System imbalances are a relatively common occurence in mutual credit systems, when the administration of the system becomes too big of a burden to manage completely and properly, and when periodic account clearing and overall system reports are not done. It also happens in other local currency systems where the currency is issued in a fiat way, such as handed out to people who advertise in a Local Currency Magazine.

Any currency system needs to have methods for withdrawing currency from circulation. This is just as true for Local Currency Systems as it is for national currency systems.

Indicators of System Imbalances

The first indication of a system imbalance is inflation in prices beyond the levels set by the community. This means that there is more local currency than there are goods and services to trade. An analysis of the system accounts may reveal that a small number of people hold high positive balances, with a large number of people holding the balance. Morale and trading in the system may be low, and few new people may be interested in joining the system.

The Administration may be creating its own currency, which is not allowed in Mutual Credit Systems but often happens in order to pay staff despite a small membership base.

Identifying the Source of the Problem

After conducting an overall assessment of the accounts, or the amount of currency in circulation relative to the number of members using it, one must try and identify the source of the problem:

- Is the Administration creating and spending money?
- Is the number of members declining?
- Have some people who normally provide goods and services stopped trading?

Solving the Problem

The problem is solved by implementing measures to withdraw currency from circulation, and by better matching the creation of new money with the supply of goods and services available for trade.

For Mutual Credit Systems (LETS, Time Dollars)

A new account needs to be created, it can be called a #2 Balance Account.

If the Administration has a negative balance and is creating money, it must stop doing so immediately. Those that have received funds in this way should return it, as a transaction to the Balance Account.

A maximum balance needs to be set, which includes 75% of all positive balances. The remaining 25% of positive balance holders should be required to pay a negative interest of between 6 and 10% per year, until their balance is within the margins that have been set. This negative interest charge goes to paying off the Balance Account.

If more rapid measures need to be taken, this is the process used by some Mutual Credit groups:

1. Take the latest updated list of accounts.
2. Record all positive and negative balances as a transaction from the Balance Account.
3. The Administration Account moves its negative balance to this account, and then receives a transaction from the Balance Account to give it a positive balance.
4. In this way, the Balance Account holds the imbalance which must be paid off.
5. The Account Holder's Agreement must be adjusted to reflect the new rules that the Administration is not allowed to create currency, and members are responsible for their negative balances when they leave the system.

For Fiat Local Currency Systems (Hours)

Most Fiat Local Currency Systems use printed currencies, and generally have no method for removing currency from circulation. To solve inflation problems, the currency will need to be terminated, and measures put in place to remove excess currency from time to time. Therefore:

1. Terminate the existing currency, and issue new notes, preferably through a Member Account.
2. Introduce negative interest charges of about 6-8% per year.

For Printed Local Currency Systems (Backed, Unbacked, all others)

Similar to Fiat Local Currency Systems, we recommend terminating the existing currency, and replacing it with a new local currency that carries a negative interest charge, as well as being issued through accounts or through conversion with national currency.

To discuss these issues more deeply, please contact the Help Desk Coordinator.

Remember, each of these choices has advantages and disadvantages. It is therefore important to discuss these options with your group.