Why Community Currency Systems such as LETS Need Not Collapse Under Opportunistic Behaviour

The Mutual Credit System (MCS) is a ‘self-help’ solution to the problem of private management of a community currency. The most widely implemented MCS is the Local Exchange and Trading System (LETS). As Michael Linton puts it: “A LETSystem is a self-regulating economic network which allows its members to issue and manage their own money supply within a bounded system” (in Ekins, 1986:200). This ‘endogenous money supply’ feature of the MCS is, for the purpose of community currency stability, both its most important and most problematic. By effectively putting the management of the money supply in the hands of the individual transactors, that is ‘the market’, Central Bank malprediction and mismanagement are avoided. Instead, transactors can flexibly adjust their individual money needs to their transaction needs, such that at a macro-level the money supply adjusts in real time to the needs of the economy. This, in turn, may prevent inflationary booms and recessionary busts caused by central administration inertia or failure as described in the Capitol-Hill baby-sitting-co-op currency by Sweeney and Sweeney (1977). However, the other side of the coin is that giving the individual so much power over the management of the community currency might cause dissipation of the benefits of flexibility in the detriment of system collapse. That is, optimising behaviour by individuals at a micro-level might aggregate to disastrous over-supply and collective default at a macro-level.

Source: [PDF] Mutual Credit Systems and the Commons Problem: Why Community Currency Systems such as LETS Need Not Collapse Under Opportunistic Behaviour* | Semantic Scholar

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