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Attributes of Complementary Currencies and Their Application On Attributes of Complementary Currencies and their Application on a Specific Case Thesis By Pavel Jiránek Submitted in Partial fulfillment Of the Requirements for the degree of Bachelor of Science In Business Administration State University of New York Empire State College 2016 Reader: Tanweer Ali “We don’t need money. We need the things that money can buy.” Bernard Lietaer Acknowledgment Greatest thanks to my parents, who always support me in everything I do. (Except some of my stupid ideas which would get me in trouble) Table of Contents I. Introduction II. Money and its creation a. History of money and the myths surrounding it b. What is money? c. Creation of money III. Complementary Currency a. Fundamentals i. Why we need CCs b. History c. Time banks d. Mutual learning e. LETS IV. Advantages and limitations of CC a. Advantages i. Economical ii. Social b. Limitations V. Incentives in the Czech Republic a. Complementary currencies in the Czech Republic b. Introduction to penitentiary environment in the Czech Republic VI. Practical Use Case – a CC system in penitentiary a. Description of the penitentiary b. Description of the scheme c. Considerations & assumptions VII. Conclusion Abstract Complementary currencies have been evolving significantly in past decades in various forms. Even though most people perceive complementary currencies only in their modern, digital form, there are several different ways in which complementary currencies may operate. Moreover, there are several advantages as well as disadvantages of using a complementary currency in comparison to a conventional financial system. Recent trends and analysis suggest that, in some cases, complementary currency systems can eventually become common supplements to regular financial environment. As a specific use case to prove the advantageous potential of complementary currency systems, this thesis develops and describes a complementary currency scheme in a penitentiary in the Czech Republic. Research Questions: 1) Do complementary currencies have the capability of substituting conventional financial systems? 2) Would a complementary currency system, which is set up in a penitentiary in the Czech Republic represent a feasible application of CC schemes? I. Introduction What is money? How did it develop? Where does it come from? At first glance, these questions might seem to be very trivial and basic. However, it may be argued, and an extensive research support this claim (NFEC, 2015), that a significant portion of our society would not be able to answer them properly. In other words, the majority of today’s population is “financially illiterate”. Here, it is suitable to use the analogy of a fish swimming in the water, cited from the professor of economy, Bernard Lietaer: “Fish is born in the water, it lives in the water and it dies in the water. However, it has no idea what water actually is” (Lietaer, 2011). Most people function the same way with money; they enter the world and learn only as much as they need to survive in the financial machinery. It must be admitted, however, that this is somewhat expected because most people are simply not interested or do not care about the mechanics. (Un)fortunately, in our world, it is money and the mechanics behind it, what determines and influences whole lot of things in our lives as well as in the functioning of entire nations. Therefore, it is very important that people are aware of at least the basics so they can foresee the outcomes of bad financial decisions – be it their own decisions or decisions of the governmental and financial institutions. As history has proven, the opposite creates an environment which is favorable for financial crises, which are generally caused precisely by the bad financial decisions. Some experts go even further than that when analyzing different causes of a financial crisis. As professor Lietaer proposed in his Pop-tech speech, even though it is quite efficient, it is the settled monetary monoculture which causes destructive instability (Lietaer, 2011). On the other hand, understanding the - 5 - fundamentals and mechanics well will allow a person to foresee different trends and either make profit of them or to at least to hedge him/herself against the risks. So what are the answers to those questions from the first line? Even though this paper will explore the fundamental mechanics of money in the following chapters, let’s settle one essential attribute of any kind of money now: using money in trade requires mutual trust and good reputation between the interested parties. Simply put, one must trust you that if you pay him/her with a bill or a coin or any other kind of money, he/she will be able to retrieve the value out of it later in time. This gets us to the point of this thesis and to what Mr. Lietaer talked about: the monetary monoculture in which we learned to live is not so vital for a society to function as some might think. Generally, we only learned to accept it as it is and we follow regulations which are set by the governmental and financial institutions. However, as a matter of fact, complementary currencies (= a currency that is used to supplement a national/conventional currency and whose purpose is to protect or stimulate the particular economy/community) have been around for a long time. Think of the air-miles system of your favorite airline company. That is a complementary currency system. Or your reward/membership card in your favorite business which provides you with discounts. That is a complementary currency system. Besides these two examples, there have been many others in various fields throughout the course of our modern history. However, sometimes they are simply not thought of as complementary currency systems. Moreover, both of the above- mentioned examples represent the essential attribute of any payment method – they require mutual trust and good reputation in order to work. - 6 - Living in the 21st century, we also have one great element which will allow us to take the phenomenon of complementary currencies to the next level; and that is technology. It can be argued that the technology which we have nowadays (along with the rapid rate of development) will allow significant improvement in the stability and functioning of the complementary currency systems. Also thanks to technology, the knowledge and understanding of complementary currencies in general can be expanded among large numbers of people. Moreover, with the recent history (the Financial Crisis in 2008) in mind, public’s trust in the conventional banking system as well as governmental and financial institutions are at deep low. As the advertising expert Paul Kemp-Robertson cited a scientific survey during his TED talk, “45% of 25-34 year olds in the US would be comfortable with using an independently issued or branded currency” (Kemp, 2013). Simply put, approaching the third decade of the 21st century, we are more ready to start fully leveraging the potential of complementary currencies than ever before. In this paper, the author will introduce an alternative view on history of money, its creation and its fundamental mechanics. Then, the concept of complementary currencies in general will be presented with categorical examples. Only after laying this solid foundation, the paper will shift its focus specifically on fundamentals and practices of complementary currencies, as well as its advantages and disadvantages when compared to conventional national currencies. By developing a specific use case at the end of the paper, the author will answer the main research question: do complementary currencies have the capability of substituting conventional financial systems? - 7 - Complementary currencies have been spreading significantly in recent past in various forms. There are several advantages as well as disadvantages of using a complementary currency system in comparison to a conventional financial system. However, it can be argued that the advantages outweigh the disadvantages; especially with the technological advancements of our era. Moreover, recent trends suggest that, in some specific cases, complementary currency systems will eventually become common supplements to conventional financial environment. II. Money and its Creation Before the thesis about complementary currencies can be developed it is truly essential to lay out and explain the foundation of money; the history of it, its underlying concepts and the mechanics behind its creation. Without such understanding, it would be quite difficult to comprehend the topic of complementary currencies. Moreover, this chapter is going to challenge some settled views and perceptions regarding money. a. History of money Let’s start with the history of money. Most likely everyone, who had studied economics before, surely heard the story of money slowly evolving out of barter; i.e. exchanging goods or services for other goods or services without using money as the medium of exchange. As a matter of fact, most of the economic textbooks that describe the same story. This general approach to the history of money has - 8 - evolved since 1776, when the famous economist Adam Smith brought the discipline of economics into being and described this “money evolution” as the way bills and coins were created. Summing up this wide-spread theory, first there was barter, where two or more people were exchanging goods and services between each other. After some time, it was figured, that such “economical” setting is inefficient as it faces two major problems; these are so-called “double coincidence of wants”1 and the “fair rate of exchange” for different products2. Therefore, people started to use precious metals as a medium of exchange which eliminated the two major problems and from which coins and bills emerged later on. Only then the perception of credit and other financial instruments were developed and started to be used. This is the story which has been generally accepted by the majority of people.
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