How do Merits Work?
By Alex Zorach, February 2nd, 2009
Like people accessing money in a checking account, each member of Merit Exchange has a balance of merits, and can transfer them freely to others. A person's balance must always remain positive, and all transfers must be voluntary. Unlike money, borrowing and lending are not permitted. This means that if people makes an arrangement or deal to pay for something later in merits, they must rely solely on their trust in that user: this encourages people to focus on earning and saving before spending, rather than borrowing to spend beyond what they have earned.
Unlike national currencies, and some alternative currencies, merits are not redeemable by any central authority for dollars or for any goods or services. Merits are not owned by anyone: they are only a recordkeeping instrument.
Like a floating national currency, merits do not have a fixed value; they are not anchored in value to some other currency or measure of value. Rather, their value is determined by the collective behavior and decisions of all people who use them. The value of merits takes form as people set and negotiate prices, trade goods and services in a free market, and think critically about how much things are worth to them and how much they can afford to pay. Like money, the prices and value of goods and services in merits will vary regionally and even from one person to another.
How can merits be used?
Merits can be used in different ways. One of the easiest ways is as a "thank-you" provided to someone after that person provides some goods or services. Such thank-you's can be an acknowledgement that a person has saved you money or time, or it can show appreciation on some other level. This use of merits is similar to the "thankyou's" currency run by the Friendly Favors network. However, unlike the Friendly Favors network, which encourages users to think of thankyou's in dollar value, Merit Exchange encourages its users to move away from thinking in dollar values and instead consider the value of goods and services relative to each other in order to determine the value of merits.
Merits can also be used like money to purchase goods and services. Because merits are not legal tender, whenever merits are accepted as payment, the person receiving the merits must agree to cancel whatever debt is owed in some other currency (such as dollars). In the U.S., such a transaction is taxable as income for the person receiving goods or services. However, people still save money because the amount paid as tax is always much less than the amount in dollars saved. If this sounds complex, do not worry: Merit Exchange provides tools to help you understand and manage these transactions. And even if you never use these types of transactions, you can still save money by using merits as thank-you's.
How are merits issued?
Merits are issued directly to all members on a per-head basis. Merit Exchange uses a demurrage fee or holding fee on unused merits. The supply of merits is expanded and contracted as needed by varying the fee and rate of issuing to people. In the short-term, most users will see only negligible changes in their balance due to the fee and issuing scheme. In the long-run, however, this scheme will prevent hoarding of merits and ensure all communities have equal access to the currency.