Autrian school and Silvio Gesell

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jtimon replied on Thu, Jun 21 2012 3:03 AM

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Second sentence: My notion, which I got from Mises, is that they tend to a positive non zero number.

Third sentence: Capital yields also tend to that same non zero number.

Well, "tend to zero" is not the same as "goes to zero", Tend to zero is going to zero without never reaching it. I think we're on the same page here.

What Gesell says is that the very structure of capital-money prevents that from happening with capital yields thus leading to capitalism instead of a free market. That is, gold has an inherent flaw as money that rises a rent which he identifies with the basic interest (although many times he reffers to it just as interest for simplicity). Now, if you accept this formulas:

gross/nominal interest = real interest + inflation premium = basic interest + risk premium + inflation premium

From what we got previously, we could afirm that the basic interest will tend to zero (to a very small positive number close to zero if you wish) in perfect competition.

But the austrian school explains that basic interest through time preference. And that number should never approach zero because "it is always better to have things in the present than in the future". Aren't those two things a contradiction?

That "it is always better to have things in the present than in the future" proposition only applies to capital-money. All the other things perish.
That's why capital-money is at an advantage in the market over real products. And that's what explains the existence of the basic interest.
Besides, being liquid is like an insurance against uncertainty (because is like a wildcard, which is even better than a King) and money holders get that insurance for free (if they chose not to exchange it for the basic interest). This is clearly an externality that someone has to pay somewhere. How the rest of capital-money users pay for that externality according to the austrian school?

I think Chapter 19 of Human Action is where all this is discussed.

Thank you. I'm reading the book slowly but maybe I jump to that chapter.

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Smiling Dave replied on Thu, Jun 21 2012 7:51 AM

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Well, "tend to zero" is not the same as "goes to zero", Tend to zero is going to zero without never reaching it. I think we're on the same page here.

What mises is saying is that it tends to some unknown number, which may be 5%. But not that it gets smaller and smaller arbitrarily close to zero. That is not the case. There is some lower bound greater than zero. And of course, that number changes with time, since it comes from people's minds.

These posts may help:

http://mises.org/Community/forums/p/29561/475037.aspx#475037

http://mises.org/Community/forums/p/29561/475039.aspx#475039

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jtimon replied on Fri, Jun 22 2012 11:33 AM

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What mises is saying is that it tends to some unknown number, which may be 5%.

So you don't agree that capital yields tend to zero in perfect competition or you don't think that capital yields tend to equal the basic interest?

But not that it gets smaller and smaller arbitrarily close to zero. That is not the case. There is some lower bound greater than zero.

Exactly. And Gesell's claim is that this lower bound represents an economic rent that we should eliminate.

And of course, that number changes with time, since it comes from people's minds.

It is the other way around. Money influences our time preference. Capital-money make us think in the short term. The basic interest depends on the structure of money and not on our time preference. How is it possible that this number is never negative? Why don't we prefer things in the future over things in the present some times?

Look at this picture thinking about it and ask me if you don't understand something from it. This tree metaphor is from Bernard Lietaer, I guess you don't know him neither. He's an advocate of money diversity and blames for monetary crisis to what he calls "a monoculture of currency". Pretty interesting too.

http://content.wuala.com/contents/jtimon/temp/what%20do%20we%20invest%20in.png

With a free-money (money with demurrage) the basic interest would disappear and we would think more in the long term than with capital-money.
Do you agree that interest rates would be lower with a free-money? How does the time-preference theory on itnerest explain that? If that number is in our head it should be independent from the type of money used, which is not the case.

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Torsten replied on Sat, Jun 23 2012 4:03 AM

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If taken narrowly, there would be some Austrian objections to Gesells free money.

Not sure what you mean here.

Because it is fiat money, and it's quite close to the Keynesian approach.

Gesell's intitial proposal (freigeld) was a monetary monopoly ran by the state, because he thinks money is a natural monopoly.

Money isn't really a natural monopoly, it's just an institutionalised means of exchange. Most states made it a monopoly via the central bank. And priviledged their money politically by legal tender laws. 

Since I'm a free monetary market advocate (like E.C. Riegel) I prefer my proposal which does not depend on any state. It's basically a fork of bitcoin with demurrage. I've called it freicoin. I hope I get the time to code it some time soon..

Most austrians (agreeing with me in the free monetary market part) say "it just won't be competitive". I believe it will. I consider myself some sort of  gesell-austrian hybrid, although Gesell himself was pretty libertarian in general. Despite his monopoly money proposal is often reffered to as an anarchist..

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jtimon replied on Sat, Jun 23 2012 5:14 AM

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Because it is fiat money, and it's quite close to the Keynesian approach.

Gesell expliicitly predicted the failure of "Keynesian money". My proposal (freicoin) is not fiat, it is a private, p2p money and has a fixed supply. So it is not inflationary in any sense.

Money isn't really a natural monopoly, it's just an institutionalised means of exchange. Most states made it a monopoly via the central bank. And priviledged their money politically by legal tender laws.

I don't think it is. Japan, for example, has hundreds of currencies in operation despite the legal privileges for the yen. This is where I disagree with Gesell. Again, my proposal is not fiat and does not rely on any government. I'm for a free monetary market of competing monies.

I'm not an orthodox libertarian, but even they ought not to have an objection with a means of payment that doesn't depend on the state. Or at least isn't legally priviledged. However there may be some dogmatic objections by gold enthusiasts against this.

So we're on the same page here. You are also for a free monetary market.

The competetiveness would be of concern to me as well. I also doubt that it diminish the negative effects of present money systems. People will try to skip the effects of demurrage i.e. the fee they got to pay by exchanging it into non-depreciating goods (like gold coins).
I for my part can see it to be viable ones the existing money systems start failing. Then it may rather be a question of political competetiveness then economic one.

The fact that people exchange it for goods and services and doesn't hoard it to avoid the demurrage fee is the intended consequence of demurrage. People will spend it or lend it, but not hoard it. That will lower the interest rates of loans denominated in this currency.
According to Gresham's law, people will tend to spend this money first, thus increasing its velocity. I think this kind of money would be more used as a medium of exchange, even if people still buys precious metals as a storage of value.

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skylien replied on Mon, Jul 9 2012 4:38 AM

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jtimon:

The fact that people exchange it for goods and services and doesn't hoard it to avoid the demurrage fee is the intended consequence of demurrage. People will spend it or lend it, but not hoard it. That will lower the interest rates of loans denominated in this currency.
According to Gresham's law, people will tend to spend this money first, thus increasing its velocity. I think this kind of money would be more used as a medium of exchange, even if people still buys precious metals as a storage of value.

So the sensible thing to do would be to save in e.g. precious metals and do the spending in Gesell's Freigeld? Let’s see how this works out.

I have Gold saved up. I want to buy a good from someone else. So I need to sell my Gold to get Freigeld to send it to the other guy who sends me the good. Then of course he obviously as well will not want to save in Freigeld punished with fees and buys Gold with it.

Don’t you think this is somewhat strange? It seems a bit impractical. Why not transact directly in Gold?

Demurrage means per definition to take away or at least cripple the function of store of value. Now lots of things also non money things can be a store of value but you cannot have money without it.

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jtimon replied on Mon, Jul 9 2012 6:29 AM

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So the sensible thing to do would be to save in e.g. precious metals and do the spending in Gesell's Freigeld? Let’s see how this works out.

That depends, I wouldn't chose precious metals as as store of value while they still have a monetary component on its value, because money can be demonetized. A symbolic (money) store of value is an illusion. It relies on the assumption that the quantity of money hoarded remains constant.
To easily show the illusionary nature of the store of value function of money I'll use an example:
We have an island. Its society enjoys good years and saves (by hoarding, not lending, investing or storing goods that they may consume in the future). During 5 years the percentage of the total money that is hoarded instead of used in the market as a medium of exchange rises from 10% to 40%.
Now there's a tsunamy, the ships get broken and the fields turn into swamps. So there's no food. But don't worry, We've been preparing ourselves for bad times, so let's just eat all those paper bills and gold bars.

I have Gold saved up. I want to buy a good from someone else. So I need to sell my Gold to get Freigeld to send it to the other guy who sends me the good. Then of course he obviously as well will not want to save in Freigeld punished with fees and buys Gold with it.

He obviously won't want to HOARD free money for a long period of time. But he has many options besides buying gold.
He can SPEND the money (he's "giving" away his wares [this includes labor] and he wants other wares in echange).
If he doesn't want to consume other people's wares right now (if he wants to save) he still can buy wares that don't perish fast and store them to consume them later. Those STORED WARES will also work as some kind of insurance.
Another option is to LEND its money so that other people can use invest it. Investing without saving (Keynesian economy) is not a good idea, but saving without investing (hoarding) won't make the economy grow.
The last option is to INVEST himself, to buy capital goods. The only thing he can't do without taking losses is to lock the medium of exchange, to enjoy the insurance of hoding a "wildcard ware" for free.
Why would he want to store gold if it weren't money? What does he want the gold for?

Don’t you think this is somewhat strange? It seems a bit impractical. Why not transact directly in Gold?

Because gold-money (capital-money) has higher commerce costs than free money. That's the criterion of quality for money.
Capital-money money also holds back prosperity by preventing capital yields to naturally drop near zero like other economic profits (through the basic interest that appears with money-capital) and springs monetary cycles.

Demurrage means per definition to take away or at least cripple the function of store of value. Now lots of things also non money things can be a store of value but you cannot have money without it.

Your defintion of money is different than mine's. I don't think that "store of value" is a desirable property of money. Well, as shown in the island example I don't think that's even possible. Money is just information, kind of a certificate of labor or wares provided.
What's your definition of money?
Please, don't tell me only what money DOES (medium of exchange, unit of account, store of value), tell me also what money IS according to you. I hope you don't say it's a commodity or a ware like anyone else.

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skylien replied on Mon, Jul 9 2012 8:22 AM

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jtimon:

That depends, I wouldn't chose precious metals as as store of value while they still have a monetary component on its value, because money can be demonetized. A symbolic (money) store of value is an illusion. It relies on the assumption that the quantity of money hoarded remains constant.

Uhm, this free money value also is an illusion to the same degree, even one with an additional devaluation component.

I’ll just ask you a simple question. Would you as a merchant rather take money A that at least may keep its value, or would you rather take money B that for sure will lose value by definition?

jtimon:

To easily show the illusionary nature of the store of value function of money I'll use an example:
We have an island. Its society enjoys good years and saves (by hoarding, not lending, investing or storing goods that they may consume in the future). During 5 years the percentage of the total money that is hoarded instead of used in the market as a medium of exchange rises from 10% to 40%.
Now there's a tsunamy, the ships get broken and the fields turn into swamps. So there's no food. But don't worry, We've been preparing ourselves for bad times, so let's just eat all those paper bills and gold bars.

100% of the people will always have 100% of the money at all times! The only thing that happened after 5 years were lower prices of the goods, but a 100% of the money spent still buys a 100% of the goods and services created. At any time it just depends on what the money is spent on. If they buy canned food good, if not it’s bad on this island. The nominal amount of money going round does not change that. The restraint comes from scarce resources not from scarce money.

jtimon:

He obviously won't want to HOARD free money for a long period of time. But he has many options besides buying gold.
He can SPEND the money (he's "giving" away his wares [this includes labor] and he wants other wares in echange).
If he doesn't want to consume other people's wares right now (if he wants to save) he still can buy wares that don't perish fast and store them to consume them later. Those STORED WARES will also work as some kind of insurance.
Another option is to LEND its money so that other people can use invest it. Investing without saving (Keynesian economy) is not a good idea, but saving without investing (hoarding) won't make the economy grow.
The last option is to INVEST himself, to buy capital goods. The only thing he can't do without taking losses is to lock the medium of exchange, to enjoy the insurance of hoding a "wildcard ware" for free.
Why would he want to store gold if it weren't money? What does he want the gold for?

At all times you have all of those options. How do you want to prevent people from saving in Gold? You could only do this by punishing things like Gold with a tax that is so high that they rather would accept the "free" money fee. Also people cannot save in normal goods. Why? Because if e.g. all people saved in canned food, that would mean there were huge inventories of canned food, that would drive the price of canned food lower at the moment some people want to make use of this purchasing power (that would just create a canned food bubble). So canned food will not retain its value the same way as Gold does, and of course after a few years it perishes anyway, which means a lot of economic effort was done for nothing. Not to forget that if you have canned food you would first need to find someone who would want to buy canned food to give you money. Good luck with that in a world in which everyone already has tons of it himself (That's how bubbles start to bust actually). So nobody will save in canned food, not the way you think.

jtimon:

Because gold-money (capital-money) has higher commerce costs than free money. That's the criterion of quality for money.
Capital-money money also holds back prosperity by preventing capital yields to naturally drop near zero like other economic profits (through the basic interest that appears with money-capital) and springs monetary cycles.

No, it does not. If you look at my example from before you will notice that me and the seller of the good always have to pay the sell and buy spread of Gold if we want to save in Gold. It was actually cheaper in this example to do the business directly in Gold. If the commerce cost was lower of free money then this “free” money wouldn’t punish me with a fee that is driving me to an alternative in the first place. And of course if there is no government forcing this free money on me, I will not use it anyway, as you wouldn’t either.

jtimon:

Your definition of money is different than mine's. I don't think that "store of value" is a desirable property of money. Well, as shown in the island example I don't think that's even possible. Money is just information, kind of a certificate of labor or wares provided.
What's your definition of money?
Please, don't tell me only what money DOES (medium of exchange, unit of account, store of value), tell me also what money IS according to you. I hope you don't say it's a commodity or a ware like anyone else.

Sorry but that (store of value) is the most important function of it. Money is the most widely accepted medium of exchange. How does it get that status? Of course by being a reliable store of value, beside some other characteristics.

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skylien replied on Tue, Jul 10 2012 4:56 AM

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jtimon:

Because gold-money (capital-money) has higher commerce costs than free money. That's the criterion of quality for money.
Capital-money money also holds back prosperity by preventing capital yields to naturally drop near zero like other economic profits (through the basic interest that appears with money-capital) and springs monetary cycles.

Since I read the link you provided, I now realized that with commerce costs you are not talking about transaction costs. I assumed you meant transaction costs since my question originally referred to them, so your answer was in fact a switch to another topic…

On the issue of commerce costs by which the linked article refers to a general higher mark up on goods by merchants who only trade but not produce goods, I only can say that this is a great example for cherry picking some data, asserting that they show a bad development and arbitrarily finding the fault with whatever you don’t like, as in this case it is Gold of course. They conclude:

“These figures are a clear proof that since gold has been adopted as the medium of exchange, commerce has become more difficult.”

Of course this is a pure assertion, lacking any content. Gold is picked as a medium of exchange since thousands of years, and then they try to use data from a given time period of only 25 years to show a “clear proof” that Gold has done the damage!

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skylien replied on Tue, Jul 10 2012 5:31 AM

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@ jtimon

I just read another interesting article on the site you just linked and it  really is quite horrible. Do you really believe what is written there?

"How does the Community Exchange System work?

The object of the Community Exchange System (CES) is to facilitate trade without using our conventional national currencies, and build a sense of community at the same time.

By 'trade' we mean the normal economic activity of selling goods and providing services by 'producers', 'sellers' or 'providers', and the purchase of these by 'buyers', 'customers', 'clients', 'patients', 'consumers', etc.

The CES serves two basic functions:

• it is an online money and banking system
• it is a 'marketplace' where people sell goods and services

Although the CES is internet-based it also works for those who do not have computers. Each user gets an account number and a password, and this gives them access to their account on the CES web site. The site works like a true on-line banking service. Participants can view their current balances and obtain statements of account. They can also keep track of the trading position of others.

Goods and services are advertised on the web site through an 'Offerings List'. Participants look through this list, or do a search, and if they find anything they want they contact the seller who then provides the goods or service. Payment is effected through a Trading Slip which serves both as a means of payment and a receipt for the goods or service. The information on the Trading Slip is entered by the seller into a transacation form on the web site. This credits the account of the seller and debits that of the buyer. Accounts record these debits and credits, giving a balance after each transaction.

Those without computers can interface with the system through 'branches' where everything is done manually and information is available on paper.

To ensure that unscrupulous buyers do not exploit the system, details of each user's overall trading position are available to all. General trading statistics are also available to show how much trading is taking place.

The web site also provides all the information needed to contact other participants. There is also a 'Wants List' where participants can advertise for goods and services they require.

Trading in this system requires no supply of money, either by the community as a whole or by each participant. Instead of using a 'hard' currency, which then has to be allocated according to some formula, the currency of this system is the pure recording of the values exchanged in trade. Money in this system is thus created at the trading interface and is recorded as credits for sellers and debits for buyers.

There are CES exchanges in a number of countries around the world. Each exchange has its own currency but members of one exchange can trade with members of other exchanges, making CES currencies as versatile as our conventional currencies.

The local currencies are units of measure rather than tradable commodities like conventional currencies. However, to make these currencies meaningful to users, their value is based on the national currencies. This is purely to give them reference. They are in no way tied to the national currencies and will deviate from them over time.

There are no rules for pricing in the CES. The 'law' of supply and demand prevails. However, within the context of the CES, certain services that otherwise would not be highly valued, might increase in value because of their relative shortage. Other services that outside the CES are expensive might be cheaper in the CES because the provider wishes to attract custom."

Emphasizes is mine. Can you please just explain the bold text, because to me it sounds like a pure contradiction? Maybe at hand of an example:

There is a person who has the painting "The Scream" for sale. Two people (A and B) are contacting him and say that they are interested to buy it. Since both have no supply of money, and according to your theory don't need such, how exactly does this trade play out? Who gets the painting? How do they establish a price? Why should the person even sell the painting in the first place since he doesn't need a supply of money to buy other things at all?

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jtimon replied on Thu, Jul 12 2012 4:48 AM

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Uhm, this free money value also is an illusion to the same degree, even one with an additional devaluation component.

Yes, but free money doesn't claim to provide the store of value function. And there will be less increases and decreases in hoarding. Hoarding would be low and more or less constant. The differences in hoarding can have an important effect on the price of money. In fact, monetary cycles with a gold standard start with an increase in hoarding that causes deflation.

I’ll just ask you a simple question. Would you as a merchant rather take money A that at least may keep its value, or would you rather take money B that for sure will lose value by definition?

I would accept both and spend the free money first. I think that's what merchants do with the chiemgauer and other Regio currencies in Germany.
That's what merchants did in Wörgl during the great depression. It's better to take free money than not selling anything because money velocity is frozen, don't you think?

100% of the people will always have 100% of the money at all times! The only thing that happened after 5 years were lower prices of the goods, but a 100% of the money spent still buys a 100% of the goods and services created.

Not completely accurate but...

At any time it just depends on what the money is spent on. If they buy canned food good, if not it’s bad on this island. The nominal amount of money going round does not change that. The restraint comes from scarce resources not from scarce money.

Exactly. By hoarding money they're not better prepared for anything, just like printing money after the disaster won't help them.
The "store of value" is only when the individual compares himself with the others, but society as a whole isn't storing any value by hoarding money. Money is just like a certificate of labor/services provided. It is just an accounting tool, information, a technology. It doesn't have intrinsic value. It doesn't need intrinsic value. It just needs users willing to accept it and trade with it.

At all times you have all of those options. How do you want to prevent people from saving in Gold? You could only do this by punishing things like Gold with a tax that is so high that they rather would accept the "free" money fee.

Let them save in gold. I (unlike Gesell who thoutght that money was a natural monopoly) advocate for a free monetary market. But be aware that gold is still money. If it wasn't, its price would be much closer to silver. It has a value component that comes from the fact that it is money. This monetary value can dissapear if it stops being money, gold can be demonetized. Even if Gold remains a money-like certificate that only serves as a "store of value" it depends on how much people want to save at the same time.
If many people wants to "save" at the same time, great, the price rises and everybody feels reacher. If everybody wants to cash out at the same time, they will realize that Gold wasn't actually the store of value they thought.

Also people cannot save in normal goods. Why? Because if e.g. all people saved in canned food, that would mean there were huge inventories of canned food, that would drive the price of canned food lower at the moment some people want to make use of this purchasing power (that would just create a canned food bubble). So canned food will not retain its value the same way as Gold does, and of course after a few years it perishes anyway, which means a lot of economic effort was done for nothing. Not to forget that if you have canned food you would first need to find someone who would want to buy canned food to give you money. Good luck with that in a world in which everyone already has tons of it himself (That's how bubbles start to bust actually). So nobody will save in canned food, not the way you think.

No, no. I didn't meant everybody saving all its wealth in canned food, just another possibility. As an insurance to consume later themselves if they need it, not to sell it later. They will pay in storage costs and the food will eventually rot, but they're saving through this insurance. they could also buy other commodities such as oil or gold (not as secure as some may think), but, again, it's just another possibility.
The main way to save is to invest in capital goods or lend the money (even at zero interest).
The point is, discouaraging hoarding is not the same as discouraging saving, they're not synonyms.

jtimon:
Because gold-money (capital-money) has higher commerce costs than free money. That's the criterion of quality for money.
Capital-money money also holds back prosperity by preventing capital yields to naturally drop near zero like other economic profits (through the basic interest that appears with money-capital) and springs monetary cycles.

No, it does not. If you look at my example from before you will notice that me and the seller of the good always have to pay the sell and buy spread of Gold if we want to save in Gold. It was actually cheaper in this example to do the business directly in Gold. If the commerce cost was lower of free money then this “free” money wouldn’t punish me with a fee that is driving me to an alternative in the first place. And of course if there is no government forcing this free money on me, I will not use it anyway, as you wouldn’t either.

About the commerce costs, you say something differet later. I'll answer to that.
About the monetary cycles, this is the sequence of events:

1) Capital accumulation leads to prosperity but also to lower capital yields and therfore lower interest rates.
2) With low interest rates, savers prefer to hoard rather lend.
3) An increase in hoarding causes deflation which at the same time encourages more hoarding. Borrowing gets less attractive with deflation and some loans are not payable anymore, because business plans weren't taking delfation into account.
4) Destruction in the financial market, capital destruction (new capital goods aren't produced and the old ones perish) leads to higher capital yields (less competition among capitals).
5) At some point, a new price equilibrium is reached in which the capital yields are above the basic interest (an economic rent caused by capital money) again.

jtimon:
Your definition of money is different than mine's. I don't think that "store of value" is a desirable property of money. Well, as shown in the island example I don't think that's even possible. Money is just information, kind of a certificate of labor or wares provided.
What's your definition of money?
Please, don't tell me only what money DOES (medium of exchange, unit of account, store of value), tell me also what money IS according to you. I hope you don't say it's a commodity or a ware like anyone else.

Sorry but that (store of value) is the most important function of it. Money is the most widely accepted medium of exchange. How does it get that status? Of course by being a reliable store of value, beside some other characteristics

No. The most important function is the medium of exchange, it enables division of labor, specialization, big projects, etc.
Money doesn't need an underlying source of value different than being the medium of exchange. Money can be made of paper.
Also, as shown before, the store of value function in a symbolic "commodity" as money is an illusion.
You didn't define money. It would be intersting to know the differences in our definitions.
For me, money is just an accounting tool (information) that serves as a medium of exchange.

I'll answer to the rest later.

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jtimon replied on Thu, Jul 12 2012 5:00 AM

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Since I read the link you provided, I now realized that with commerce costs you are not talking about transaction costs. I assumed you meant transaction costs since my question originally referred to them, so your answer was in fact a switch to another topic…

No. the topic is still an optimal desgin for money. Why free money is better or worse than capital money (for example, gold).
Thank you for taking the time to read it, that will help you understand my point of view. The whole book (without the first two parts on land), would be better, but that's more than what more pure austrians I have discussed with have done.

On the issue of commerce costs by which the linked article refers to a general higher mark up on goods by merchants who only trade but not produce goods, I only can say that this is a great example for cherry picking some data, asserting that they show a bad development and arbitrarily finding the fault with whatever you don’t like, as in this case it is Gold of course. They conclude:

“These figures are a clear proof that since gold has been adopted as the medium of exchange, commerce has become more difficult.”

Of course this is a pure assertion, lacking any content. Gold is picked as a medium of exchange since thousands of years, and then they try to use data from a given time period of only 25 years to show a “clear proof” that Gold has done the damage!

He's talking about the imposition of the gold standard in Germany. Not sure what they had before. I think some kind of bimetalism.
Still, the main point is that the best money is the one that makes trade (as a whole) cheaper. Do you agree?
For example, with the costs you would need to account central banks officials and lots of other jobs with a fiat system like we have now.
I would say that what we have now is far more expensive than the gold standard even though many of the costs (malinvestments caused by manipulating interest rates, for example) are very difficult to account for.

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jtimon replied on Thu, Jul 12 2012 5:59 AM

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I just read another interesting article on the site you just linked and it really is quite horrible. Do you really believe what is written there?

Not as horrible as you may think. I'm sure you would be ok with this voluntary (not fiat) money if it wasn't for how they descibe it many times. Some people have a problem with calling this monetary systems money, like if money was inherently bad or something.
CES is just an implementation of LETS, but this complementary currencies community often likes to have a hundred different names for the same thing. For example, I would say that a time bank is nothing but a LETS denominated in hours.

"How does the Community Exchange System work?
...
"
Emphasizes is mine. Can you please just explain the bold text, because to me it sounds like a pure contradiction? Maybe at hand of an example:

They also say that is a money system above, which also seems in contradiction with "trading requires no money supply". What they mean is that the supply of money can be zero, then grow, then fall. Because this money is not cash. It's credit money. It is created when needed and destroyed when debts are settled. Is like if you pay with IOUs and then get those IOUs back in exchnage of your wares.

There is a person who has the painting "The Scream" for sale. Two people (A and B) are contacting him and say that they are interested to buy it. Since both have no supply of money, and according to your theory don't need such, how exactly does this trade play out? Who gets the painting? How do they establish a price? Why should the person even sell the painting in the first place since he doesn't need a supply of money to buy other things at all?

LETS only works in closed communities, usually local. So The seller, A and B must belong to the same community, there exists trust between them.
The price is negotiated as always. Say A offers 100 usd and B 120 usd (I know, very cheap for that painting). The seller will prefer 120 usd so B gets the painting. LETS is only an accounting system and all the balances always sum zero. So the balances will be

S: +120
A: 0
B: -120

Now, say S buys something from A for 40 usd. The balance will be:

S: +80
A: +40
B: -120

Then B sells something to A for 120:

S: +80
A: -80
B: 0

etc.

Any unit can be used: usd, eur, btc, oz of silver, hours, 1970usd...
But this system is not scalable, because it relies on trust and you need to avoid "free-riders". To scale mutual credit you need Ripple. You need everybody to act as a bank, to "print their own currency".

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skylien replied on Thu, Jul 12 2012 7:31 AM

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I know Wörgl and the Chiemgauer, which is and was not money. It is/was always pegged to the official money and never stood on its own... Anyway I don't want to go into every point again. For the simplicity it should be suffice to go with this last example.

So what exactly keeps B from offering 140? And A in turn from offering 160 and then B from 1000 and so on? I guess you will say nothing that is why you said free-riders are actually a problem. Ok, lets ignore them, I even go along this example and ask further: How does B or A know how much 100 whatever (let’s take silver) is worth, if they never have to acquire it on the real market? It is purely arbitrary if they say I offer 10, 100 or a trillion even if they do not want to free ride.

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jtimon replied on Fri, Jul 13 2012 1:33 PM

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I know Wörgl and the Chiemgauer, which is and was not money. It is/was always pegged to the official money and never stood on its own... Anyway I don't want to go into every point again. For the simplicity it should be suffice to go with this last example.

We're working on a non fiat and non backed demurrage currency (a voluntary unbacked currency): http://www.freicoin.org/

The example was for a LETS. The concepts are completely different. LETS is credit-money and freigled, freicoin, gold, etc are cash-monies.

i this video, the terms one-sided (instead of cash) and tow-sided (isntead of credit) are used.

Anyway, I can answer you any question about mutual credit systems. Just take into account that this is not what Gesell proposed (actually they're closer to Proudhon's original proposal, exchange banks). Gesell says that Proudhon saw the problem with capitalism (different from free market by their definition), but didn't saw the solution. I think Gesell would consider mutual credit systems like LETS or Ripple free money too if he was alive.

So what exactly keeps B from offering 140? And A in turn from offering 160 and then B from 1000 and so on? I guess you will say nothing that is why you said free-riders are actually a problem. Ok, lets ignore them, I even go along this example and ask further: How does B or A know how much 100 whatever (let’s take silver) is worth, if they never have to acquire it on the real market? It is purely arbitrary if they say I offer 10, 100 or a trillion even if they do not want to free ride.

He will have to pay back the 140 with goods and services. Communities usually use as denomination their national currency (which have to use anyway) or hours. Defined as "hours of unskilled labor", so the doctor will earn more than an hour of currency per hour of work. In the US, 10$ is taken as an approximation.

I think the video explains it very well, but ask whatever you don't understand.