What it means
In a LETS, a member who provides a service, such as gardening, receives credits from the buyer, and the buyer's account goes down by the same amount. Nothing is borrowed from a bank and no interest is charged.
The credits are simply a record of what each member has given to and received from the community. Accounts can be negative as well as positive, because the system works on trust.
A negative balance means a member has received more than they have provided, and a positive balance means they have provided more. All the balances across the network always add up to zero, since every credit is matched by a debit.
Most schemes set a limit on how far a balance can go below zero, to limit the risk to others. Members usually list offers and wants in a directory, and a volunteer coordinator keeps the records.
The idea was developed in Canada in the 1980s and spread to many countries. LETS keeps wealth circulating locally, helps people with limited cash to trade and builds community links.
It is limited by size, because it works best where the members offer a wide enough range of goods and services. People may also run up debts they cannot easily repay if the community does not offer what they need.
Tax and legal treatment varies. In many countries, income earned through such trades is still taxable at its market value, and businesses that accept credits may need to record them in their accounts.
Anyone joining should check the local rules and keep clear records. Some modern schemes run on websites or apps, and they sit alongside other local currencies and time banks.
The common thread is that value comes from the members' work, not from a central bank or a pile of cash. For a finance professional, a LETS is a useful example of credit created by trust.
In practice
Real-world examples.
Example
A retired carpenter repairs a neighbour's gate for 80 credits, then uses those credits to buy vegetables from a local grower. He never needed cash for the exchange. The grower later spends the credits on a haircut. The balances across all three people remain matched.
Example
A freelance translator with an irregular income joins a LETS to pay for childcare. She earns credits by translating documents for other members and spends them with a local nursery assistant. Her cash is saved for rent and bills. She is glad that her translation skills can pay for childcare as well.
Example
A small cafe accepts part of its lunch price in local credits and spends them on repairs to its shelves. The owner records the credits at their agreed dollar value in the accounts. She also reports the income for tax like any other sale. The scheme provides her with a monthly statement to make this easier.
Formula
Calculation
Sum of all member balances = 0
Ana does $120 worth of gardening for Ben, so Ana's balance becomes +120 credits and Ben's becomes -120. Ben then repairs a bicycle for Cara, valued at 60 credits, which gives Ben +60 and Cara -60. The balances are now Ana +120, Ben -120 + 60 = -60 and Cara -60. The total is 120 - 60 - 60 = 0, as the rule requires. If the scheme sets a limit of -200 credits per member, all three are well within it.Case study
Seen in the real world.
Riverbend Exchange is an illustrative, fictional LETS in a small market town with about 150 members. It started after a local factory closed and many residents had skills but little cash.
In its first year, members traded the equivalent of about $90,000 in services, from plumbing to piano lessons. The coordinator noticed that three members had balances approaching the -300 limit, and that few members were offering the services those three needed.
The committee held a meeting to recruit members offering more trades, including food and transport, and reminded everyone to keep a record for tax purposes. Within six months, the negative balances had eased. The story shows that the system works only if the mix of offers fits the needs.
Watch out
Common mistakes.
- Treating LETS credits as tax-free, when authorities in many countries treat trade income at its market value.
- Thinking a negative balance is a debt to the coordinator, when it is an obligation to provide goods or services to other members.
- Expecting credits to be converted into national currency, which most schemes do not allow.
Questions
People also ask.
How is a LETS different from barter?
Barter swaps goods directly between two people, while a LETS records trades in a shared ledger so credits can be spent with anyone in the network.
Is the money in a LETS real?
The credits are a record of obligations within the community and are not legal tender, but they can have real value to members.
What limits the size of a LETS?
The number of members and the range of goods and services they offer, because credits are useful only if there is something to buy.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related