Amidst the media frenzy in recent years regarding inflation, it is worth asking when, and for whom, is inflation actually a problem? As economists are quick to point out, in the conventional monetary system the upsides and downsides of inflation are not equally distributed across populations. To illustrate, those on fixed incomes or who hold little debt (typically retirees of advanced age, such as baby boomers), are adversely affected by inflation because their spending power is effectively reduced. In contrast, those who hold large amounts of debt and the prospect of present and future wage increases (typically younger people holding student loans or with large mortgages, such as millennials) can actually benefit to a certain extent. This is because inflation effectively reduces the value of previously borrowed money. This elementary economics lesson reminds us that the adverse effects of inflation do not map neatly onto a class politics. Whereas for a poor pensioner inflation is a huge problem, for a poor student with a lot of debt, inflation may offer some benefits. Indeed, there is a generational politics to inflation.

To further explore the politics of inflation, here I analyze the expansion of what I term “the credit field” in the conventional monetary system and in a local currency system called the Comox Valley Local Exchange Trading System (LETS). The Comox Valley LETS (the LETSystem) was a pioneering community currency that was founded on central Vancouver Island in British Columbia in the 1980s. The LETSystem was a grassroots effort to redress economic downturns by fostering local liquidity and facilitating mutual credit among community members. The Comox Valley LETS became the prototype for a range of similar LETS that spread around the world and took hold in places as diverse as Japan, Australia, the UK, and Ecuador.

The Comox Valley LETSystem consisted of a network and three devices: the green dollar, a registry, and listings. The network was the community of users who had registered accounts with the LETS. The green dollar was the unit of account for the LETSystem. It was completely virtual—there was no paper currency and users could create money (as credit) whenever they needed simply out of the promise to repay the network at some future time. The registry was the central ledger in which the debits, credits, and balances of network members were recorded. The listings were essentially the marketplace for the LETSystem: a catalogue, printed monthly, of the goods and services either wanted or on offer by the members of the network.

The logistics of a transaction were not complex. In a hypothetical transaction a painter, Peter, might agree to paint Sue’s fence for $40/hour and accept payment in 50% green dollars. If he completed the job in 5 hours, Sue would owe him $100 in Canadian and $100 in green dollars. The portion of the debt denominated in Canadian dollars could be cleared using either cash or bank credit. The remaining debt was cleared when Peter called into the central office and recorded the transaction on the answering machine. Sometime later, typically the following day, a clerk in the central office would then credit $100 green dollars to Peter’s account and a debt of $100 to Sue’s account. This meant that Peter had accumulated an increased balance of $100 that was available as credit with the entire community of users at some future time. Sue, in contrast, had now had a commitment to the network of $100: she had essentially agreed to recompensate the network with $100 in goods and/or services at some future juncture.

The Credit Field

One useful concept I have sought to develop to understand how a LETS works is what I term “the credit field.” The credit field is the space-time of exchange possibility. In other words, it is the possibility that enables members of a network to participate in commercial exchange. It is in the credit field that inflation emerges as an issue, because expanding the credit field creates more money.

Expanding the credit field provides sufficient liquidity to enable commerce. It is one of the primary reasons that precious metal standards are an ineffective means of administering the supply of money in an economy. In the conventional money system, expanding the credit field is undertaken exclusively by two institutions that have the power to create money: the state and commercial banks. The state does so through printing money to buy goods and services or through techniques such as quantitative easing. Banks create money through issuing loans. The fractional reserve system ensures that banks only have to hold on deposit a small fraction of the money as liquidities, typically under 10%, when making new loans.

In contrast, in a LETS, any member of the network can create money. A LETS is similar to rotating savings systems and credit associations, insofar as they entail members of a network facilitating credit for one another. However, in a LETS the members do it in money that they create, rather than in state money. When one person issues a promise to repay (debt) the network, it creates credit for someone else in the network. In so doing, someone who incurs a commitment to the network benefits themselves by obtaining some good or service, but also benefits other members of the network by enhancing the opportunity for them to engage in exchanges. LETS credits are useless as assets because the credits earn no interest. Furthermore, these credits cannot be used for speculation—one can’t buy equities, bonds, or derivatives with LETS money.

Expanding the credit field and the problem of inflation

One potential response to the ability for users to create credit in this way is that it would lead to inflation, but when and for whom is inflation a problem? Compare again the different logics that undergird the conventional and LETS monetary systems.

The conventional money system is premised, in part, on the commodity theory of money, according to which the value of money stems from its scarcity (Menger 1892). Scarcity creates an incentive to accumulate, since one never knows what the future will bring, one is predisposed, proverbially, to “save for a rainy day.” The state seeks to regulate the creation of new money due to the danger of inflation. Too much money chasing too few goods can potentially cause inflation. The issuance of conventional money is premised on a zero-sum game: one person acquiring it, means someone else has lost it.

But LETSystem money is premised on a token theory of money (Ingham 2004; Vasantkumar 2019). As in language, symbols are infinitely abundant. Thus, rather than operating from the standpoint of scarcity, the operating concern is sufficiency: the amount of money should be commensurate with the needs of the network. One does not have to “save for a rainy day” because, whether one’s balance is positive or negative, one will always have sufficient money to meets one’s needs. LETSystem money is not zero-sum, but rather “positive sum” because one need not worry about not having it, because there is always a sufficient supply.

Because it is not scarce, there is no incentive to ensure its value. Network members decide the value of the goods/service they offer to the community. If a member accumulates credits, it creates an incentive to spend them, since there is not much benefit to the accumulation of credits. The incentive to spend, increases the volume of trade. (What an economist would call an increase in the velocity of money).

Two Theories of Money

The conventional money system attempts to reconcile the two main theories of money: the commodity (orthodox) theory and the token (heterodox) theory. In the conventional money system only the central bank and commercial banks can issue money that circulates widely. The restriction on the right to issue stems, at least in part, due to the fear of excessive inflation. This fear is based on the orthodox theory of money: that money’s value comes from its scarcity. To hold its value, the thinking goes, money should be treated at least partially, like gold, a commodity. But of course, some inflation is not deemed a problem, as long as it is kept within a certain circumscribed target, generally in the range of 2% per year (Holmes 2023). Nevertheless, in the conventional system, commercial banks and the central bank are empowered to create new money and do so all the time. The practices of creating money by printing it or issuing fractional reserve debt take place under the presumptions of a token theory of money.

In contrast, the LETSystem eschews the commodity theory of money and embraces the token (heterodox) theory of money that contends that money’s value comes from its recognition as a symbol of value by other members of a community. It can be issued by any user of the network at any time. In the LETSystem, inflation is not a problem in the same way, because creating money creates a credit for someone else in the system, which entails an incentive to spend that money. If someone knows that money is going to come back to them, they are more willing to part with their money in the first place. This has the effect of accelerating the exchange of goods and services, rather than hoarding of (scarce) money. This reduces the imperative to save money, which in the conventional system does not benefit anyone but the banks, who profit off savings through lending at interest. Facilitating the ability of members of a network to spend readily and at will benefits the members of a network by enabling the members to satisfy their real needs and wants, such as food, shelter, and clothing, rather than simply storing idle value for that ”rainy day.”

According to proponents and practitioners of the LETSystem, in general people were willing to pay more in green dollars than they were in federal dollars. Liberated from the imperative to hoard scarce money and empowered with the capacity to expand the credit field of their own accord, members of the network could spend freely to garner the goods and services they wanted or needed. As one participant in the system described to me, a babysitter who charged $3/hr in federal money realized quickly that she could charge $6/hr in green. This led to increased prices in green dollars, but given that money was not scarce, but rather abundant, the downside of such increases wasn’t really a problem.

In conclusion, often when I describe the LETSystem to colleagues, the usual surprised reaction is “people could issue money themselves, didn’t that lead to inflation!” Such a reaction makes two presumptions that might be worth reflecting on. First, we might ask, “when and for whom, exactly, is inflation a problem?” And second and more tellingly, we might also ask, “why are we so quick to trust bankers with stewarding the credit field as opposed to our neighbours?” After all, the recurrent economic crises that date back to 2007 and illiberal counterrevolution that has emerged in response suggests that they have not done a very good job.

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Daromir Rudnyckyj is Professor of Anthropology at the University of Victoria, where he serves as Director of the Counter Currency Laboratory and is Past President of the Society for the Anthropology of Religion (2021-2023).  His research addresses money, religion, development, capitalism, finance, and the state. He is the author of Beyond Debt: Islamic Experiments in Global Finance and Spiritual Economies: Islam, Globalization, and the Afterlife of Development), which was awarded a Sharon Stephens Prize by the American Ethnological Society. He is also the co-editor, with Filippo Osella, of the volume Religion and the Morality of the Market.

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References

Holmes, Douglas. 2023. “Quelling Inflation: The Role of the Public.” Anthropology Today 39 (2):6-11.

Ingham, Geoffrey. 2004. The Nature of Money. Polity Press.

Menger, Karl. 1892. “On the Origin of Money.” Economic Journal 2 (6):239–255.

Vasantkumar, Chris. 2019. “Towards a Commodity Theory of Token Money: On ‘Gold Standard Thinking’ in a Fiat Currency World.” Journal of Cultural Economy 12 (4):317-335.

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Cite as: Rudnyckyj, Daromir 2024. “When is inflation a problem?” Focaalblog 10 December. https://www.focaalblog.com/2024/12/10/daromir-rudnyckyj-when-is-inflation-a-problem/