Community Currencies:
A New Tool for the 21st Century

Bernard A. Lietaer

1. Aligning Moral and Economic Incentives2. Functions of Money
3. Conflicts Among the Functions of Money4. Problems with Interest
5. Reprogramming the "Invisible Hand"6. The Validity of "Booster" Currency
7.Historical Precedents8. Community Currency
9. Potential Misunderstandings10. Conclusions
11. Notes
'A "Green" Convertible Currency'

Community Currencies: A New Tool for the 21st Century

The three most important concerns of our contemporaries in the developed nations are remarkably convergent--unemployment, the environment, and community breakdown--and there are strong indications that these same issues will remain on top of the agenda well into the next century. Emerging technologies promise to keep unemployment a major issue, even if all Western economies get out of recession. By 2010, China will introduce as much carbon dioxide in the atmosphere as the entire world does today. And community breakdown is one of the most systemic, deep, and complex societal trends of the past 30 years, with no signs of any reversal.

Precisely because we will have to live with these issues for the foreseeable future, only a long-term structural approach can successfully resolve these problems. Here I show how community currencies could contribute to tackling all three problems and also permit us to "retrofit" economic motivation to desirable human behavior.

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1. Aligning Moral and Economic Incentives

There are three main ways to induce nonspontaneous behavior patterns: moral pressure, coercion, and economic incentives. For example, recycling glass bottles can be promoted by education, by regulations, or by incorporating a refundable deposit in the purchase price. A combination of all three incentives is obviously the most effective strategy.

When these incentives conflict, problems will arise. For instance, when there is an economic incentive to do something a regulation or law prohibits, we need costly and permanent enforcement systems. Even in the presence of such enforcement systems we expect smuggling and many more imaginative forms of cheating to occur. More evident are cases where moral pressure is supposed to overrule economic interests. Consider, for instance, the well-known saying, "Money is like manure; it does good only if spread around." This sentiment has been espoused in less florid language by most religions for a long time. However, this moral pressure is diametrically opposed to the concept of receiving interest on money, which provides a built-in incentive to hoard currency. Whenever there are such structural contradictions many people are unable to afford, or simply do not care enough, to follow the moral advice.

It is possible, however, to design a coherent and operational currency system so that this apparent structural contradiction disappears. In other words, by questioning some traditional implicit assumptions, we can realign the moral and economic incentives so that they are in harmony.

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2. Functions of Money

To understand community currencies we need to better understand what money does. We will see that a community currency should fulfill at least some of the key roles of any currency, and that a well-designed community currency can even fill some of the roles that the "normal" national currency does not.

Since the breakdown in 1972 of the Bretton Woods system, the world has been living with pure fiat currency--that is, there is nothing material backing the currencies of the world. Nonetheless, money has continued to fulfill a number of different functions, only two of which are essential:

Money has sometimes played three other roles in the past, and happens to play them today as well:

Though we tend to take for granted that money serves all the functions we are used to--which today means all five functions for the U.S. dollar--it is important to realize that money really needs to serve only the two essential functions in order to be an efficient currency.

The Future of Money