New Money for a New World

by Bernard Lietaer

  Saber and Inflation

  Three factors make the noninflationary dynamics of the Saber fundamentally different from those of regular money. They are:

  Sabers are only redeemable into conventional money by universities or third-level educational institutions within the system, and only for educational purposes;

  the quantity of Sabers issued would be equal to the universities’ capacities to increase their number of students, thereby avoiding the inflation problem generated by a currency that is created in excess of the goods or services available. Extra students would be using seats that would otherwise be empty;

  the demurrage fee of 20 percent ensures that the Sabers circulate only for a limited and controlled time period, further reducing the possibility of excess currency.

  Support for the Saber

  A variation of the original Saber project is being developed by Professor Schwarz, with funding by Brazil’s Ministry of Science and Technology, Brazil’s Ministry of Culture, and the Brazilian Development Bank (Banco Nacional de Desenvolvimento Economico e Social, or BNDES). It should also be noted that the Saber also enjoys support from the central bank of Brazil, which has formally acknowledged that “social currencies” not only do not pose a threat to conventional monetary management, but instead provide a significant positive contribution to the social fabric and the economy in general.

  The legal counsel of Brazil’s central bank has recently concluded that: “social currencies should be regarded as public policy instruments for local development compatible with monetary policy.”)264 This is the first central bank to make such an acknowledgment. Other countries have expressed interest in this concept.

  CLOSING THOUGHTS

  Many of our most pressing social concerns are treatable. Improvements can be made without the need to increase taxes, redistribute wealth, borrow, or otherwise increase burdens on already limited public resources and overtaxed economies. Communities around the world are instead finding relief in the form of complementary currencies, such as the Fureai Kippu and the Saber. These monetary initiatives can be designed specifically to address particular concerns by ways and means that do not hurt anyone and instead promote the general good. Many different monetary designs and improvements are now readily available, made possible by the revolution now taking hold in our understanding and use of money.

  Society functions in a manner consistent with the systems that are in place. Until and unless there is amendment to the operating systems that govern society, the desired changes and improvements sought by growing numbers of concerned citizens will simply not take hold. But by rethinking money, many new options and opportunities do become readily available.

  CHAPTER SIXTEEN - Commercial-Purpose Currencies

  Sure, money’s all wrong, and the devil decreed it;

  It doesn’t belong to the people who need it.

  ~PIET HEIN

  While many communities around the world are turning to complementary currencies to help address an ever-expanding range of social issues, new monetary innovations are also being applied increasingly to business-related concerns and objectives. As noted, complementary currencies have been employed for commercial purposes down through history and are finding increasing use again today in business.

  One of the most extensive uses of complementary currencies is the familiar loyalty mechanism used by airlines, credit card companies, hotels, and travelers worldwide—frequent flyer miles. Though not customarily thought of as such, frequent flyer miles are a complementary medium of exchange, with ever increasing opportunities offered to earning flight miles, be it with purchases made through branded credit and debit cards, eating at participating restaurants, renting vehicles, and the like. There are many opportunities as well to make use of these earned miles for an expanding array of products and services. These and other commercial-purpose currencies have clearly demonstrated that such systems need not be restricted to small-scale objectives or local applications alone. During the first 20 years of operations, 9.77 trillion frequent flier miles were awarded, and this number is still growing at a rate of 11 percent per annum.265

  Two of the many timely and vital commercial complementary currency applications are examined next. Each initiative is designed to help businesses, particularly those that are small to medium-sized, weather the ups and downs of the business cycle, and to help ensure against the loss of jobs during downturns. We begin with the longest surviving commercial-purpose complementary currency in the Western world, the Swiss WIR.

  THE WIR AND THE BUSINESS CYCLE

  An insidious feature of economic downturns is the accompanying freeze on credit by banks to businesses. The present money-creation process tends to amplify the fluctuations of the business cycle. When business is good in a particular market, banks tend to be more generous in terms of credit availability, thereby pushing the good times into a potentially inflationary boom period. Conversely, as soon as the business horizon looks less promising, access to credit is tightened, contributing to the deterioration of a minor business dip into a full-blown downturn.

  With the loss of liquidity, a domino effect ensues. Spending decreases, businesses get stuck with inventory, orders to suppliers for materials and services for new products dry up, and so on. A chain of bankruptcies is started with all its effects on unemployment and related social problems. The credit crisis that accompanied the global recession is one case in point. Though central banks try to counteract this cycle, their success is variable, at best.

  Several years following the recent global downturn, the economic climate remains uncertain. Many companies struggle to stay afloat, while U.S. unemployment remains stubbornly high—well over 9 percent according to official estimates, with unofficial figures much higher still.266 The jobless face fierce competition for work, and those with a job are watching their paychecks shrink.267 While the trillions in bailouts aims at preventing a repeat of the 1930s, these sums could not prevent the massive disruption that has taken place, nor has it restored confidence in the marketplace. According to an Associated Press-GfK poll taken in the first half of 2010, only 20 percent of Americans surveyed believed that the economy was doing well.268 Given the banking system’s inherent aversion to risk, credit availability remains hard to come by and is not likely to return to pre-recession levels any time soon.

  All of this begs the question: What can be done to help businesses weather this and future economic storms?

  Options, though not necessarily of the conventional kind, certainly do exist. One example of what is possible comes to us from Switzerland during the difficult Great Depression period.

  Switzerland enjoys one of the most stable economies and highest standards of living in the world. Factors often cited for the economic well-being of this nation include tourism, chocolates, precision watches, a world-famous banking system, and political neutrality during and following World War II. While each of these may well play a role, a unique, little-known, but very robust complementary currency has also contributed to the country’s economic stability for the past 75 years.

  This nation is home to the oldest continuously functioning complementary-currency system in the Western world. Called the WIR, it is a Swiss acronym for Wirtschaftsring-Genossenschaft, which roughly translates as “Economic Mutual Support Circle.” Wir is also the pronoun “we” in German.

  In the early 1930s, Switzerland was faced with economic woes similar to those of neighboring Germany and Austria. By the time of its inception in 1934, WIR’s 16 founding members and many of their clients had received notices from their respective banks that credit lines were going to be reduced or eliminated. Bankruptcy was only a matter of time. Unable to count on the banking sector to obtain the necessary capital during this difficult period, these Swiss businessmen decided to create a mutual credit system among themselves, and invited their clients and suppliers to join. Unlike the afore-mentioned Wära and Wörgl systems, the Swiss initiative managed to not only survive the period, but con
tinues quite successfully to this very day.

  The WIR provides more than seven decades of experience and demonstrates the degree to which complementary currencies can assist both individual businesses and the economy-at-large.

  How It Works

  When business A makes a purchase from business B, A’s account is debited and the corresponding amount is credited to B’s account. The unit of account is the WIR, with parity between it and the Swiss franc (one WIR equals one Swiss franc). The currency is designed to serve only as a medium of exchange to facilitate business transactions. WIR accounts do not bear interest and do not serve as a practical store of value.

  The WIR (“veer”) was devised to counteract the business cycle. This internal currency is used to purchase and sell goods and services from business members within the WIR network, especially when national currency is difficult to come by, as occurs during economic downturns. When banks tighten lending practices, members of the WIR network can simply opt to accept or borrow the readily available WIR complementary currency to continue transacting business, thus diminishing the likelihood of more severe supply or demand side disruptions. Once the economy improves and bank credit is again normalized, WIR members can then shift back once again to the national currency. In essence, the issuance of WIR currency expands and contracts countercyclically with the Swiss franc economy.

  The countercyclical function of the WIR provides an important macroeconomic advantage not only to WIR members but also to the Swiss economy as a whole. A notable quantitative study on the WIR’s macroeconomic impact was conducted by Dr. James P. Stodder, professor at the Lally School of Management and Technology at Rensselaer Polytechnic Institute. Dr. Stodder’s study concluded that: “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.”269

  Simply stated, the study showed that the WIR system contributed significantly to the stability of the Swiss economy and to its low unemployment rates. When the conventional Swiss franc economy slows, more people and firms participate in the WIR economy, thus demanding fewer disruptions to business and far fewer layoffs. The WIR functions as a powerful stabilizing mechanism that limits the severity of the business cycle and the inevitable ups and downs of the economy.

  Professor Tobias Studer, from the Center of Economic Studies at Basel University, Switzerland, considers the Stodder research a breakthrough. He reports:

  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.270

  History and Scope

  It bears noting that the WIR’s contributions to both the economy and the banking sector were not always so well appreciated. When operations first began in the 1930s, the WIR was erroneously viewed as a direct threat to the banking system’s hegemony, and, prompted a similar response to those taken by the central banks in neighboring Germany and Austria at the time (against the Wära and Wörgl, respectively). The Swiss banks proceeded to mount an aggressive press campaign to stop this complementary currency initiative from occurring. Miraculously, their hostile efforts failed.

  In the first three months of operations, the WIR attracted 1,700 participants. Within a year, more than 3,000 businesses made use of this complementary-currency system, and were linked with one another by a catalog of 850 unique categories of goods and services. A cooperative was established to track WIR user accounts, which soon allowed participants to borrow WIR at the low interest rate of 1-1.5 percent. These loans, similar to those issued by a conventional bank, were backed by inventory, real estate, and other hard assets. The system was ultimately credited with saving many of the businesses involved.271

  The system remains fully operational today, with more than 65,000 members participating in WIR nationally. This represents nearly one quarter of all Swiss businesses. In 2006, trading volume in WIRs was 1.67 billion Swiss francs ($1.4 billion).272 WIR owns its own bank that operates in both Swiss francs and WIR, with six regional offices that conduct business in four languages.

  Members tend to participate in WIR exchanges for the following reasons:

  cost efficiency—commission on sales and payment expenses are limited to 0.6 percent on deals completed in WIR;

  cheaper and more readily available credit than is issued in national currency, particularly during downturns;

  auxiliary services such as direct mail, publicity among members, publications, and more, encourage and support small to medium-sized businesses;

  access to a large, varied, and prescreened—thus dependable and credit-worthy—client base, which helps engender trust, a key ingredient with all currencies;

  ways and means to continue to conduct business during periods of contraction or high interest rates.

  Within the context of the recent global economic crisis and the corresponding credit crunch threatening countless businesses, the question that begs to be asked is, might the WIR’s proven ability to facilitate business activity and employment during economic downturns be of use by other communities? Given that complementary currencies have become well established in one of the most conservative, hard-nosed capitalist countries in the world because they make both business and macroeconomic sense, why should it be any different in the United States and elsewhere?

  The case is made below for expanding the WIR model as a means of reducing the impact of the global financial crisis on businesses and governments, both locally and nationally.

  COMMERCIAL CREDIT CIRCUIT (C3)

  What began as a financial and banking crisis in 2008 rapidly turned into a major job crisis. The bulk of the global economy and the vast majority of private jobs are provided by small and medium sized enterprises (SMEs). The survival of many such firms was put at risk due to cash flow problems related to the downturn.

  The Problem

  Under the current paradigm, SMEs rely upon banks and other finance institutions for credit. When credit lines are tightened, the entire economy is adversely affected, especially SMEs. These firms must overcome unique hurdles to continue operations, particularly during downturns. Unlike large customers who are given 90 days or more to pay for services and goods, SMEs are pressured for prompt payments, often within 30 days. When banks either refuse to provide bridge financing or do so at steep conditions, a deadly cash flow trap ensues for SMEs. This has long been an endemic issue in developing countries, but lately has become more critical in developed countries of late as well.

  The Solution

  The Commercial Credit Circuit (C3), like the WIR, provides another option for needed liquidity, and at more reasonable costs than are typically available. This is accomplished by forming a credit circuit among SMEs, their customers, and suppliers, with the addition of an insurer. For a small cost, the insurer underwrites the business deal to guarantee that all parties involved with a business transaction will receive payment.

  Unlike the WIR, any transaction using C3 is fully convertible at any time into national money, allowing this currency system to more easily attract business entities that might otherwise shy away from a complementary means of payment.

  How it Works

  Let us say that a theatre seat manufacturer receives an order for 100,000 seats from a reputable firm, who will pay for the seats by check on delivery. The manufacturer (business A) has its own workers to produce the seats, and a supplier for the requisite materials (business B). Everything is in place to make the deal happen except for the money needed to pay workers and business B. Normally, business A would have to go to a bank for a bridge loan for this situation, which, depending on factors such as the business climate at the time, may or may not be successful. With C3, the needed financing is available in another way.

  The process uses insured invoices
or other payment claims as liquid payment instruments within a business-to-business clearing network. Each recipient of the liquid payment instrument has the choice to either convert it into national money (at a cost), or directly pay its own suppliers with the proceeds of the insured invoice. The manner by which C3 works is described below.

  C3 Step by Step

  The business that initiates a C3 transaction (business A) starts by securing insurance for an invoice up to a predetermined amount, based on the specific creditworthiness of their own business and that of the claims they obtain on third parties (the clients of A). Business A opens a checking account in the clearing-network, electronically exchanges the insured invoice for clearing funds, and immediately pays its supplier (business B) with those funds via the network.

  To receive its payment, business B only needs to open its own checking account in the network.

  Business B now has a positive balance on its account in the network (regardless of when the original invoice comes due from business A).