Q: This question has to do with running an exchange versus what the difference is between the line of credit and a debit to a member acct.
Since an exchange can “create” trade dollars as needed by simply assigning and increasing a line of credit to our exchange, and since those trade dollars have no tax consequences as they are created rather than earned through sale activity, what is the point of charging a member’s account $10 or $15 per month in trade dollars?
We were under the impression that the reason we debit a member account for trade dollars each month is so we have trade dollars available to the exchange for business and personal use, such as advertising for the exchange in a member magazine. But if we simply have the right to create and increase our exchange trade dollar line of credit there appears to be no need to debit the member account other than to create a sense in the member that they need to trade more often since we are debiting their account.
A: One is a credit line where you are using trade dollars that you haven’t earned, which is no different than a business getting a credit line or taking a business loan from a bank to use for business expenses. This credit line (when used) or loan has to eventually be repaid. Charging members a monthly fee in trade becomes trade dollar revenues to the exchange whereby you are earning trade dollars from sales (fees) that you can use to pay for business expenses, such as advertising, office cleaning, computer networking and repair, etc.
Let me correlate this to the US government. The government collects taxes (as an exchange would collect monthly trade fees). They use those taxes to pay for government operating expenses. But, they don’t collect enough taxes because the government spends more than they collect. So, the government is deficit spending, creating a huge deficit in the economy, which a) eventually screws up the economy and b) somehow the deficit needs to get repaid.
Spending a credit line for operational expenses is OK, but only to a certain extent as significant deficit spending will screw up your exchange’s economy. And like any bank loan or credit line, the credit that you extended (even to to yourself) has to be repaid. The only way an exchange has to repay the credit extended to an exchange is to earn trade dollars from monthly trade fees or from profit derived from trade sales.
Most highly successful trade exchanges attempt to maintain a zero or near zero deficit system, meaning the total of all of the positive account balances equal the total of all of the negative account balances, including the exchange’s operating accounts. Exchanges do this by earning as much trade as they need to cover trade dollar expenses.