A community without dollars is not a community without wealth – this basic understanding fuels the sharing economy.  Every community, no matter how money poor, has, at the very least, a wealth of human resources and the capacity to create material resources.  Dollars give us a very organized means of sharing and exchanging those resources.  However, when there is a scarcity of dollars, our economy need not grind to a frightening halt.  We need only find additional ways to share and exchange.  Our systems for exchange could be as organized as a local currency or online mutual credit system, or as casual as swapping and gift-based provision among friends and community-members.  This vast realm of economic possibility, of course, churns up new legal grey areas and unique challenges for attorneys working in this realm.

The Scarcity of Dollars

To the extent that people want them badly and use them often, dollars will always be in our lives.  But today, U.S. society is plagued by foreclosures, business closures, and unemployment – these are both the causes and the effects of dollar scarcity.  Even in better economic times, there have always been people that do not have enough money to meet their basic needs.

Scarcity is built into our money system itself.  The majority of money in circulation today was issued by banks in the form of loans.  Money is, essentially, lent into existence, with interest.  Repaying a loan with interest means the borrowers must work hard to earn even more than they have spent. People end up competing with one another to earn that premium and to get ahead financially.  Inevitably, some people do get ahead, and do so at the expense of others that fall behind, fall into default on credit cards, and fall into poverty.  In such a system, money will always be scarce for some people.  Today, in 2012, it is scarce for many.

If all dollars in existence were to simply disappear – evaporating from our wallets and our bank accounts – the sum total of all wealth in society would not be affected in the least.  In fact, the disappearance of dollars would be our good fortune if it were to help us see that we have other reasons, incentives, and mechanisms for providing that wealth for one another.  If dollars were out of the picture, humans would find innumerable and creative ways to exchange.

Even though dollars will not disappear entirely, their abundance is subject to wild fluctuation, and we would do very well to establish alternatives to our dependence on dollars.  The more ways we find to exchange, the more resilient our economy will be in difficult times.  For example, in 2011, the world watched as Greece suffered from a dramatic financial collapse, after which barter networks and local currencies gained strong traction, giving people means to continue transacting with each other.1

Also, in the 1930s, when Switzerland experienced a scarcity of the national currency, a complementary currency known as the WIR was created.  The WIR is not a printed currency, but an exchange system that exists only in bookkeeping.  Today, the WIR continues to play a strong role in the Swiss economy, with tens of thousands of people circulating the equivalent of $3 billion dollars in WIR.2  Use of the WIR grows in popularity when the Swiss Franc becomes scarce; because use of the WIR restores balance and enables transaction during times of scarcity, the Swiss economy is somewhat insulated from the extreme effects of recession.3  A society that implements such complementary systems and habits of exchange can therefore be far more resilient during tough economic times, and will also be far less likely to suffer from extreme ups and downs.

The Spectrum of Ways to Exchange

In the U.S., there are already innumerable ways to exchange without money at the national, local, and personal levels.  First of all, there are now systems to exchange with complete strangers all over the country.  For example, last year, I “bought” and “sold” 18 DVDs using SwapaDVD.com, and the only currency I used consisted of “points” I earned after mailing free DVDs to total strangers.  Many other websites have now been established to allow people to swap goods and services within a network, and to pay one another with “points,” “credits,” or through other systems for tracking transactions.4   The Green America Exchange5 is an example of a barter exchange, where members, who are mostly green businesses, can offer their services and goods to other members, and receive “payment” in Exchange Dollars.  In addition, Facebook has created its own currency called “Credits,” which can be used to purchase apps, games, and other virtual goods.  Credits are earned in a variety of ways – by playing games, watching ads, paying ten cents to Facebook, or buying an Arby’s sandwich.6

At the level of local communities, there are now many time banks, which are communities of people that do favors for one another in exchange for “time dollars” that can be “spent” within the network to meet a variety of needs.  Time banks are unique in that one person’s hour is valued the same as someone else’s hour, so there is no market-based valuation of people’s services.  In addition, people can spend time dollars, accumulate a negative account balance, and they are never legally obligated to “repay” them.  It means that people that are in need can use a time bank to get assistance, without having to first accumulate a positive balance.  In this respect, time banks aren’t exactly facilitating barter; they are facilitating a culture of giving that could be an incredibly important tool for providing for people with diverse needs.  Local currencies – both paper and digital – are also beginning to flow in small communities around the country.  Even Time Magazine has acknowledged that local currencies are gaining traction.7

Finally, on a person-to-person level, people may barter formally, swap casually, or simply adopt a habit of giving to one another.  It is hard to measure how prevalent this has become in recent years.  However, it is clear that when people do not have money to exchange with one another, gifting and bartering are often the first solutions people turn to.

When people transact using barter, swap networks, online currencies, local currencies, or time banks, this allows small scale and local enterprises to gain an immediate advantage over multi-national businesses like WalMart, which only accepts dollars.  Rather than struggling to compete with multimillion dollar companies, a new generation of micro-entrepreneurs will thrive on new kinds of transactions.

Money Soup: Legal Grey Areas in the Spectrum

The spectrum of ways to exchange also means that there is a spectrum of legal reactions to those exchanges.  On one end of the spectrum, there are highly formalized, contractual, and quantifiable exchanges, which are more likely to be subject to taxes, commercial regulations, employment laws, and so on.  For example, if I pay $8 dollars for a bowl of soup at a restaurant, I likely have a legal right to receive my soup (or my money back).  I will pay sales tax on the $8, and the restaurant pays income tax on it.  As an establishment that regularly provides soup for money, the restaurant is subject to all regulations of commercial food businesses.

At the other end of the spectrum are the casual and less quantifiable ways we provide for one another.  If my neighbor brings me soup when I’m sick, I have no contractual right to demand my soup, and my neighbor has no contractual right to demand my gratitude.  I’m not taxed on the value of the soup I receive and she’s not taxed on my gratitude; as discussed further below, the IRS generally does not consider gifts to be taxable income.  Furthermore, my neighbor is not considered by the health department to be a restaurant.  The gift of soup is a fairly simple transaction, free of legal headaches.

Between those two far ends of the spectrum, there are many ways to move soup around, and many grey areas in determining what regulations apply.  Here are nine examples of ways that I might provide soup for others, moving from the casual to the formal end of the spectrum, and the legal questions that begin to arise along the way:8

Soup Parties

Imagine, first of all, that I start throwing a monthly soup party for my friends.  My friends may sometimes show their appreciation by inviting me over for dinner, or by bringing dessert or drinks to my party.  In that respect, I materially benefit in exchange for my soup, but in ways that are fairly unpredictable and unquantifiable.  Most likely, the IRS and other regulatory agencies would not even bother with me.  I haven’t created a restaurant and the dessert my friends bring probably won’t be taxable to me as “income.”

Gift Economy Soup

Now what if I start having weekly soup parties and my friends start doing things for free too?  As the spirit of giving and generosity grow, friends might offer free massage, gardening, computer help, handy work, or other favors.  Other friends hold weekly salad nights, curry nights, or cook-out nights, enough that all of us could get free dinners every day of the week.  In this circle of giving, no one is obligated to give or receive anything, and no one is officially keeping track of who gives what and how it should be valued.  Social expectation, not contract, governs this system of exchange.

What are the legal implications in this scenario?  Since the giving occurs among friends and comes largely from a place of generosity, it will all probably be tax free.  And because there are no contractual expectations of compensation and because people aren’t bargaining for things at market prices, these activities probably wouldn’t be considered commercial.   The reason I say “probably” is that only slight variations in the above scenario could cause it to look more like example #3 (Barter Soup) or #6 (Soup Enterprises), which probably are taxed and regulated as businesses.

Barter Soup

Now what if my accountant agrees to prepare my taxes in exchange for coming to five of my famous soup nights?  This example differs from the above Gift Economy example, because now we have a direct exchange that we’ve bargained for, and we have a binding verbal contract for barter.  As discussed later in this chapter, although there are grey areas, this arrangement is quite possibly something the IRS would want us to report.  My accountant would include the fair market value of my soup nights in her calculation of gross income.  I would include the fair market value of the accounting services, and may suddenly even find myself paying self-employment taxes.

Another question to ask here is: Am I now accidentally operating a soup business?  Since I have a binding and bargained-for agreement to receive valuable services as “payment” for my soup, I’ve essentially sold soup to my accountant.  Regulation of business comes from all kinds of agencies – such as health departments, planning departments, and state tax boards.  In the eyes of these three types of agencies, selling soup even one time could technically be illegal without a health permit, zoning certificate, and seller’s license, respectively.

Time Bank Soup

To continue expanding on the soup scenarios, my next project could be to go to the homes of elderly people to help by cooking soup.  Because they and I are part of a local time bank similar to the Japanese Furaei Kippu (“Caring Relationship Tickets”)9 system, for each hour that I spend helping out, I get a “time dollar.” Later on, I could redeem each “time dollar” for an hour of someone else’s time, so long as someone is available and willing to do me a favor in exchange for a time dollar.

In tax rulings described later in this chapter, the IRS has given some vague indication that they aren’t interested in taxing exchange of services like this.  They give at least two reasons: 1) The exchanges are informal, meaning that I get no contractual right to have my favor returned, and 2) The exchanges are non-commercial, meaning that they aren’t bargained for at market rates; whether I spend an hour cooking soup or an hour providing legal advice, my hour is valued at the same rate, and all transactions are an-hour-for-an-hour.  Note, however, that I may, in fact, be subject to taxes and regulations for these time bank exchanges if my primary profession is as a personal chef and if normally I do cook for people in exchange for dollars.

Soup for Hire

Next, my landlord, who lives downstairs from me, learns of my superb soup and asks me to become a personal chef for her family, in exchange for allowing me to live rent-free.  I begin cooking two meals a day for her family, and at her pleading, learn to make things other than soup.  The value of my free rent should be reported as income on my tax returns, and the value of my cooking services should be reported on her tax returns as rental income.   It’s also possible that I should now be classified as her employee, since I work for her regularly and take some direction from her about what and when to cook.  Regular household workers often need to be classified as employees, which means they must be paid at least minimum wage in dollars.  Our soup-in-exchange-for-rent arrangement may, therefore, be illegal under wage and hours laws.

Soup Enterprises

Moving on with my soup scenario, now my soup has become so popular that I make multiple pots of soup every day, invite people over to share it, or put it in mason jars for people to pick up on my door step.  No one ever pays me U.S. dollars for my soup, but I have been able to use soup to “pay” for most of what I need.  I now get “free” health care, bike repair, fresh produce, and many other necessities and perks in exchange for jars of soup.  Even with no money changing hands, chances are that I’ve suddenly found myself in the soup business, and should pay tax on the value of most of what I receive in return.  Also, as bizarre as it sounds, when my friends come over to help me chop vegetables, the law says I may need to be paying them minimum wage and obtain a policy of workers compensation for them.10

Soup Bucks

Next, I can take my soup operation one step further and start creating soup gift certificates.  If I pay someone soup in exchange for a bicycle, it will be more convenient to give that person 50 soup certificates rather than 50 jars of soup.  The recipient can redeem the certificates for soup when he or she needs it and could also give certificates to someone else.  If my “Soup Bucks” start circulating within my local community, they essentially become a local currency.  Each certificate has value not only because it can be exchanged for soup, but because it can be exchanged with anyone that is willing to accept it.    (Interesting, the U.S. Dollar came about in a similar way, except that it was backed by gold, not soup.)

Exchanges that take place with Soup Bucks will likely be taxed and regulated in the much the same way that dollar transactions are.  When people transact with Soup Bucks, they likely need to assign a fair market value to the Bucks, which could be difficult.  That value may be roughly the equivalent of the fair market value of a jar of my soup, which is $8 perhaps.  However, if businesses begin accepting one Soup Buck for goods they would normally charge $10 for, then the fair market value of the Bucks rises.  The value of the Bucks must be determined with reference to their value in the marketplace, not to the value of soup that backs them; if currency were valued on the basis of its backing, the U.S. Dollar would be worth absolutely nothing, now that it is no longer backed by gold.  The legalities of issuing non-dollar currencies will be discussed further below.

SoupExchange.com

Next, to make the exchange of Soup Bucks somewhat simpler and streamlined, I create an online system for tracking exchanges.  Many entrepreneurs in my community begin using digital Soup Bucks to buy and sell goods and services with one another.  A lawyer offers services at a rate of 10 Soup Bucks per hour, and uses her Soup Bucks to pay a house painter, who uses his Soup Bucks to pay a physical therapist, and so on.  Because all of these exchanges take place through the online system I created and administer, the IRS would now consider me to be operating a “barter exchange,”11 and would require that I issue a 1099-B to participants for every exchange valued at more than $1.00.

Soup Credit Union

My final project is to issue 50,000 Soup Bucks and to donate them to a member-governed organization that I help to establish.  People become members of the organization by depositing some of their Soup Bucks into accounts maintained by the organization, and the organization makes loans of Soup Bucks to start-up businesses in my community.  By making loans and receiving deposits, this organization is essentially a credit union, subject to banking regulations and charter requirements at the state or federal level.12

1. Complementary Currency Resource Center: Center for Resources & Networking on Complementary Currency and Alternative Exchange Systems – Home of the International Complementary Currency System Database, as well as the CC Research Group.
2. Community Currencies in Action – Transnational partnership helping to lay the ground for cross-sectorial currency innovations designed for the common good.
3. The New Economics Institute – A list of local currencies active within the US and around the world, developed by the New Economics Institute – founders of the BerkShare.
4. Monetary Ecology – A tool to learn about, create, and share stories of complementary currencies
5. Alternative Currency Systems – Exhaustive list of resources with links
6. Complementary Community Currency Systems and Local Exchange Networks

Videos and Documentaries on the Money System

1. Money and Life –  an inspirational essay-style documentary that asks a provocative question: can we see the economic crisis not as a disaster, but as a tremendous opportunity?
2. Money as Debt – Full length documentary on how money is created
3. Could these 3 simple changes to banking fix the economy? Positive Money
4. 10 year old explains the truth about where money comes from, Positive Money
5. Bernard Lietaer at Pop-Tech 2011
6. The Money Myth: Jem Bendell at TEDx Transmedia 2011
7. Creating Our Own Money: Introduction to Complementary Currencies

Footnotes