history, and full details on my prescriptions for businesses, communities, and governments.–t.h.g. 

Legalize Competing Currencies

I recently held a hearing in my congressional subcommittee on the subject of competing currencies.  This is an issue of enormous importance, but unfortunately few Americans understand how the Federal Reserve and Treasury Department impose a strict monopoly on money in America.

This monopoly is maintained using federal counterfeiting laws, which is a bit rich.  If any organization is guilty of counterfeiting dollars, it is our own Treasury.  But those who dare to challenge federal legal tender laws by circulating competing currencies– at least physical currencies– risk going to prison.

Like all government created monopolies, the federal monopoly on money results in substandard product in the form of our ever-depreciating dollars.

Yet governments have always sought to monopolize the issuance of money, either directly or through the creation of central banks. The expanding role of the Federal Reserve in the 20th century enabled our federal government to grow wildly larger than would have been possible otherwise.  Our Fed, like all central banks, encourages deficits by effectively monetizing Treasury debt.  But the price we pay is the terrible and ongoing debasement of our money.

Allowing individuals and business to use alternate currencies, especially currencies backed by gold and silver, would expose the whole rotten system because the marketplace would prefer such alternate currencies unless and until the Fed suddenly imposed radical discipline on its dollar inflation.

Sadly, Americans are far less free than many others around the world when it comes to protecting themselves against the rapidly depreciating US dollar.  Mexican workers can set up accounts denominated in ounces of silver and take tax-free delivery of that silver whenever they want.  In Singapore and other Asian countries, individuals can set up bank accounts denominated in gold and silver.  Debit cards can be linked to gold and silver accounts so that customers can use gold and silver to make point of sale transactions, a service which is only available to non-Americans.

The obvious solution is to legalize monetary freedom and allow the circulation of parallel and competing currencies.  There is no reason why Americans should not be able to transact, save, and invest using the currency of their choosing.  They should be free to use gold, silver, or other currencies with no legal restrictions or punitive taxation standing in the way.  Restoring the monetary system envisioned by the Constitution is the only way to ensure the economic security of the American people.

After all, if our monetary system is fundamentally sound– and the Federal Reserve indeed stabilizes the dollar as its apologists claim–then why fear competition?  Why do we accept that centralized, monopoly control over our money is compatible with a supposedly free-market economy?  In a free market, the government’s fiat dollar should compete with alternate currencies for the benefit of American consumers, savers, and investors.

As Austrian economist Ludwig von Mises explained, sound money is an instrument that protects our civil liberties against despotic government. Our current monetary system is indeed despotic, and the surest way to correct things simply is to legalize competing currencies.

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Interest and the Role of Trade Exchanges

As cashless exchange becomes an ever more significant portion of total transactions in the economy, the regulatory issue will become a greater concern. It is important that trade exchanges NOT be perceived as issuers of credit, so as to avoid running afoul of banking regulations and possible tax liabilities. Everything that trade exchanges do needs to support the position that the role they play is that of “third-party record-keepers” and that it is the members themselves who provide credit to one another.

Paul Suplizio, former Executive Director of the International reciprocal Trade Association (IRTA), has expressed it this way:

“This means members with positive balances are the issuers of credit and the exchange has only administrative powers, delegated by the members, to regulate credit extension.”

It can be argued that the credit clearing process is simply one of generalizing (collectivizing) the longstanding practice of businesses transacting trades with one another on “open-account,” i.e., selling to one another on credit and allowing some period of time in which to pay.

It has properly been a cornerstone of the trade exchange business that there is no interest charged on negative account balances and no interest paid on positive balances. Therefore it cannot be argued that trade exchanges are acting as banks or lenders of money.