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Business Solutions: An Overview

Submitted by on March 11, 2010 – 6:02 amNo Comment

Although we have witnessed the biggest bailout in human history, the real economy—the one in which businesses manufacture and sell goods and services—is turning out to be the next victim of the banking crisis of 2008.  Whatever governments have done for the banks, credit is now a lot harder for businesses to obtain, and that will remain true for many years to come.

The trickiest part of the situation is the simultaneous nature of the crisis.  When many major banks cut back on their loan portfolios simultaneously, it deepens the hole being collectively dug for the world economy.

Under these circumstances, the most urgent action for businesses to take is to create a Business-to-Business (B2B) mutual credit system at whatever scale makes sense to them.  Use of such currencies would be voluntary.  The WIR system is a successful precedent  of this strategy, and it is operational in Switzerland since 1934.

The Story of the WIR

Once upon a time, during a crisis similar to today’s, 16 businesspeople got together to see how they could help themselves. They or their clients had received a notice from their banks that their credit lines were going to be reduced or eliminated. Bankruptcy was only a matter of time. They realized that business A needed a loan to buy goods from business B, which in turn needed money to pay its suppliers. So they decided to create a mutual credit system among themselves, including their clients and suppliers. They created their own currency, identical in value to the national money—with the interesting feature that this currency didn’t bear interest. A debit in this currency would be reimbursed with sales to a participant in the network or settled in national money. This system saved many of the businesses involved.

A cooperative was set up among the users to keep the accounts dealing with this currency. Soon, participants could also borrow in that currency from the cooperative at the remarkably low interest rate of 1 to 1.5 percent. These loans needed collateral, exactly as in a conventional bank. Over time, the system grew to include one-quarter of all the businesses in the country. The secret of the nation’s legendary economic stability was that strange little unofficial currency.

Whenever there was a recession, the volume of business in this currency grew significantly, thereby reducing the negative impact on sales and employment. Whenever there was a boom, business in national currency expanded, while activity in the alternative currency tended to stagnate or drop back. The spontaneous counter-cyclical behavior of this little system helped the central bank of the country stabilize the economy.

This isn’t a fairy tale, but the true story of the WIR system (WIR, an abbreviation for Wirtschaftsring, “economic circle,” also means “we” in German). The country is Switzerland and the 16 founders met in Zürich in 1934. Within a year, some 3,000 participants were benefiting. And the system still works; the annual volume of WIR business now is about $2 billion. One of its key interests is that it is the only complementary currency system about which we have enough historical data to measure its macro-economic impact, proving its counter-cyclical stabilization effects, as was done by Prof. Stodder.

Adopting Mutual Credit Systems

Businesses do not have to wait for governments to agree on a new global monetary architecture to contribute to solving today’s sustainability challenges.  They can themselves take the initiative to create and use complementary currency innovations that not only make business sense.  Businesses can create such systems at whatever scale makes sense to them.  This approach will prevent or reduce the strangulation of the real economy by the credit contraction. It will avoid duplicating the worst of the 1930s: massive bankruptcies, intolerably high unemployment and untold suffering.  The system we consider the most mature for such implementation today is the Commercial Credit Circuits (C3) , for which open-source software is available.

Time is of the essence, if we want to avoid the social and economic ravages unleashed by the unraveling of today’s complex business supply chains. As the rot spreads from the banking system to non-financial businesses, a lot of the damage will be done quickly.

Loyalty Currencies

Many businesses have been issuing and using for decades business to consumer (B2C) currencies, also called loyalty currencies . Among the pionneers was the airline industry, which  uses “Frequent Flyer Miles” under various names as a loyalty currency. Initially, these were simple marketing gimmicks, but today 2/3 of British Airway miles are cashed in for something else than airline tickets. Their volume is substantial:  five airline consortia issue over 1,500 billion airline miles every year.  In 2005, there were 14,000 billion airline miles outstanding.

This idea has spread in almost all other industries, from book- or record-shops to supermarkets.


The Terra

This leads us to ask what the benefits for the global economy would emerge if  a complementary currency became available on a supra-national scale.  The “Terra” is specifically intended for such a role.

The Terra is a complementary currency designed to provide an inflation-resistant international standard of value; to stabilize the business cycle on a global level; and to realign stockholder’s interests with long-term sustainability.    From a legal viewpoint, the Terra is standardized “countertrade” (international barter), which is routinely used for over one trillion dollars worth of transactions per year. Legislation on countertrade exists in about two hundred countries, including all the major trading nations.  Introducing the Terra would therefore not require new international governmental agreements.

Terras would be issued by the Terra Alliance (a cooperative of its users), as electronic inventory receipts for commodities sold to it by producers. It would therefore be fully backed by a standard basket of the most important commodities and services traded in the global market (e.g. oil, wheat, copper, and some standardizable services like international freight or carbon emission rights).  The cost of storage of the physical commodities (estimated at 3.5-4% per annum) would be paid by the bearer of the Terra. This makes the Terra a ‘demurrage’ currency, i.e. with a negative interest rate. This encourages its use only as a contractual, planning and trading device, and not as a store of value.

Like the WIR, the Terra would be spontaneously counter-cyclical to the conventional money creation process, thereby stimulating the world economy in downturns and cooling it off in boom periods. Furthermore, the demurrage feature of the Terra would realign financial interest with long-term thinking, thereby resolving the conflict between shareholders’ optimization and long-term sustainability. Finally, it would be an inflation-resistant currency, ideal to track results over long time periods or across countries.

More details are available here.