Rethinking Money

by Bernard Lietaer

  I believe, inevitable. The question is only

  whether we can think our way through to a

  better outcome before the next generation is

  damaged by a future and bigger crisis.1

  SIR MERVYN KING, Governor of the Bank of England

  Ordinary people all over the world have been rethinking money in an effort to resolve their pressing cash problems. Rethinking money leads us to reconsider the entire banking sector as the source of money and loans. This has generated some interesting and provocative innovations, some by clear intent, others by happenstance.

  Dissatisfaction with the banking sector is at an all-time high. The Facebook movement Move Your Money materialized when Bank of America announced plans to increase its bank fees. Within 90 days, 5.6 million U.S. adults changed banks. “Of those switchers, 610,000 U.S. adults (or 11 percent of the 5.6 million) cited Bank Transfer Day as their reason and actually moved their accounts from a large to a small institution.”2

  Community Bankers of America said a poll of its 5,000 members found that nearly 60 percent of community banks are gaining customers who “are sick and tired” of the big financial institutions.3

  As described in Chapter 4, in functioning systems, nature leans more to resilience than efficiency. Ironically, whenever a banking crisis unfolds, governments invariably help the larger banks absorb the smaller ones, believing that the efficiency of the system is thereby increased. Instead, when a bank has proven to be “too big to fail,” why not consider the option of breaking it up into smaller units that compete with each other? This has been done in the United States before; for instance, the Bell Telephone monopoly was broken into competing “Baby Bells.” But more often, what tends to happen is that banks that are too big to fail are made into still bigger ones, until they become “too big to bail.”

  In the midst of today’s widespread discontent and lack of access to credit, a number of successful solutions using cooperative currencies have popped up in various parts of the world. Perhaps one of the more entertaining and imaginative solutions spontaneously emerged out of dire necessity.

  Ireland, during the decade between 1966 and 1976, experienced three separate bank strikes that caused the banks to completely shut down for a total of 12 months, virtually bringing the country to a standstill. It was impossible to cash a check or carry out any banking transaction while the banks’ doors were closed. Consequently, the population of Ireland could not access well over 80 percent of its money supply.4

  What arose from this seeming disaster was the largest spontaneous nationwide mutual credit system—with the local pubs acting as the center of commerce. Michael Linton commented, “The Irish are an imaginative bunch, and they soon realized if the banks were closed then nothing prohibits writing a check and using this check like cash. So they started writing checks that soon circulated, valued at their face-value, as if they were official money. A check would make the rounds between several people within a circuit facilitating business and people getting on with their daily lives.”5

  When official bank-issued checks were used up, individuals went to their local stationery shop or news agent for supplies and created their own checks. “Usually a guy would write out a set of checks, written in denominations of fives, tens, twenties, and possibly fifties, because these would be easier to negotiate. The idea caught on quickly. Now, a person from Cork wouldn’t necessarily take a Dublin check and vice versa. It was important in these transactions to know the people with whom you were dealing,” added Linton.

  MONEY BACKED BY THE FULL FAITH AND CREDIT OF GUINNESS

  Employers soon became keenly aware that their employees needed access to cash to cover the critical needs of their daily lives. Some of the large employers, Guinness among others, issued paychecks in various smaller denominations, rather than one check for the entire salary. That way, they could be used as a medium of exchange, just like cash. Linton added, “Employers, particularly the brewers, started giving paychecks to their employees in denominated checks, and those checks became fully accepted at every drinking establishment in Ireland.”

  Additionally, full paychecks for the entire amount of one’s wages, especially from trusted employers, could be readily used as an instrument of payment for goods and services. This is reminiscent of the story in the opening of Chapter 2, where the tourist comes to the inn and puts a $100 bill on the counter, and while he’s investigating the accommodations, several townspeople circulate the $100 to pay off their debts. But in this case, the pub owner or local merchant could validate the creditworthiness of the check.

  Economics Professor Antoin E. Murphy of Trinity College Dublin reports, “The nature of the economy greatly facilitated the emergence of this new system. The Republic of Ireland had a population of only three million inhabitants. The small size of the population meant that there was a high degree of personal contact amongst members of the community. Where information was lacking at the personal level, a substitute collective information existed in the form of retail shops numbering around 12,000 and that well-known Irish institution, the public house, 11,000 of which exist in the Republic [which yielded] a pub to population ratio of 1:190.”6

  The close-knit nature of Irish life, even in the cities, meant that shop owners and publicans knew their regular clientele very well. As Murphy put it, “One does not, after all, serve drink to someone for years without discovering something of his liquid resources.”

  He continued, “The Irish created an unregulated, totally anarchistic community currency matrix. They were operating on the basis of the Irish pound at the time. But there was nobody in charge and people took the checks they liked and didn’t take the checks they didn’t like. So the whole world just revolved around that simple fact. And, it worked! As soon as the banks opened again, you’re back to fear and deprivation and scarcity. But until that point it had been a wonderful time. High velocity, local circulation, and the pubs as the center of commerce.”

  To sum up, the Irish developed a system that enabled them to get on with their lives during a very challenging time, with great success.

  According to Murphy’s research, uncleared checks totaled £5 billion when the banks opened again for business. “The direct use of means-of-payment money (bank deposits) was removed from the transaction process. In the absence of this money, exchange activity remained relatively unaffected because the public was prepared to use undated trade credit as the instrument of exchange.”7

  Another variation of the mutual credit system was used to address a different banking crisis in another decade in another country. In this case, the banks threatened to suspend lines of credit, the lifelines of many businesses. The solution that arose is still in existence today. It is actually a major contributor to that country’s ongoing monetary stability and robustness. It is perhaps surprising to learn that the country where this happened is Switzerland, one of the world’s most economically conservative and stable countries.

  THE WIR

  Opinions abound as to why Switzerland enjoys such apparent economic stability. Many suppose that it’s because the country was neutral in the Second World War and didn’t have to suffer the economic and social consequences. Whimsically, would it have something to do with some unknown magical ingredient in their Alpine drinking water?

  The truth is far more compelling. A major contributor to Switzerland’s resilience turns out to be a business-to-business currency and an unheralded dual currency banking institution behind it. The story of this success has its initiation during the bleak days of the Great Depression.

  Two Swiss businessmen, Werner Zimmermann and Paul Enz, got together with a dozen or more business associates to decide what they could do to address the financial crisis of the 1930s. They had each received a notice from their respective banks that their credit lines were going to be reduced or eliminated; hence bankruptcy was inevitable. They realized, however, that business A needed the bank loan to buy goods from business B, which in turn
needed money to buy materials from its own suppliers. So they decided to create a mutual credit system among themselves, inviting their clients and suppliers to join.

  Here’s an example in very simple terms: A baker who needed flour and eggs incurs a debit from a local farmer in exchange for these goods; with that credit, the farmer gets hardware from the local supplier for the barn he is repairing, and the baker supplies the local car repair shop owner with baked goods for his family, bringing the baker’s balance back to zero. All these transactions take place without being mediated by conventional money.

  The country’s banks mounted a massive press campaign to try to squelch this revolutionary idea. Miraculously, the campaign failed, and this ingenious system saved the businesses involved. These people went on to create their own currency, the WIR, whose value was identical to that of the national money but had the distinguishing feature that it didn’t bear interest. A cooperative was set up among the users to keep the accounts dealing with that currency. Over time, the system grew to include up to a quarter of all the businesses in Switzerland.

  Although the value of the WIR is pegged to the Swiss franc (1 WIR = 1 Swiss franc), all debts in WIR have to be settled in WIR. There is no convertibility into national currency. Participants can also borrow—that is, secure lines of credit from the cooperative—in WIR currency at low interest rates ranging from 1 to 1.5 percent. All such loans need to be backed by inventory or other assets.

  The interesting feature of the WIR is that the currency issuance automatically tends to be countercyclical. During a recession, when regular banks reduce lending, businesses use more WIR to meet their needs. When the economy heats up and the commercial banks are lending Swiss francs again, the number of WIR in circulation tends to decrease. This feature is effective at smoothing out the booms and busts in the Swiss economy and has contributed significantly to Switzerland’s economic stability.

  Jürg Michel, president of the WIR Bank, sums up the core attractions of WIR in the 2010 annual report: “Trust is an invaluable asset, especially for a bank. This trustworthiness is confirmed by both private and business clients in a representative survey. The WIR clearing system as the central anchor in our business model has been based for over 76 years on the trust in this currency. The WIR system, oriented towards small and medium enterprises in Switzerland, enables a unique economic network amongst the participants.”8

  Today, the WIR Bank employs 205 people at its headquarters in Basel and seven regional offices. While individual memberships ceased in the late 1950s, some 60,000 businesses, an estimated 16 percent of all Swiss enterprises, were trading in WIR in 2010. Although depositors are mostly small-and medium-sized businesses, more than a third of all construction companies in Switzerland—a massively capital-intensive sector—use WIR.9 Currently, the volume of trade in WIR annually is 1.6 billion WIR, which is just under $2 billion. This is a 1.4 percent increase over the previous year.10

  Business is conducted by check, credit cards, and the Internet. Mobile phone payments will be available soon. Transaction fees are paid on each deal. Interestingly, the WIR is the credit card in Switzerland that operates in two currencies.

  The WIR members have access to an internal database to search for goods and services of all descriptions. Next to each business listing is the percentage it is willing to accept in WIR, or whether the rate is open to negotiation.

  Professor James Stodder of the Rensselaer Polytechnic Institute has conducted several macroeconometric studies proving that the secret to the country’s legendary economic stability is this WIR currency, circulating among businesses in parallel with the national money. His study proved that the WIR contributes significantly to the stability of the Swiss economy and its low unemployment rates by providing “residual spending power that is highly counter-cyclical.”11 “Growth in the number of WIR participants has tracked Swiss unemployment very closely, consistently maintaining a rate of about one-tenth the increase in the number of unemployed.”12 This means that when the conventional Swiss franc economy slows, job losses are spontaneously reduced as more people join the WIR economy.

  Finally, a more recent study13 based for the first time on more detailed WIR data explains how it is possible that the WIR, whose volume is only a fraction of a percent of Swiss GDP, can have such a significant macroeconomic effect. The answer is that the WIR volume is not only highly countercyclical, but also highly leveraged, meaning, therefore, that many WIR exchanges are pulling a significant volume of activity in Swiss francs with them. For instance, when a hotel is purchased 50-50 in WIR and Swiss francs, the overall economic impact is double from what it appears by counting only the WIR component. This study also reveals that many of the larger Swiss firms are officially “non-members” of WIR, but accept de facto WIR transactions during economic downturns. A third relevant factor is that the velocity of WIR exchanges among the smaller businesses that are members increases significantly when the economy slows down, so that the same volume of WIR currency generates more business activity, again precisely when it is most needed.

  Professor Tobias Studer, from the Center of Economic Studies at Basel University, Switzerland, considers the Stodder research a breakthrough: “For the first time, an independent American researcher has arrived at a surprising conclusion: Far from representing a factor of disturbance for the national monetary policy, the credits created by WIR constitute a support of the National Bank [the Swiss central bank] in pursuit of its monetary policy objectives.”14

  Stodder added, “So when conventional banks are cutting their credit because there’s a big lack of financial confidence, and banks are essentially closing their doors to small creditors, there’s no question that historically these periods are those in which cooperative currencies spring up. It happened during the Great Depression, and it’s happened again during the current world downturn.”

  THE WIR IN THE UNITED STATES

  The WIR’s success has inspired some innovators to take action. An application of the WIR model, although on a very small local scale but inspired nonetheless by the Swiss prototype, has taken root in Burlington, Vermont, spearheaded by the Vermont Businesses for Social Responsibility (VBSR) program. “Quite literally, from my studies of biomimicry, I’ve been applying what I’ve observed to the monetary system. And a fiat monetary system simply doesn’t resonate, but mutual credit does indeed. Mutual credit really looks to excess capacity where things are being wasted or unused and turns them into inputs. As the saying goes, linking unmet needs and unmet resources within a given community,”15 says Amy Kirschner, marketplace manager for VBSR.

  She explains that every business or industry has a cycle. Few businesses are busy all the time, so they take their trade excesses, things like empty seats in classrooms, matinee screenings in cinemas, off-peak times at restaurants, empty meeting spaces, and unsold advertising and sponsorships, and offer them as employee bonuses and benefits and as promotions without having to use conventional money. Business can find new suppliers and customers, using VBSR trade credits.

  “More than 1,500 businesses in Vermont already have access to a system through which they can find new customers using their excess capacity to pay for their unmet requirements,” she added.

  BRAZIL—A NETWORK OF DUAL CURRENCY COMMUNITY BANKS

  João Joaquim de Melo Neto Segundo recalls a fateful neighborhood meeting he attended in Conjunto Palmeira in the late 1990s. His hometown is 14 miles from the seaside tourist town of Fortaleza in northeastern Brazil. Originally, nothing was there but palm trees. It became a shantytown with a population of 32,000 during the 1970s as people were relocated from the coastal areas. While basic infrastructure like housing and some roads had been built, there was little in the way of urbanization: Shops and other basic essential services like health offices that offered rudimentary medical treatment were nonexistent. Life was basic and bleak and therefore rather depressing.

  “Someone at the local meeting of folks from the neighborhood raised
the key question that turned everything on its head. That provocative question was ‘Why are we poor?’ And the response would be that we’re poor because we have no money! But the answer may appear obvious, though that it can’t be true. It has to be something else. So people in the community started doing research and mapped out the consumption patterns of the population of the area. They figured out that approximately 1.3 million Brazilian reals ($662,570) at that time circulated within the community. So it’s not a lot of money, but it’s definitely some money. The problem was that 80 percent of that currency was quickly leaving the local economy. We’re poor because we lose what we have, and additionally we lose what little savings we have. So neighborhoods are not poor; they become poor. And that realization was the beginning spark of Banco Palmas,” recalled Segundo, a former seminary student turned banker.16

  Conjunto Palmeira near Fortaleza, northeastern Brazil in 1974 during the early stages of building. There was nothing but palm trees when construction first started. Photo credit: Banco Palmas.

  Segundo also realized that relatively small cash infusions could make a big difference in people’s lives. These microloans can be classified into two categories. First, there are loans for personal needs, known as consumption loans, to cover food, clothing, gas, and items for personal hygiene. Second are comparatively larger loans, called production loans, for setting up or in most cases expanding small businesses, such as street stands, shops, and service providers. Segundo’s inspiration came primarily from Liberation Theology, a Christian movement that developed in the Catholic Church in Latin America in the 1950s and 1960s and explores freedom from economic and social injustice. Another major influence on Segundo came from the Spanish cooperative movement of the late 1950s, called Mondragon. It is a federation of cooperatives that currently provides employment to some 83,000 people in a network of 256 companies in the Basque region in northern Spain. Its annual revenue is 32 billion euros.17