Currency and Limits

Hardly anyone should be surprised with the notion that all currency units are issued ‘out of thin air’. In traditional currency systems, the ability to create new currency units for circulation in the market is restricted to banks, at the time that they issue loans to borrowers. In most complementary or alternative systems such as LETS, the ability to create new currency units is decentralized; the system participants expect to be able to issue currency units at will to complete a transaction.

However, a currency system that sets limits on its participants’ ability to accrue debits cannot fulfill the expectation for spontaneous and independent currency creation. For example, when a currency administrator sets a maximum negative limit on a member’s LETS account, that limit effectively becomes currency that has been pre-issued when the member joins the system. When a member issues credit to another account, that member is simply re-assigning or re-allocating the limits that has been originally assigned to his or her account. That is, no new currency units are created by members since the total spendable limit does not change within a  currency system that assigns a debit limit to its members’ accounts. 

(Mathematically, a debit limit in a LETS system is equivalent to a pre-assigned X quantity of credits, where -X is then used as an offset factor for calculating an account’s credit balance. When debit limits are viewed as pre-assigned credits, it is easy to see that the total number of credits, or X*number of accounts, does not increase or decrease in a LETS system through member transactions.)

In pointing this out, I am not arguing against a currency administrator’s duty to set reasonable and practical limits to its member’s accounts. I am simply trying to highlight the fact that alternative currency administrators, when they set debit limits, should not advertise their system as enabling its members to become independent currency issuers. Such a claim would be misleading – a LETS member’s ability to issue currency is dependent on the debit limit that has been pre-assigned to his or her account. It would be more accurate to say that a LETS system, as a whole, could act as an independent currency issuer, while its members has the ability to only re-assign currency or limits within that system.