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Chapter 2 Basic Money Understandings: Introducing the Importance of the Role of the Community of Users

Message Paul Krumm

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In this, our second post on basic money understandings, we will get into the nuts and bolts of bottom up operation, and the results of its use. As we proceed we will find that this organization is pivotal to the understanding of all fiat money.

Making Explicit the Steps in Bottom-Up Money Transactions

To explicitly represent a transaction with public fiat money requires acknowledging a community commons current account and an individual account for each community member in this community commons account. An explicitly described transaction between community members then involves five distinct operations.

  • 1) A buyer and a seller meet as members of the community and agree on a transaction.

      The buyer agrees to receive value from the seller and in return will make a commitment to the community to provide equal value (represented by a debit in community money numbers) to anyone in the community in the future.

      The seller agrees to receive a claim on the commitment of the community in the future (a credit in community money numbers) equal in value to the goods-services they sold to the buyer.

      The buyer and seller authorize the community to record this transaction in its accounting system.

  • 2) The community commons enters the debit authorized by the buyer in the buyer's community account, balanced by a credit in the community commons current account, creating the money numbers for the transaction.

  • 3) Then, the community commons puts a debit in its community commons current account balanced by the credit authorized for the seller in the sellers community account, issuing those money numbers to the seller.

  • 4) The community zeros out its current account by balancing its credit with the buyer and its debit with the seller, extinguishing both on its books.

  • 5) Goods-services pass from the seller to the buyer, also mediated by community trust in the value of these debits and credits for community money operation.

The net result is that the buyer gets a debit with the community and our goods-services from the seller, and the seller gets a credit with the community, all mediated by the community commons which actually creates and issues the money for the transaction. The community, and trust between its members, is again what makes this system work.

Instead of users being required to maintain a positive balance in our accounts, as is currently required, in a bottom up system user balances revolve around zero. Limits on both negative and positive balances are developed and implemented by the user community to prevent system imbalance. Negative as well as positive numbers are spendable as long as they remain within community agreed upon limits.

The money supply consists of the sum of all user positive balances, which is structurally equal to the sum of all user negative balances. The money supply automatically changes with each member transaction. It does not have to be managed as we will see is the case in authority based money systems.

In a succeeding transaction the seller from the first transaction may become a buyer, making a commitment to the community. This transaction results in a negative entry in their individual community account, extinguishing (at least some of) their money numbers. As above, this negative entry is balanced by a positive entry in the community current account, creating new money numbers which, are issued to the new seller, again zeroing out the community commons current account.

The community commons current account, by its nature, maintains a zero balance, because for every individual debit to the community from a buyer there is an equal credit for a seller. For this reason it is easy to ignore and/or externalize the critical nature of the community commons in creating and issuing the money for all of our transactions.

So in this system, the community creates and extinguishes money numbers by authorization of community members as we make transactions. Money is created, issued, and extinguished by the community.

The money supply in this system, again defined as total outstanding debits or credits (which remember are always equal) is thus automatically regulated by system structure and function. Money is only created as needed for trade. It is created and extinguished as the total value of aggregate trade increases or decreases.

The spreading of commitments (debits) and claims on commitment (credits) from an individual to the community of money users is the characteristic that separates all public fiat money systems, both mutual and authority based, from barter . Again it is trust between members of the community that underlies system operation.

And again, a credit - a claim on the commitment of the community - spendable money numbers, is what we call money; in this case, specifically, public bottom-up fiat money.

A Few Bits of Bottom Up Money History

Public mutual fiat money has been practiced for at least 5,000 years, the use of shubati in Babylonia being the first known example.

Bills of Exchange, which were exchanged as money, were accepted as legal by the Roman Empire, documented by Cicero (106-43 BC). They have been used ever since. They have usually involved discounting, rather than interest, where used.

Tally sticks, used at least from the time of Christ to about 100 years ago followed the same practice. Notably tally sticks were Coin of the Realm in England from 1100 AD when King Henry I began accepting them in the payment of taxes, to 1826 when the private bankers finally gained complete control of the money system.

The system of traders who moved between trade fairs in Europe from the time of the late Roman Empire until the use of modern banking gained an edge, is also an example of mutual fiat money. The WIR system1 in Switzerland, created in the early 1930's, and which still operates there, is another.

Mutual Money Results and Implications

In bottom up money systems, each of us is our own authority, authorizing transactions with our peers under the community rules we have agreed on. These rules structurally create a circular economy because everyone is required to balance income and outgo. Those who for one reason or another are not in a position to provide for their needs in the market, will be discussed below.

Bottom up money is not designed for accumulation. No one is expected to either get in debt or to hoard money. Here, money's purpose is simply to grease the wheels of trade, allowing all members of the community to be provisioned. Interest is not generally included in its creation or its use.

In mutual systems, if an individual or group needs capital or a loan (Both are a large claim on the commitment of the community) they must convince, and get the permission of the community commons which will hold the commitment. Community members have the right and responsibility to make the decision whether the investment is something that we want to be a part of, and support with our commitment. 'Community' in this case may be an institution of political government or an independent community group or organization.

When a community commits itself to a project, it takes that commitment as a negative balance which is kept in a separate community commons asset-liability account. The contract and expectation is that this negative balance will be repaid (extinguished) by the income of the project over time. So creating large sums of money explicitly becomes a function of community commitment and responsibility rather than being practiced as a transaction between a lending authority and a borrower, as is current practice.


In some mutual systems, demurrage has been practiced. Demurrage is a periodic charge on the balance in each account, which is transferred to the community commons asset-liability account. It may be seen as negative interest and results in small amounts of money numbers disappearing from one's account (being transferred to the community commons) over time. Demurrage rates have been from one to ten percent per year.

With demurrage, holding on to money becomes a liability. Traded goods-services are worth more in the future than the future value of money, so its users are encouraged to get rid of money, trading it for something of value, rather than saving it. This fundamentally changes the user's relationship with money as well as their relationships to things, and each other.

Demurrage promotes long lasting products which keep their value, unlike interest bearing money which promotes a buy, use and throw away economy. Repair and maintenance of things is promoted, rather than replacement with use-and-throw-away things. Things come to be seen as parts of a circular economy, rather than a mine, use and trash economy. This is an example of how outcomes are determined by money structure and function.

Historical examples of successful money systems that have included demurrage, although some were managed by local authorities, are The Egyptian ostraka, which were used for at least 1500 years, the German Wara2 and a stamp script developed in the town of Worgl, Austria3 in the late 1920s and early 1930s. At that time, there was extreme inflation in the national currency and the government money was practically useless.

Both of these last efforts were highly effective but were closed down by their respective national governments, as they were seen as a threat to the national banking systems. Lietaer4 proposes that had these initiatives not been shut down, the rise of the Third Reich could have been prevented.

A current example of local money which includes demurrage is the Chiemgauer, a local currency in southern Germany. This trading system includes demurrage , which in addition to covering system expenses supports local non-profits.

Chiemgauer has also built up a savings fund that is not subject to demurrage but pays no interest. Money in this fund is loaned out to local businesses, with no interest charge, if all repayments are made on time.

One use of demurrage has been to cover monetary system operation costs. Any surplus in the community asset-liability account, where demurrage accumulates, is available to be democratically gifted by the community for community needs.

Gifting in the Mutual Money Paradigm

At times, the community commons, or community members, may decide to gift at least some portion of a needed community expense because the result will support or improve their community.

There are two classes of gifting. Gifting value involves giving and receiving value without any money transaction. Gifting money involves the donor authorizing a negative entry in their account and a positive entry in the receiver's account, without any value traded. The receiver may be an individual, a group, or the community commons.

Mutual money and gifting are communal devices and agreements consciously working together. Gifting is an outlet for a surplus in ones account that is approaching, or is going over the positive system limit. Again, this economic paradigm is designed to be circular in its operation, promoting provisioning rather than the accumulation of profit, thus mimicking the operation of natural systems, with those who have a surplus sharing with those who have current unmet needs.

A note on gifting and taxes. Taxes in a mutual economy, where the users make the decisions on what money is to be created and issued for, can be seen as agreed upon organized gifting as an integral part of the economy, to care for the community's needs, and the needs of its members who are not in a position to care for themselves.

Scale in Bottom-Up Money Systems

In mutual systems, scale is attained by creating federations of local groups, rather than creating a top down structure. Federation decision making is driven by local group members and their member groups. Decisions are made by delegates subject to immediate recall if they do not represent their community, rather than by any central authority.

The work of the economist Elinor Ostrom, who studied commons, and what it takes for a commons to operate effectively over the long term, is pertinent to money, which as described above is a community commons. Ostrom won the Nobel Prize in Economics in 2009 for her life of work in this area. She was the first woman to ever receive that prestigious prize.

In our next post we will turn our attention to fiat money created and issued by an authority.

1Lietaer, Bernard, and Stephen Belgin, New Money for a New World, Qiterra Press, Boulder CO, 2012, pp 158-162

2Lietaer, Bernard, The Future of Money, Century, 2001, ISBN 0 7162 8399 2, p 151

3Ibid, p 153-5

4Ibid, p 152-3

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I am a semi-retired self employed business owner who designs and builds instruments and machines. Obtained a BS in Sociology (with minors in Physics and Math) in the 1960's and became interested in studying the structural violence built into (more...)

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