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MUTUAL CURRENCY SYSTEM PROVIDES BUSINESSES WITH CHEAP CAPITAL

Perhaps the best example of the benefits that can flow to businesses which join an arrangement to create a private currency is provided by WIR, the Wirtschaftsring (Economic Circle) co-operative in Switzerland, which, since its inauguration in October 1934, has grown into a massive organisation turning over 2,521m. Swiss francs (1,200m.) in 1993 among its 60,000 account holders. Indeed, the WIR system is so simple, so successful, and saves its participants so much money by enabling them to obtain zero-interest working capital that it is surprising that similar systems have not been set up around the world.

Essentially, WIR is an independent currency system for small and medium-sized businesses. A company wishing to join contacts the head office in Basle or one of the six regional offices and sets up a meeting at which the firm's credit requirements and the collateral it is able to offer are discussed, just as they would be if it sought a loan from its bank. As first mortgages in Switzerland do not usually exceed 60% of the purchase price of a property, the collateral most frequently offered is a second mortgage on a house or business premises: in recent years, over 80% of WIR's loans have been secured this way. If the meeting is successful, a loan application is sent to the WIR credit approval committee which checks the security and obtains a report on the applicant from a credit-checking agency. If the report and the security are in order, the new participant is given a WIR cheque book, a plastic charge card and a fat catalogue listing other participants with whom the loan has to be spent.

Although the sums in WIR accounts are denominated in Swiss francs they are not Swiss francs at all since, unless one breaks the rules, they cannot be turned into cash, paid into ordinary banks or given to non-members. We will therefore call the system's units 'Wir'. Even when someone wishes to leave the organisation, he cannot get national currency out. As a result, the purchasing power created when the credit committee authorises a loan stays entirely within the 'ring', generating increased business for all participants. Secured loans of this type are cheap. In 1994 Wir mortgages carried a service charge of 1.75% and relatively long repayment terms could be negotiated; the charge for ordinary current-account loans was 2.5%.

The credit committee has a policy of restricting the total value of the loans it authorises to one-third of the system's annual turnover in order to maintain the Wir’s value. All repayments are made in Wir earned when the member sells his or her goods and services to other participants. Only the service charges on them have to be paid in Swiss francs, since the co-op itself cannot function without some national currency. Its other charges - a quarterly subscription of 11SFr. to cover the cost of the WIR magazine and a new edition of the catalogue and a levy of 0.6% of the value of each cheque lodged to a participant's account - are all in Wir.

Almost every conceivable product and service was listed in WIR's summer 1994 catalogue which included 167 lawyers, 16 undertakers, 1,853 architects and 18 chimney sweeps. "The main areas are gastronomy and the building trade while the odder categories are astrologers, piano tuners, matrimonial agencies, genealogical researchers and magicians. There's even a circus" says Claudia Horny from WIR's public relations office 17.Not all suppliers will take 100% payment in Wir, but with several sources listed for most products and services, it is generally possible to find at least one who will, particularly at slack times of year or during sales. Prices and payment terms for transactions in Wir are just the same as they would be for cash and, until recently, if a supplier insisted on getting a proportion of his invoice paid in national currency, two cheques, one in Wir, one in Swiss francs, were handed over at the same time. However, since the beginning of 1995, it has been possible to make combined payments of cash and Wir using a single plastic charge card.

In fact, the percentage of the Swiss franc price of the goods and services that participants will supply for Wir is discussed with each member when he or she joins and the service charges mentioned so far only apply to 'official' members who have agreed to guarantee to accept at least 30% of the payment in the system's unit. Members unable to give such an undertaking are called 'unofficial' and pay higher charges - 3.5% for current account loans and a 1.2% rather than 0.6% levy on the value of each cheque.

The system was set up as a co-op in 1934 by Dr. Werner Zimmermann and Paul Enz with some of their friends to overcome the currency shortages of the time. The group, influenced by Silvio Gesell, had as its motto 'Free exchange of goods and services without exploitation of our fellow man and without government coercion' and saw high interest rates as an aspect of exploitation. Initially, the idea was simply that businesspeople who knew and trusted each other would extend each other credit for purchases within their group, cutting down their need to borrow from banks. According to a 1971 report on the system'they thought they could transact business among themselves with a system of chits similar to IOUs that would cover at least part of the price of any transaction, the balance being settled in the conventional way.....(However) it was soon found that in order to bring about wider acceptance of these chits, and also to comply with existing banking laws and avoid financial losses, collateral was essential' 18

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This insistance on collateral might partially explain why WIR has survived and similar systems established at the same time in England, Germany, France and Austria have disappeared without trace 19.However, an official history of WIR produced in 1984 for its 50th anniversary suggests that WIR is the sole survivor because the other circles did not realise the significance of what they were doing and wound themselves up when the financial crisis was past 20. But opposition from vested interests played a part in some cases too. Zimmermann and Enz visited circles in Norway and Denmark before starting WIR and when they returned to Denmark for a second visit, they found that the circle there had been closed by the government after pressure from the banks.

The structure of WIR reflects the original small-group concept. Although by the end of 1935, the co-op had 3,000 accountholders, only sixteen shareholders had any say in how the organisation was run. After 1939, additional shareholders were permitted but even today, only about 5% of participants hold shares entitling them to select the board of directors.

A Dutchman, Hank Monrobey, tells me he attempted to set up a rival to the WIR which would be open to anyone in the late 1970s but the venture was closed down by the Swiss police. Monrobey, a computer expert, had become familiar with the way the WIR worked in 1977 when he was asked to devise an electronic data transfer system to prevent members breaking the rules and selling Wir for Swiss francs. At one stage, the exchange rate dropped as low as 55% and as this figure was quoted on a electronic news screen at the main entrance to Zurich central station, WIR's prestige suffered.

Monrobey says that he structured his organisation, SYS Network, to enable it to avoid the constraints placed on the WIR by the Swiss central bank. There was a lot of public interest in it and two members of the Zurich branch of the Economic Crimes Police attended one of his presentations. He repeated the presentation at police headquarters a few days later and after he had finished, Monrobey says that the senior officer present told him that SYS could wipe out Switzerland's banking institutions and it would not be allowed to do so. Shortly afterwards, his Swiss partners were threatened with long and detailed investigations into their tax affairs and so much pressure was put on the Swiss president of SYS that he committed suicide. The network was wound up.

When Monrobey tried to set up a similar system in Holland in 1983 the reaction was equally hostile and a daily paper appeared with the banner headline "Monrobey is damaging Dutch Economy: Central Bank to Investigate". During this investigation, according to Monrobey, one of his associates told the bank's inspectors: "You can never stop Monrobey doing what he's doing. You'd have to beat him to do that." A newspaper got hold of the story and embroidered the words so that they read 'beat him to death' and next day when Monrobey was walking in the street, one of two youths on a moped took off his helmet and swung it at him. Monrobey saw the pair coming and tried to get out of their way but the helmet hit him in the mouth, damaging his teeth, some of which had to be extracted later. He is convinced that the attack was not a random incident but had been ordered by a commercial bank.

Then the tax authorities began their own investigation and in April 1984, a Dutch business magazine, FEM, published an eight-page cover-story about the network. "It gives the impression that he's a crook" a Dutch friend told me after reading the copy I gave her. "It doesn't say so explicitly, of course, but if you read between the lines". Monrobey’s wife was so upset that five days later she filed for divorce.

"She could no longer carry the burden of living in fear with a man who had decided to go against the banking wind" Monrobey says. "I decided to liquidate the network but before it was wound up the Central Bank's eight investigators had completed their report, saying it was the cleanest fiscal operation they had ever seen. The tax people said the same." He left for the United States to make it harder for his enemies to trace him. "I arrived in the US almost penniless because when I got there I found that my English partners had blocked my bank account in Europe to try to force me to go back there" he told me.

Today, however, he is back on his feet financially again and busy developing a network of ’Liquid Capital Circuits’ (LCCs) in the United States. An LCC is a community-controlled payments system: members lodge national currency to their LCC account and their account balance is recorded as ’electronic capital’ on a micro-chip in a special credit card, the DCN-Passport, which they carry. DCN stands for ’Dynamic Capital Network’ which links local LCCs and enables 'each member of the network to buy and trade with every other network member' wherever in the world their respective LCCs are located. In an explanatory brochure Monrobey writes:

The LCC system revolves around consumers using the DCN-Passport for their normal purchases. Businesses which accept the DCN-Passport as payment will see a tremendous influx of new business as members of the LCC choose to patronise firms which support their local economy. As your business grows, the LCC will be there to provide you with the needed capital to fund your growth. The LCC will establish interest-free financing for additional inventory, new employee training, improved facilities etc. As your local LCC grows it willbegin to replace any current bank financing you may have. Your overhead will drop substantially as the LCC eliminates any interest expense. So you could lower prices, become more competitive, and still make larger and larger profits. The LCC quickly expands up your chain of suppliers, dropping their overhead and their prices. The net drop in retail prices soon becomes very large. It is a well-researched fact that 30% to 50% of retail prices consist of overhead created by the cost of capital in the supply pipeline. Imagine the competitive edge LCC businesses will have over others who fail to see the advantages of interest-free capital.21

Where does this interest-free capital come from? Monrobey explains that just as American Express or Thomas Cook always have a large amount of cash which they can invest from the sale of their travellers' cheques because of the days or weeks which elapse between the time a customer buys the cheques and the time he or she spends them, a LCC has a lump sum too as there is always be a period between the moment a member’s national currency becomes electronic capital and the moment the electronic capital is converted back to cash to purchase something a member needs from a supplier outside the system. "As the system grows, the electronic capital begins to have a life much longer than the the life of simple traveler’s checks.... this greatly increases the average time each cash dollar is at the disposal of the LCC for interest-free financing" Monrobey says. In effect, then, a LCC aims to keep its electronic credits circulating among its members for as long as possible before they are converted back to cash and, by linking individual LCCs, the Dynamic Capital Network stops credits leaking from the system even if they are spent out of town. By early 1996, however, Monrobey was still some way from establishing a viable system. Not one of the LCCs was really working, he told me, and none had more than fifty members.

Monrobey is very critical of the WIR which he says is not a good model for the rest of the world and is only able to continue because the Swiss are enormously self-disciplined in the way they think and work. He claims that the rate at which Wir circulate has been kept very low under pressure from the country’s banks. As a result, the prices charged by member-firms have not gone down in the way they would if the system had been working well because of the interest payments it would have enabled members to save. Too many members, he says, build up large surpluses of Wir which they use to build properties to rent. Construction and the restaurant trade are the activities which under-pin the system, he says.

Current proposals for a mutual credit network in Britain seem simple by comparison with Bor’s. They were developed in the mid-1980s in complete ignorance of the WIR by Christian and Diana Schumacher, the son and daughter-in-law of the author of Small is Beautiful, Fritz Schumacher. However, neither has had time to follow the idea up and so far, no system has been established, although talks took place with local authorities in the Sheffield area in 1994 and a hunt for market-research funding is going on. What the couple suggest is that businesspeople in a particular area should set up a committee which would determine how many 'bonds' each of their companies should be allocated by the rest of the group 22.

These bonds, which would be interest-free for three months and have parity with the national currency, could only be spent with other members of the group, exactly as with WIR. At the end of every three-month period, however, members would be obliged to bring their total holding of bonds back to its original figure. So if they had sold more to the rest of the group than they had bought from it and had a surplus of bonds in their account kept by the central committee they would receive cash for the surplus amount. On the other hand, if they had sold less to the group than they had bought, they would be required to pay cash to cover the shortfall. As the total cash sum due to accounts in surplus would be exactly equal to that received from the accounts in deficit, the committee would not be required to do any balancing itself unless a business in difficulties failed to remit cash to cover its shortfall.

"The quarterly repayments ... give a regular opportunity for the scheme's administration to detect problem signs in advance of a major crisis and for help and advice to be given" the Schumachers write in their project proposal. "If a member business collapses, its outstanding debt to the system would be legally recoverable in the same way as other liabilities. If this were not possible out of then proceeds of liquidation, then guarantees under [a mutual cross-guarantee arrangement] would have to be called." In other words, all the remaining members of the system would share the loss.

The Schumachers' aim in designing their scheme was to enable a network of inter-linked businesses to grow up in a particular area so that if one of them failed, perhaps because an outside customer had switched his orders for components elsewhere, there would be a high probability that other opportunities could be found. "Where there are already many businesses trading, these businesses themselves generate new business opportunities for other businesses and vice versa" they write. "Equally, where there are few businesses, then the possibilities to start new businesses are correspondingly fewer." They argue that the bonds would encourage businesses to place their orders with suppliers in their own areas and thus foster business development there.

Although the Schumachers mention that bonds would be of considerable help to businesses unable to raise adequate working capital, they deliberately avoid saying that banks would lose business as a result of the scheme for fear of alerting a powerful opposition. Nor do they stress how much interest participants might save.

"We've checked out the legal aspects as far as possible and it seems that there are no problems there" Diana Schumacher told me. "As a result, I don't see how the banks could stop a local trading bond scheme being started but it seemed a good idea not to provoke them too much." In view of Hank Bor's experience, this seems wise. A really effective alternative economic system will inevitably damage the profits of one of the most powerful groups in the world and their reaction to it is liable to be frightening and extreme.

How would the Schumachers’ trading bond organisation differ from the business barter networks which have been operating for thirty years in the US and are now spreading in Britain and Ireland? The answer is very considerably, largely because of the difference in the motives of the people behind them. The commercial networks’ aim is to make a profit for their proprietors rather than to boost business in a particular area. They usually charge a joining fee of 200-300 and a 10% commission on each purchase. Their rules require all trades between members to be passed through them so that they can take their cut although they generally try to find a customer for whatever stock or services a business wishes to sell or a supplier of whatever it wishes to buy. The barter networks also limit the extent to which a company can take goods and services from the network without balancing it by supplying another member. "If we were doubtful about the saleability of a business’s product we would make it an associate member and not allow it to purchase through the network until it had made a sale" says Pat Naismith, a co-founder of the Irish barter network, Contranet.

No commercial barter organisation would have reservations about extending membership to multinational corporations. Indeed, it was to facilitate giant companies that the first US networks were set up23. Moreover, although they might have a local base, they would see nothing wrong in arranging deals anywhere in the world. In short, commercial barter networks are part of the world economy rather than a means of promoting a local or regional one.

Click for 2003 description of Bartercard, a commercial bartering organisation, by Richard Douthwaite

July 2006 Update:

Theo Megalli and Tom Greco have written "An Annotated Précis, Review, and Critique" of Prof. Tobias Studer's book, WIR and the Swiss National Economy, which can be downloaded from www.reinventingmoney.com/documents/StuderbookCritique.pdf.

WIR's website is at  www.wir.ch , e-mail basel@wir.ch. The street address for the main branch is Auberg 1, 4002, Basel, Switzerland., tel. 061 277 9111, fax 061 277 9239.

Hank Monrobey & Associates Ltd., P.O. Box 2736, Ann Arbor, MI 48106, USA, tel. (734) 423-0119.

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