The Evolution of Money

by David Orrell

  Negative Interest

  Historically, people often seek alternatives when the currency of choice, deliberate or forced, is in short supply or is otherwise losing its footing. The situation is akin to a cardiac arrest: money stops flowing, and unless something takes its place, parts of the economy can wither and die. The Great Depression saw the invention not just of the WIR but also of some more radical monetary experiments that proved very successful, at least while they were allowed to continue, and paved the way for the later development of local currencies,

  In 1929, the owner of a small Bavarian coal mine offered to pay his workers in a script that was redeemable in coal (the alternative was to close the mine). The notes, called Wära, had a monthly fee of 1 percent—a kind of negative interest—that paid for the storage costs. As the economist Silvio Gessel had shown, this meant that people spent the bills as quickly as possible, instead of hoarding them (see box 3.2). The effect—as with the bracteate coins from the Middle Ages—was to boost the velocity of money and, therefore, economic activity. Wara quickly gained popularity, first among local businesses, which accepted it in exchange for goods and services, and then nationally, as some 2,000 companies from all around Germany joined the scheme. Shortly afterward, in November 1931, the German central bank prohibited the use of wara, and the coal mine that backed it closed down.

  It therefore met the same fate as the equally short-lived worgl money (1932–1933), which was backed by Austrian schillings rather than a commodity. Worgl, a small town in the Austrian Alps, decided to cope with the failing economy and rising unemployment via “certified compensation bills.” Each month, a stamp worth 1 percent of the face value had to be applied, which again amounted to a negative interest rate, and created an impetus to spend (if people didn’t want to buy anything, they could always pay their taxes early). The town’s economy thrived and attracted the attention of economists, including Irving Fisher, and mayors of 170 communities that started exploring the possibility of adopting the worgl. At that point, the Austrian National Bank issued a prohibition order against this tender and made the issuance of “emergency money” a criminal offense.

  Scrip currencies were also popular in many other countries during the Great Depression. In the United States, they were championed by Fisher, who wrote a book on the subject called Stamp Scrip, and suggested the slogan “Stamp Your Scrip to Stamp out the Depression.”21 Instead, Roosevelt stamped scrips out in 1933, by making them illegal. In 1936 the Social Credit government in the province of Alberta issued prosperity certificates to civil servants as part of their pay. Each dollar certificate needed a 1-cent stamp to be added every week to remain valid; at the end of the week there was a rush to spend the certificates, with the result that merchants were often left with the task of affixing the stamps. The federal government outlawed the program after one year (matters weren’t helped by the fact that the stamps tended to fall off).

  It is not clear how sustainable schemes such as the wara or worgl would have been, since the experiments were artificially cut short, but it is notable that their closure coincided with the rise of unemployment, and later fascism, in Germany and Austria in the period leading up to World War II.22 And of course it was the preparation for that war that finally lifted countries such as the United States and Canada out of depression. Scarcity-based currencies, which were invented to pay war debts, have war in their DNA.

  (Hyper)local Currencies for Local Wants and Needs

  The idea of local currencies did not of course die out, and indeed their popularity has steadily gained in recent decades, propelled by the monetary uncertainty that followed the Nixon shock, the rise in community activism and environmental/antiglobalization groups, and the advent of personal computers and the Internet, which made administration much easier. As with liquidity networks such as WIR, they gained a further boost in the fallout of the GFC, when people again became understandably keen to explore alternative monetary avenues. Greece, for example, has seen a resurgence in local currencies since the debt crisis created a sudden shortage of euros.23 Estimates vary, but it is believed there are up to a few thousand alternative currencies of various sizes in operation around the world. Many (though certainly not all, as we will see later) are explicitly motivated by community activism or ecological principles and an attempt to move away from the conventional currency system, which is seen as socially and environmentally damaging.

  The model for many such schemes is Ithaca Hours, which was first introduced by community organizer Paul Glover in Ithaca, New York, in 1992. Each Hour is valued at $10 and is generally considered to be a reward for an hour of work, though rates are subject to negotiation. While not directly convertible to dollars, they are backed by a network of businesses that agree to accept them as payment at that rate. Users were originally matched through advertisements in a bimonthly newspaper and received four Hours when they placed an ad. Today the printed notes can be purchased from a local credit union and are currently accepted by more than 900 participating local businesses.24 Because the currency needs to be used locally, this gives an advantage to small businesses with local supply chains (or put another way, it counterbalances the advantage of large companies that source globally and have no attachment to the community). As Glover said in an interview: “We would like to change the trading process so that it’s more equitable, more welcoming, more fair, opens doors between people, builds bridges, allows people to trade on a more fair basis, and get compensated doing what they like to do. Especially, the environment is a consideration in the market place for us.”25

  The Canadian city of Calgary’s version, known as Calgary Dollars, has been operating successfully since 1996. San Francisco’s Bernal Buck, unlike most other local currencies, relies on plastic and is thus a local Visa, based on an account at a local credit union. When used at participating venues, consumers get back 5 percent of their next purchase, which resembles the scheme that frequent-flier or rewards cards—corporate money we shall discuss further—employ.26 In England, the seaside city of Bristol got a lot of attention in 2012 with its launch of the Bristol Pound, a local currency backed (in pounds sterling) by the Bristol City Council and the Bristol Credit Union, and endorsed by firms including the local bus company and the electricity provider Good Energy. Users of the currency are charged 3 percent to convert back into sterling, which incentivizes them to stock with local providers. A critical feature is that council taxes can now be paid in local currency, which is a direct challenge to the main currency’s monopoly. The mayor of Bristol, George Ferguson, takes all of his income in Bristol pounds. The project is run by the nonprofit Bristol Pound Company, whose Stephen Clarke says: “We’re not really just an economics project, we’re a social project. One of the big things we’ve done is we make people talk about money and think about money.”27

  Most community currencies are still fiat currencies that need to be administered by a central authority—even if it is now a local authority. An alternative approach is Local Exchange Trading Systems (LETS), which act as a kind of WIR-like exchange network for labor. The name was coined in 1983 by Michael Linton, who initiated a LETS system in Courtenay, British Columbia. Under this system, a babysitter, for example, can swap time for a credit and use it to pay someone for a haircut. The credits don’t become scarce, because they can be created at any time by doing work, and interest is not charged. It is therefore not necessary to manage the money supply as with a centralized currency. LETS and related Time Dollar schemes, which are valued in terms of labor time, now exist in many countries, but tend to be rather small-scale, perhaps because that makes it easier to identify and deal with freeloaders (a problem with any form of credit sharing is that people can go into debt, and some decide to stay there).

  A unique advantage of alternative currencies is that they can be tailored to incentivize users not just to shop locally but also to shop or otherwise behave in a particular way. As just one of many examples, the Torekes currency from Ghent in Belgium, cr
eated by a team led by Bernard Lietaer, was explicitly designed to revitalize the deprived Rabot-Blaisantvest area of the city. Participants earn Torekes by performing tasks such as caring for their street, participating in community events such as cleanup days, coaching sports, signing up for green electricity, and so on. The Torekes can be spent in local shops and are the only accepted means of payment for renting a plot in community gardens.28

  Similarly, Equal Dollars of Philadelphia is based on the idea that a good deed should not go unrewarded. Accepted by more than 100 local businesses, Equal Dollars can be earned largely by helping neighbors and volunteering. “The U.S. dollar is fine to feed the upper one percent, but we are missing something that gets people to work for each other and for the community. … This helps regular people exchange goods and services in an economy that is in deep trouble,” explained Bob Fishman, the executive director of Resources for Human Development (RHD), a nonprofit that launched the project in 1996.29 Successfully, one might argue, since the crisis-driven spike in interest enabled RHD to offer a $50,000 grant to the first state government that will try out its baby. The EU similarly decided to back projects such as Community Currencies in Action, which aim at understanding the purpose and function of local moneys and at subsequent explanation of these to the public sector.

  Japan, too, has developed a number of innovative schemes. Hureai Kippu (Caring Relationship Tickets), launched in 1994, are earned by helping to look after seniors, so are like Time Dollars but are tailored for a particular type of work. The credits are transferable, so for example, a person can send them to their parents in another town. Another complementary currency known as WAT, which started in 2000, operates on the same principle as bills of exchange or tally sticks. A WAT is reckoned as 1 kWh of electrical current generated by natural forces (e.g., wind or solar), and equates to about six minutes of unskilled labor or around ¥75 to ¥100. Any participating business can write a WAT ticket, which circulates within the network of users until it returns to the original issuer, who then cancels it.30 And anyone can join this peer-to-peer network just by accepting a ticket as payment; transactions and participants are not centrally tracked or controlled. Because the system is based on mutual trust, rather than deference to a central authority, it helps to foster business relationships.

  The success of these currencies proves there is a tectonic shift going on at least in certain pockets of society and shows how specific niches—meaning groups that identify themselves with a particular idea—can be served well by an appropriate monetary tool (box 8.1). Local currencies are also perceived as being somehow warmer and more friendly than cold hard cash and help to build community spirit and social capital, and their use is associated with an increase in reported well-being.31 Money operates at the nexus between number and value, between calculation and spirit, and its design affects that relationship. Just as scarcity-based currencies foster a sense of individuality, competition, and power, so complementary currencies can foster a sense of connection, cooperation, and trust, and be used to incentivize desired social outcomes.

  Box 8.1

  Of a Pensioner’s Private Currency

  In 1999, retired law professor Giacinto Auriti persuaded people as well as forty retailers from the Italian village of Guardiagrele to dump liras and adopt his very own currency, the simec. He offered an unbeatable deal, since the simec was pegged to the lira but Auriti paid two simec for every lira received. This experiment was supposed to prove his theory about money and a vast banking conspiracy in which central banks, instead of giving money to the people, lend through the banking system at interest and thus are robbing the common man.

  A chance to double one’s purchasing power, rather than the reasoning behind it, inspired a shopping spree that generated an estimated 5074.6 million liras ($2.74 million) in turnover, with Auriti claiming that at one point there were 2.5 billion liras in circulation. That is when Italy’s Finance Guard, a militarized police force that usually deals with smuggling or tax fraud, came in. One hundred guardsmen invaded the town, confiscating the simec banknotes—only to be later ordered by a judge to release both the notes and the professor. Auriti, as tax police investigators found out, funded the scheme from his very own savings, and thus no criminal offense had been committed.

  This could have been the end of the story but it was not. In 2002, before European states were about to adopt the euro, Auriti returned to the stage, warning that global central bankers were about to provoke an artificial crunch, adding that the simec provided a necessary safety net. At the same time, Italy’s anti-immigrant, anti-euro Northern Party announced its interest in replicating the Guardiagrele monetary experiment. Since then, nonconformists and fringe politicians alike occasionally reintroduce the idea.

  Alternatively, of course, the same effects can be harnessed by corporations to improve profitability. Tiring of branding commodities and experiences, some are now turning to branding money itself.

  Corporate Money 201: In Brand (Loyalty) We Trust

  Which is the biggest currency of all? While most would probably guess the U.S. dollar, the reality is slightly different, should we allow for a broader definition of money. In 2005, the Economist weekly calculated that there are $700 billion Air Miles in circulation worldwide, making it the globe’s number one currency. Quite a trip for what started as the loyalty program of Texas International Airlines in 1979. Along the way, the number of people who belong to the scheme grew to over 100 million. More than half of the Air Miles were collected on the ground, since airlines sell points to phone operators, credit card companies, and other retailers.

  Naturally, Air Miles did not stop at conquering the global reserve currency and grew further. In 2005, there were 14 trillion frequent-flier miles outstanding. Seven years later, the amount doubled according to the Economist. Such an expansion comes at a price. “Airline miles are the most rapidly depreciating currency in the world,” the news site Zero Hedge said, pointing out the steep increase in the number of miles needed to get places in 2013.32 The “prices” went up by as much as 87 percent, which only underlined the gradual erosion of the miles’ value. At the beginning, an upgrade to first class on a supersonic Concorde cost 20,000 points; today, on a normal airplane, it is 50,000 points plus $900 in fees.

  Needless to say, while consumers suffer from this erosion of wealth—Orrell even had his Air Canada miles confiscated after being out of the country for a few years, so now scrupulously avoids that airline—those in charge reap a hefty profit. United Continental, for instance, brought in some $3 billion from its frequent-flier program in 2010. Moreover, while its revenue per passenger was $20.59, its revenue per member was $32.97, showing that these programs offer both an interesting marketing tool and also “piles of cash from sales of miles.”33 No wonder, then, that some economists compare the system to current central banking: miles can be bought, sold, held, and traded, just like (supra)national currencies, with airlines being at the center of it all, resembling central banks, controlling the rates by an increase or decrease in supply. An important advantage of miles is that the airline can control how they are spent, for example, by limiting their use to off-peak times, so that they complement rather than cannibalize conventional sales.

  A wide range of companies of various backgrounds have introduced similar loyalty programs. Canadian Tire money, for example, is issued to customers of the country’s largest hard-goods retailer when they make a purchase. It serves as a scrip currency that can be redeemed at the store (some other businesses also accept them). Introduced in 1958, it came into its own in the early 1960s when the store was involved in a gas price war with competitors. Each note was printed with the rousing message that “together we will defy the giants and win the gas war. … Our mutual cause is morally and economically right.”34

  While loyalty schemes have always offered the possibility to boost revenues and open up a communication channel with users, they more recently have also made it easy to spy on consumers. Given that
a loyalty card follows spending patterns, and given the improving ability to crunch big data, the potential these schemes have exceeds by far what could had been expected of them when the concept was introduced in the 1980s. Because the legislation lags behind the practices used, “this is a Wild West period of personal data harvesting,” as one person working in the area put it to us.35

  Empowered by modern technologies and faced with a natural limit to growth within their own sectors, a loyal community of trusted—and trusting—consumers can open up a gate to a brand new potential. Coffee chain Starbucks, for instance, could also become tomorrow’s bank. It is estimated that its Stars system accounts for up to 30 percent of all transactions, meaning that every third customer buys into the scheme that allows them to buy food and drinks with a card on which they collect points by paying with it, using the Starbucks app, or entering Star codes collected at participating retailers. Every third customer is a “good old friend” to Starbucks—and the Starbucks’ barista is their good friend.

  It is the latter that can enable the coffee company (and many others) to expand into the territory that has long been occupied by banks only. “You probably haven’t seen a bank teller since the Bush administration, but you’re on a first-name basis with the barista at your neighborhood,” notes Marcus Wohlsen of Wired magazine. A growing list of corporate nonbank heavyweights such as PayPal, Wal-Mart (through its Bluebird partnership with American Express), and Google Wallet now offer alternatives to debit cards, checking accounts, and money transfers.36 No wonder, then, that consultancy Accenture predicts that nonbanking competition will deprive banks of one-third of their revenues by 2020.37

  Be it Starbucks Stars, Amazon Coins, or Nike’s Sweat, big firms are offering alternative monetary worlds that, like fiat currencies, rely mainly on brand recognition and trust. Given that the fan base of some of the brands compares in size to large countries (Real Madrid, for instance, has 450 million fans worldwide, making it the third largest “nation” on the planet), the potential is certainly there. Moreover, as some experts argue, an interesting opening exists to create hybrids that will exploit the possibilities of two or more parallel monetary universes (box 8.2).