New Money for a New World

by Bernard Lietaer

  Business B is thus in position to proceed with one of two options: either cash in the clearing funds for conventional national money (at the cost of paying banking fees plus the interest for the outstanding period (say, 90 days); or paying its own supplier (business C) with the corresponding clearing funds (at no cost).

  Business C only needs to open an account in the network. It then has the same two options as business B: cash in the funds for national money, or spend the C3 funds in the network. And so on…

  At maturity of the invoice, the network is paid the amount of the invoice in national money, either by the client of business A, or (in case of default by that client) by the insurance company. Whoever owns the C3 funds secured by the insured invoice can cash them in for national money without incurring any interest costs (though any associated banking fees still apply).

  Benefits

  The benefits to participating businesses in C3 include:

  Businesses increase their access to short-term funds as needed to improve their working capital and the use of their productive capacity. The size of this credit can be built up to a stable level between a quarter (covering therefore up to an average of 90 days of invoices) and half of annual sales, at a cost substantially lower than what is otherwise possible.

  Suppliers are paid immediately, regardless of the payment schedule of the original buyer. Thus, ample liquidity is available at very low cost to the entire SME network. The approach provides a viral spreading of participation to the C3 networks from clients to suppliers.

  All the necessary technologies are proven; new legislation or government approvals are not required, and the necessary software is available in open source. Only invoices that are 100 percent guaranteed and 100 percent computerized are acceptable in a C3 system. C3 thereby encourages the generalization and more efficient use of IT infrastructure among SMEs, including the opening of new markets and marketing channels through e-commerce.

  Government benefits, especially at the regional level, include:

  Additional income streams are provided for government. An effective way to encourage C3 strategy usage is for governments to accept payment of taxes and fees in C3 currency. This encourages others to accept C3 payment as well, and provides added income to government from transactions that otherwise would not occur. Additional income in national currency becomes available automatically no longer than 90 days after the payment, with no disruption to existing procurement policies. This strategy is now under serious consideration for use by the government of Uruguay.

  The C3 approach is a dependable way to systemically reduce unemployment. Governments at different levels (federal, state or regional) can contribute to a joint guarantee mechanism, which would be considerably cheaper to fund than subsidies.

  C3 helps shift economic activities from the black or grey economy into the official economy, because SMEs need to be formally incorporated to participate, and all exchanges are electronic and therefore traceable.

  C3 systems are best organized at a regional level, so that each network remains at a manageable scale. Businesses with an account in the same regional network have an incentive to spend their balances with each other, and thus further stimulate the regional economy. C3 provides a win-win environment for participants, and promotes other collaborative activities among regional businesses.

  Each C3 network should use the same insurance standards and compatible software to interconnect as a network of networks to facilitate exchanges internationally.

  Benefits to banks and the financial system include the following:

  C3 significantly streamlines the lending and management for insurance and for loan providers. As the C3 process is entirely computerized, SMEs can become a more profitable sector for banks, as the credit lines are negotiated with the entire clearing network, thus providing the financial sector with automatic risk diversification among participants in the network. In the upcoming surge of new competitors in the market—such as Facebook, Google, or Tesco currencies and banks—this monetary innovation provides an additional window for banks to sell their core activities.

  Most banks are also involved in providing insurance services. C3 opens up a whole new market for insurances and credit, all the way down to services for microfinance enterprises. As C3 is fully computerized, even such small-scale entities can now be serviced at a very low cost.

  The C3 mechanism systemically contributes to the stability of employment and of the entire economy, which is helpful for the overall solidity of the banks’ portfolios.

  CLOSING THOUGHTS

  Owners of small businesses can do something more than hope that the economy gets better, or that someone else will see to their needs. The WIR and the C3 are easily implementable and provide cash flow and other benefits for all those directly involved in these complementary currency programs, as well as to the economy-at-large. Additionally, the software required for C3 is available in open source to encourage start-ups of such systems anytime, anywhere. If Uruguay can achieve this on a national scale, it can be done on any other scale that makes sense to the participants.

  CHAPTER SEVENTEEN - The Terra, A Trade Reference Currency

  Many have a wait and see attitude to innovate proposals of this nature, but they shouldn’t with the Terra. Such a Trade Reference Currency reduces risk, stabilizes the world economy, and is a more cost effective approach for international business.

  ~TAKASHI KIUCHI

  Chairman, The Future 500

  Former CEO, Mitsubishi Electric, America

  The world needs a global currency that is nobody’s national money. This may at first appear as a surprising idea, but there are several powerful reasons to justify it.

  WHY A NEW GLOBAL CURRENCY?

  There are two key reasons why a specialized global currency is required today:

  Geopolitical: If the dollar should lose its privileged status as a global reserve currency, we can expect a power grab by other currencies for influence in their respective regions, which has historically generated many wars.

  Practical: A specialized global currency can be designed and administrated to resolve several key issues, including economic instability and corporate short-termism.

  A few words are warranted on each of these arguments.

  Geopolitical

  The dollar’s use as a global reserve currency gives the United States a particular advantage as the only country today that can afford a permanent deficit in its trade. This is because central banks are obliged to accept dollars under the current rules of the IMF. Such an advantage, however, should not be considered a permanent status. This same torch was passed from Britain to America after World War II. Some people claim that it may well soon pass, in turn, to China.

  Such transitions often incur friction, and fights for monetary zones of influence usually provoke damage. The most dangerous period occurs during the decline of a hegemonic power whereby the old guard no longer commands enough power to impose its own solution, but still retains sufficient influence to block any solution proposed by others. This is the situation we find ourselves in today. If a dollar crisis should erupt, the most likely outcome will be a fragmentation of the global system into three monetary zones: a dollar-dominated zone in the Western hemisphere, a european-dominated zone, and an Asian zone (still under preparation). We might expect high volatility between these monetary zones, even more than what is presently taking place with national currencies. It is also likely that foreign exchange controls will materialize between these zones, which will be costly and otherwise problematic. None of this is advantageous or conducive to peaceful economic and political evolution.

  The introduction of the global Terra Trade Reference Currency (TRC) avoids a major potential source of conflict, while solving important problems for all those businesses and other entities that depend on easy and efficient global commercial exchanges.

  Practical

  Introducing a special-purpose global currency resolves several other k
ey issues of particular importance today. Contrary to what takes place with conventional money, the Terra would spontaneously operate countercyclically with the business cycle and contribute to the stabilization of the world economy. Perhaps most importantly, the Terra is designed to give multinational corporations a strong incentive for long-term thinking.

  Given the stakes that are involved and the current financial instability, we believe this to be a timely and vital proposal.

  Even with the detail given here, this chapter should be considered a mere overview. For those interested in a deeper understanding, please consult the White Paper available for download on dedicated web sites.273

  CHARACTERISTICS OF THE TERRA

  The Terra is based on fundamentally distinct principles from conventional, bank-debt issued money. Key differences include:

  The Terra is 100 percent asset-backed, while conventional money is backed by nothing except the belief that other people will accept it. Therefore, by definition, there can never be fractional reserve Terras, and the supply of Terras does not rise or fall with the expansion or contraction of bank credit.

  The Terra’s assets consist of a balanced basket of a dozen of the most representative commodities and services in the world economy. This global reference currency thereby offers a natural inflation hedge.

  The Terra, like the WIR and C3, is naturally countercyclical and therefore helps stablize the economy. Conventional money creation tends to be naturally procyclical, that is, it accentuates the repeated booms and busts that destabilize the economy, even as central banks try to counteract this phenomenon.

  The Terra does not bear interest. It instead has a demurrage charge of 3.5-4 percent per year (to cover the cost of storage of the commodities backing the Terra). The Terra is therefore only a trading and contractual instrument, not a store of value. The Terra therefore encourages trading, while conventional money encourages accumulation.

  The Terra is managed by the Terra Alliance, while conventional money is managed by central banks. The alliance doesn't decide when to create or redeem Terras; member participants make such decisions.

  Four types of entities participate in the Terra system: Terra backers, Terra users, commodities/futures markets, and the Terra Alliance itself. In addition, other organizations or individuals may piggyback off the Terra system, using it simply as a contractual reference unit without participating in the system itself.

  The Terra Mechanism

  The Terra Alliance operations are now examined.

  Creation of Terras

  A member with excess inventory of one of the commodities comprising the Terra, can sell such inventory to the Alliance. By triggering the issuance of the Terra as an inventory receipt (which is paid for and denominated in Terras), that member is then functioning as a Terra Backer. This is how Terras come into being. They are in a sense, warehouse receipts, which are an historically very old form of money.

  What is a Terra Unit?

  A Terra Unit is a claim against a portion of the asset holdings of the Terra Alliance. The Alliance warehouses large quantities of the commodities comprising the Terra. These quantities always equal, in total, the amounts necessary to redeem all of the Terra units in existence.

  To use a simplified example, suppose there were 100 Terra units in existence and each unit represented 1 ounce of gold, plus 1 pound of copper and 1 bushel of wheat. In that case, the Terra Alliance would warehouse 100 ounces of gold, 100 pounds of copper, and 100 bushels of wheat at all times.

  Taking a more realistic example, suppose that an oil-producing member decides to sell 1 million barrels of crude oil to the Terra Alliance in exchange for Terras. Given that crude oil is one component of the Terra “basket,” the Terra Alliance will use commodities markets to sell enough of the oil and buy enough of the other 11 components such that all 12 components are once again equally represented in the Terra basket.274

  Conducting Trade in Terras

  Once Terras are brought into existence, they can be bought and sold like any other form of money or commodity. There is, however, a demurrage charge on Terra holdings, at a rate of approximately 3.65 percent per year. Stated differently, a time penalty on keeping Terras is being charged at the rate of about one hundredth of one percent (.01 percent) per day. Due to the electronic nature of the Terra and the power of modern computers, this parking fee can be allocated between the traders precisely based on how long they held onto the Terra units, even down to the minute. This inflation-protected currency therefore offers a permanent incentive to encourage trading with it. Each entity accepting a payment in Terra becomes one of the Terra Users.

  Redemption of Terras

  When members decide for whatever reason to redeem Terras for national currency, they need only present their Terras to the Terra Alliance. They thereby become the “final user.” When such a redemption request is made, the Terra Alliance will sell a sufficient portion of its basket to generate the cash needed to cover the redemption, and the final user pays a 2 percent transaction fee. This fee aims at discouraging the cashing of Terras for conventional money. The Alliance will then pay out the proceeds in conventional money through participating banks.

  Piggybackers

  There is a last group of parties who will benefit from the existence of Terras, even though they may never have any dealings with the Alliance, or even may never actually own Terras—piggybackers. Not wishing to be tied to the vagaries of a particular national currency, they could simply use the Terra as a trade reference currency, pricing contracts in it but settling those contracts in an equivalent amount of some other national currency, as agreed upon contractually with the other party.

  Refinements

  More sophisticated implementations of the Terra can include in the “model Terra basket” claims for future services, and even artificial assets such as carbon emission rights. Theoretically, any product or service could be included in the basket at the condition that it can be standardized and that a corresponding futures market can be organized.

  An Example of the Terra Mechanism

  Let’s consider a series of transactions made possible by an oil producer’s decision to accept payment in Terras rather than conventional money (see Figure 17.1).

  1. (a). An oil producer with an excess inventory of 1 million barrels of oil sells that quantity of oil to the Terra alliance instead of selling it for conventional money. (Note that this decision is more likely during a downturn, when demand for oil and other commodities declines and when extra sales on the market would further depress the price).

  (b). and (c). The Terra alliance sells some of that oil to increase its holdings of the other 11 component commodities.

  (d). The alliance credits the Terra account of the producer with a quantity of Terra units equal to the purchasing power of 1 million barrels of oil at that time.

  2. (a). The oil producer uses some of those Terras to buy an oil rig from a company willing to accept the Terras in trade.

  (b). The rig supplier uses some of the Terras to buy components from its own supplier.

  (c). The process continues with the Terras circulating like any other type of money until they are redeemed.

  3. The oil producer, rig supplier, and other Terra users each pay a demurrage charge when using the Terra, based on how long their Terras were held in their accounts.

  4. (a). Whenever Terras are redeemed, the final user will be charged with a 2 percent redemption fee.

  (b). In addition, the Terra Alliance sells that portion of its commodity holdings to which those Terras have rightful claim, and pays the redeeming party in conventional currency.

  5. Piggybackers simply use the Terra as a trade reference currency, pricing contracts in it, but settling those contracts in an equivalent amount of some other national currency, as agreed upon contractually with the other party.

  Benefits of the Terra

  The Terra trade reference currency provides benefits to particular segments of the economy, in
cluding: businesses engaged in international trade, governments of both developed countries and less developed countries (LDCs), and the nations that are trading partners.

  The benefits include:

  a more level playing field among nations;

  lower costs of international business;

  increased investment in LDCs;

  improved stability of the global economy;

  protection against inflation;

  a shift from short-term to longer term planning.

  Let us consider each of these benefits in turn.

  1. A level playing field among nations

  About two thirds of the time, management of a national currency is beneficial for both the national economy and world economy. But that still leaves a third of the time in which a policy that is beneficial for the national economy is detrimental to the world, or vice versa.