When money is ‘backed’ that means that the issuer guarantees to exchange it for a commodity at a predetermined price. The money is in effect a warehouse receipt for, say 1 twenty-fifth of an ounce of gold. This has the effect of anchoring the value of the currency to the value of the backing commodity, which inspires confidence where it may otherwise be lacking. Most of the current wave of local currencies are backed by legal tender.
A currency’s backing is very important to establish the legal status and also the value of a currency. If a currency can be priced unequivocally in dollars, transactions will be taxed at the dollar rate. This is entirely appropriate for a business which is doing barter as a way to get better prices of free liquidity but which otherwise measures its profit in dollars. If there is no convertibility to dollars governments step beyond their philosophical remit (this is just my opinion; I’ve never heard a government attempt to justify its actions or its existence philosophically). Rather than tax the money changing hands, guidelines around LETS taxation indicate that professional work itself should be taxed, at the going rate. So I could unblock the sink of an old lady for LETS no problem, but a plumber would have to declare the work done and pay tax on the normal callout charge. It starts to get absurd. What if the plumber invoiced a nominal amount, or charged no LETS at all, or registered an unwritten favour? Is it legal to give my labour to a friend instead of selling it for money? Does government claim ownership of everything of value we produce? Does government determine the value everything using its own legal tender as a measure? Is any life or property possible without money being demanded from people under threat of force? This is a legal grey area that needs to be explored.