ISB Paper Series Selected Research Papers on Social Banking and Social Finance

No. 11

Complementary Monetary Systems ‘Homoepathic Medicine against economic Collapse’

by Dr. Heinz Brodbeck

10 June 2013

Institute for Social Banking | ISB Paper Series, 11 No. , June 2013 | www.social-­‐banking.org 1

Complementary Monetary S ystems ‘Homoepathic Medicine against economic Collapse’

Heinz Brodbeck (16 June 2013)

Abstract

Hundreds of financial crises have destroyed economies, enterprises, and individual existences over the last decades. Most of these collapses were related to inherent weaknesses in the monetary system. This situation calls for fundamental worldwide changes and innovation in the monetary and banking system. Financial reforms seem due. The questions are what kind of change is most appropriate and is already there a solution that cures the illnesses of the current system once and forever and globally? Probably such remedy is yet unknown. Nevertheless, one contribution for improving the deplorable state of affairs could be the idea of complementary stems. monetary sy The concept is around since long but has never achieved large-­‐scale breakthrough.

This paper is descriptive and aims at introducing the reader to the phenomenon of alternative currency systems, what ow are they and h do they . work It looks at some theoretical foundations provided by traditional economics, reviews Silvio Gesell’s “Freigeld”, and mentions contributions from philosopher Rudolf Steiner, Bernard Lietaer, and from others. Examples of complementary monetary systems are then examined in detail e for making th issue tangible for the reader. The paper takes a closer look at initiatives like: City of Wörgl, “Chiemgauer”, “WIR”, “Terra”, barter trade, loyalty and schemes, “Bitcoin”. The discussion part argues about advantages and potential problems of complementary monetary systems and implicitly questions if alternative ncies curre can really fulfil the many promises and s. hope However, the paper concludes the that idea of complementary monetary systems merits further examining and practical 2 experimenting, not least because of the tremendous opportunities that the Internet could offer.

Introduction

The last financial crisis [2007 – 2008] has been damaging worldwide. Many economies and many businesses and private individuals are still suffering from its duciar fi y and social impact. “The monoculture of a single type of currency is a root cause of the monetary repeated and financial instabilities”, whereof the IMF [International Monetary Fund] has report ed 425 systemic, finance related, crises in the last four i.e. decades “an average of more than 10 countries in crises each and every year” (Lietaer & Dunne, 2013). Need for systemic changes have since become dramatically obvious and the search of remedy revives ‘dormant’ concepts. One promising idea seems enjoying e gr ater attention amongst innovative, alternative and socially oriented groups in society: complementary monetary systems. As it will be shown, it is not a totally M new idea. ore than 4’000 unofficial, private currencies rational are ope in the world today (Lietaer & Dunne, 2013). The new rise of ‘competing’ currencies scratches on the monopoly of state currencies.

Alternative or complementary tary mone systems and schemes are sometimes called local exchange trading s system [LETS], social purpose currency, Internet ‘cryptocurrencies’ or for short local, cooperative or community currencies. It is a sort of para social-­‐banking activity that is performed by private associations. Their task is issuing and controlling circulation of a standardised alternative private currenc y. The unit of account of a complementary monetary system takes many different forms such as vouchers, value points, loyalty bonus, fiat money, token for barters, virtual Internet money, time credit s, certificate etc. These types of currency are accepted as means of payment by businesses, merchants, and private individuals that are members of the currency network. Its extension is usually limited to a relatively small region of a national state. The exceptions are: “WIR” that is exchanged all over Switzerland, the “Terra” that is proposed as a global scheme, and, of course, Internet based virtual money that is unlimited in 3 its geographic reach. Most alternative money systems are not -­‐ backed up, and are, as it is the case with conventional money, first r of all a matte of trust. Money, being it complementary or official, has no material value, and it is thus nothing ‘real’. As long as the trust in the money , lasts as long can a holder of money be certain that he will find someone who converts his bill, coin or fiat money, into real goods and services.

The aim of localised alternative monetary systems is to retain r buying powe and money circulation in the region, thus rs bonding consume to local producers , and over time, creating economic wealth for the region. Complementary currency systems shall support local and regional industrial art, trade, manufacturing, and services. They shall eliminate profit-­‐making intermediaries, are thought to support economic prosperity, help to protect social freedom and . peace All these aspirations shall lead to increased quality of As life. it will be shown in this text, complementary monetary systems are designed to support the real economy, not the financial markets, and they t are certainly no meant for profit making i.e. ‘making money from money’.

A complementary private currency exists additionally and alternatively to the official national monetary system, which controlled is by the l centra bank together with the banking system as a . whole Acceptance of the alternative currency can be enforced neither by the holder r nor by the issue of that . money It is used as a medium of exchange and unit of . account It is not thought to be a store of value, on the , contrary many complementary currency systems discourage money hoarding. This is because egative n interest is charged on deposits and the value of money depreciates over time. This process is usually called ‘demurrage’. These particularities shall help to increase the velocity of money and thus create economic prosperity, instead influencing of the economy by activating monetary instruments. For example by increasing the amount of money by creating money through the banking system by means of credits and by altering the key interest rate. These are frequently used weapons of the central banks for stimulating the economy and for stabilising the currency.

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Stakeholders in an alternative currency system are: consumers, companies, small businesses such as local merchants and producers of goods and , services potential beneficiaries of donations from the scheme, and the entity that manages the complementary monetary system. Within this network of participants the currency is voluntarily accepted as means of payment. Local currency systems are characterised by attributes of the social economy e.g.: -­‐ self help, associative -­‐ co operation, ethics, social instead of profit aims, strengthening solidarity within a community, inclusiveness, participation and sharing, self-­‐ governance and independence, democratic decision taking processes, voluntariness and balancing the triple . bottom line That implies to consider the economic, ecological, and ial soc impacts of the activities. The vision of the initiators of a local ernative alt monetary system might be helping building a future that is more apt to the needs mmunity of the local co and economically, ecologically and socially more sustainable, and more just than the national monetary ystem s built on debt and interest.

A managing entity or operational centre is responsible for the seamless functioning of the , system performs operation and co-­‐ordination, and acts as the governing body of the system. Operation includes activities such as: issuing of the unit of account [money], acquisition of participants, collecting fees, statistics, training, PR and advertising, potential granting micro of credits to its members, and conversion of official currency to alternative money and vice versa. The corporate management unit together with other stakeholders often takes the legal entity of association an or co-­‐operative that governs the whole currency system. This entity does usually not possess t a bank licence bu might seek co-­‐ operation with local banks for e.g. managing ts credi and current . accounts In the case of ‘cryptocurrencies’ management entities and operational centres are redundant. These virtual currencies are pure peer-­‐to-­‐peer systems, as it will be discussed later.

The cost of the association for managing and orchestrating the scheme is usually covered by registration and turnover levied fees from the participating , shops producers, and other accepters of the alternative ey. mon Standard are charges 5 on the transactions as well as conversion fees in case the rrency local cu is exchanged to the national currency. To offset the potentially built -­‐in value depreciation of the alternative money, the wner o can pay a fee [demurrage] in order to maintain the nominal value of money. the Some schemes, e.g. the “Chiemgauer” system, use income from demurrage to make donations to local charities.

An example of a well-­‐known self-­‐help complementary currency system is the “Palmas” in Brazil (banco palmas). Another ommunities example is c that installed barter trade systems based on time credits. Such schemes are sometimes called ‘time banks’ and ‘time Dollars’, because he t unit of account in such barter businesses is usually ‘hours’. For ‘ every hour’ of practical help a participant gives another to participant he will be credited in the ‘time bank’, and will be allowed to withdraw an equivalent amount of ‘hours’ of help from other participants whenever needed. An example of barter is “Talente-­‐Tauschkreis Vorarlberg” in Austria (Talente). “Bitcoin” is an example of a ‘cryptocurrency’ that is used for trading on the Internet. ‘Cryptocurrencies’ have different aims compared to the ‘conventional’ complementary monetary systems that are in focus of this essay.

Sometimes associative exchange trading systems are creative in their choice of name of the unit of A account. barter circle in the Geneva region has been symbolic by picking “grains de sel” salt [ grains] to denominate the [monetary] value of a barter (SelduLac). In the UK the local exchange trading and complementary currencies development agency (LetsLink UK) supports initiatives for alternative monetary systems including ‘time banks’.

Complementary currencies, as any currency system, can become object of criminal activities, such as money laundering, false money, manipulation and other fraudulent use, and operational flaws can threaten the currency. This paper does neither discuss these nor other legal considerations nor taxation issues nor philosophical and historical backgrounds related to complementary monetary systems and its operation. 6

It shall also be noted that this paper has mainly ‘conventional’ complementary monetary systems in . view The phenomenon of Internet based money is only briefly explained. It would, however, deserve a much broader and deeper examination than it is possible within the boundaries analysis of this .

Theoretical Foundations

One of the aims of alternative money system is to increase currency circulation within the boundaries of its regional acceptance. A built-­‐it devaluation mechanism of negative interest shall discourage money hoarding and stimulate the desired behaviour of the participants in the system i.e. keeping the currency in flow without interruption. This behaviour supports the velocity and dec reases the demand for more money, which is netary – in conventional mo systems – satisfied by the banking system by means of savings and credits. Credits granted by the banks and interests are prerequisites for enabling money creation and multiplier effects in the banking . system On the contrary -­‐ in alternative monetary systems -­‐ negative interest, so called demurrage, devalues the currency over time when it is stored. Or positively , said there is -­‐ a built in incentive for instantly using the money g for payin purchases passing and it on.

The velocity of money is a concept that belongs to the quantity theory of money and it says how many times per year the same, e.g. EURO, bill is used to pay for the purchase of goods and services. To calculate velocity economist the divides the nominal gross domestic product [GDP] by the total amount of money in the economy (Mankiw, 2001, 635). p. The amount of money is usually measured as M2, which basically includes cash in circulation plus cheques plus demand deposits and short-­‐term savings. Thus, as faster the money travels from hand to hand as more goods will be produced [due to increased demand and availability of money]; and the if total amount of money and the unit price remain the same the “quantity equation in economics” is balanced; in arithmetic terms: quantity of money times velocity equals unit price times units of production output (Mankiw, 2001, p.635). The result multiplication of the of the variables on both sides of the equation is equal to the gross domestic product [GDP]. In the case of regional 7 money the equation would have to be calculated with regional instead of national data. The measurements might, however, not always be available and it can thus be argued that regional currencies are, rom f the perspective of the quantity equation, flying blind.

The assumption in traditional economics elocity is that the v of money remains relatively stable over time (Mankiw, . 2001, p.636) Hence, production and consumption and in turn wealth is rather stimulated by monetary interventions such as increasing amount the of money and of course technological . innovation Since long conomists e generally agree that influencing quantity of money and interest rates central by banks and by the banking system has important impact on the economic activity and on the lson, price levels (Samue 1967, p.360). The consequence of money creation by the banking system through a mechanism of savings, reserves, loans and interest rates is a debt mountain that tends to increase exponentially d ue to compound interest. This phenomenon is especially dramatic for the deeply indebted developing countries. In 2000 “the developing world was spending USD 13 on debt y repayment for ever one USD it received in foreign aid and grants” , (Lietaer 2004).

The conceptualisation and implementation of regional monetary systems was often inspired by the ideas of Silvio Gesell [1862 – 1930] represented in book his “The Natural Economic Order” that was d first publishe in German in 1916 (Gesell, 1918). His theory of “free money” [Freigeld] aimed for: a monetary governance that refrains from increasing quantity of money by means of printing money and withdrawal and thus avoids inflation and deflation; built-­‐in depreciation of the money over time as disincentive to money hoarding [demurrage]. Gesell’s “free money” is convertible to other currencies it and is localized to a defined geographical area. John Maynard Keynes – [1883 1946, British economist] said about Gesell’s ideas of rm: monetary refo “the future would learn more from the spirit of Gesell than from Marx." (Kennedy, 1995, p.40), while Friedrich Hayek – [1899 1992, Austrian-­‐British liberalist economist] was contemptuous of Gesell “and called him a ‘free money agitator’”(Hayek, 1978 cited in Hoffmann, 2010). 8

Philosopher and founder of the anthroposophical movement Rudolf Steiner [1861 – 1925] contributed with a monetary concept milarity that has some si with the one of Silvio Gesell. Steiner introduced three forms of money: “purchase money”, “loan money” and “gift money” and he too favoured money aging, meaning that the value of money should decrease over time (Steiner, 1996, p.145 et seq.) as does the value of most products either due to wear and tear or by natural decay. herefore, T Steiner’s old ‘ money’ represents the capital devaluation; it is the accumulated depreciation value of the aging money. This depreciation together with other gains from capital should, in Steiner’s model, become “gift money” (von Canal, 191 1992, p. et q.). se “Gift money” should flow to the domains of culture, arts and education i.e. hould it s finance and make possible a free spiritual life (Steiner, 1996, p.145 et seq.) and no more be used for investment nor for consumption – other than paying for ving cost of li of e th people that active are in these ‘spiritual’ fields of work.

Kennedy (1995) demands an interest free money system by which other means than interest shall foster prosperity. Interest and interest on interest [compounded interest] creates ponential ex growth of the quantity of money and thus inflation. Inflation is more likely to happen if extension of the quantity of money is not offset by gains in productivity and production . output Kennedy (1995) analysed that a hidden share of interest is part of the cost of any product and, hence, part of the prices the n consumer pays whe purchasing products and services. This hidden share of interest cost varies in size according to the ratio between labour and capital involved in the . production On ge, avera she says, all products and services that are part of an ordinary household’s basket , of goods carry accumulated hidden interest cost in range the of 50%.

This means as much as half of the final total cost of the household’s basket of goods is for cost of capital [i.e. interest] incurred along value the chains, from raw material acquisition to production on, to distributi until the products end up in a household for consumption. In other words, half of the fiduciary value of a household’s budget of cost is of living intangible; it is nothing the else than price of money. Therefore not only those who borrow money pay interest, but in the 9 present monetary system all consumers are affected by interest: hidden interest in the products bought, interest paid for as potential loan takers, and interest received from potential own savings.

All three forms of appearance of interest affect most households. And this situation, Kennedy (1995) unfolds, is nomenal a phe money redistribution mechanism from those not owning capital to the capital owners. Bluntly speaking, from the poor . to the rich She examined this situation for Germany for the year 1982 and found that for 80% of the population the e’ ‘interest balanc was negative i.e. ose th people paid more interest [hidden and effective interest] than they received from their savings, e for 10% of th population the bill was more or less balanced, and for 10% of the population it was positive. As a remedy, Kennedy (1995) follows the theory of Silvio Gesell and speaks for replacing positive interest by negative a interest to be paid for holding onto the money and thus for keeping money in circulation. The income from negative interest should be to the benefit of the national treasury for paying for governmental services, which would in turn reduce taxpayers’ bill. The feasibility of the technical implementation of “free money” and its benefits for society was successfully demonstrated by the frequently cited experiment of the City of Wörgl; a reform of the monetary system ncept based on Gesell’s co does also require following-­‐up reforms i.e. a land reform for avoiding speculation with tangible assets and tax a reform (Kennedy, 1995; 2005)

As it has been ibed descr above, emurrage d can influence velocity of money and thus stimulate balanced economic activity, can help to reduce and to control inflation and deflation, and it can provide a source of income for covering operational cost of a complementary monetary system. Furthermore it is said to support chang e of the current paradigm of focus on short-­‐term economic results to focus on longer-­‐term considerations. he T thinking behind this statement is that today’s economic environment is dominated by short-­‐term thinking, in which investment decisions are based present on day monetary . value This value is calculated by applying a positive interest to rate the discounting of the future cash-­‐flows of an investment to the present day. In this situation the time effects 10 of the discounting favour the short term. This is contrary n to the situation i a ‘demurrage world’, in which negative interest would favour the long term (Lietaer, 2012).

Examples

Kennedy (2005) affirmed the effectiveness local of currency systems including demurrage as a strategy for retaining money in circulation. She local saw currency systems as a monetary innovation for better-­‐balanced creation and distribution of welfare and she described the -­‐known well example of the City of Wörgl: To combat economic depression this small town in Austria implemented, between 1932 and 1933, experiments in ll’s line with Gese concept. As a result of it the town managed to substantially nt, reduce unemployme to increase tax income and investment in public works. The experiment was a big success for the community of Wörgl as a . whole But when 130 cities started to show interest in the concept the Austrian National Bank felt threatened and stopped to permit the setting up of local currency systems and circulation of alternative money.

Some alternative currency systems have similar values as those held by social, socio-­‐ecological and poverty alleviation An banks. indication for compliance with values of social banking might be the “Chiemgauer”. This alternative currency system e.g. co-­‐operates and partners with the German GLS social bank Bank in Bochum for managing microfinance services (Chiemgauer). cal An empiri analysis of how the business model of social banks is construed, how their brand values are lived and appreciated by employees, and how social banks fit with the social enterprise sector, recently was presented Brodbeck ( , 2013).

Many local money systems are conceptionally similar to each other and have alike operational procedures in place. Therefore, the “Chiemgauer”, Germany’s biggest regional money system, serves here as showcase and it is described in some detail below.

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The “Chiemgauer” money voucher and its electronic equivalent the “eChiemgauer” is covered by the EURO 600 and accepted by enterprises and shops in the Chiemgau area in Bavaria, Germany. Its overall aim is increasing sales proceeds of regional businesses and to contribute -­‐ funds to not for-­‐profit organisations [Vereine]. For accelerating circulation of “ the Chiemgauer” a negative interest is charged for holding on to the money; the velocity of the “Chiemgauer” is approximately 10 times per annum, which is roughly two times faster than the ; EURO the turnover value produced by “Chiemgau the er” system is approximately four million EURO (Gelleri, 2009). Conversion of EURO to “Chiemgauer” is 1 to 1 and free ion of cost. The convers back from “Chiemgauer” to EURO is charged with a currency exchange fee of 5%.

To support local culture and social life 3% fiduciary of the value of every “Chiemgauer” transaction flows gional to re non-­‐profit organisations, clubs and other social associations. This 3% sponsoring contribution is part of the 5% transaction fee that participating businesses [outlets, poi nts of acceptance of “Chiemgauer” money] pay to the scheme; the average cost of the scheme to an accepting outlet is 2.16% of “Chiemgauer” paid sales proceeds. Every new outlet is charged with an initial registration fee of 100 EURO [cost of entrance into the system]; after three months of the “Chiemgauer” issuing date a demurrage fee of 2% is levied. Thereby the nominal value is maintained for a further period of three months. e Th above information has been based on the “Chiemgauer” Internet homepage, where further details retrieved can be (Chiemgauer). As the income from demurrage is used for the sponsoring of local non-­‐profit organisations [Vereine], it can be concluded that demurrage has converted into “gift money” (Steiner, 1996, p.145 et seq.).

Chiemgauer e.V. – the managing association for the “Chiemgauer” currency – reports continuous growth. he T key financial data for 2012 was: Sales proceeds EURO 6.5 million, velocity p.a. , 11.22 which is 2.78 times faster URO than the E , multiplier effects 3.46, 71% of issued emained “Chiemgauer” r in circulation and 29% were exchanged to back EUROS, total No. of members in 3’454 the scheme whereof 633 accepting outlets in the region, donation income of EURO 56 ’000 to 12 the benefit of not-­‐for-­‐profit organisations. Volunteers perform much of the work necessary to operate the he scheme. T economic value at of th voluntary work accounts for 65% of total operation cost Gelleri, ( 2012). Although the “Chiemgauer” is by far the biggest cy private curren scheme in Germany and despite it is well established and steadily growing since 2003, its share of the regional gross domestic product [GDP] reaches 0.02% only (Gigler-­‐Beilner, 2009).

Motivation for accepting “Chiemgauer” currency was surveyed with 110 participating enterprises by Ziegler (2009). Her research is referenced here because it is probably valid beyond “Chiemgauer” the scheme. She : found For 70% of the responding enterprises, new customer acquisition and strengthening relationship ith w current customers were important . motivators Of similar importance was the opportunity to build positive reputation, image and to advertise the own market , offer as well as jointly promoting the local economy. These reasons were more important entrepreneurs for the than sheer increase of sales proceeds. For 90% of the entrepreneurs, the built-­‐in ‘mandatory’ fundraising to the benefit of local clubs was a striking argument in favour of the scheme, and 80% of respondents considered supporting emergence of regional ecological economy structures important. However, some 80% of the outlets denied that the alternative had currency increased demand for local products nor had it secured current nor jobs ad h it created new jobs (Ziegler, 2009).

A big complementary currency that is unique worldwide is “WIR”. It is emitted by a -­‐ co operative with bank status established in Switzerland in 1934. The word ‘WIR’ has a double meaning. It is the German personal pronoun of the English ‘we’ and it is the abbreviated brand name and logo of the organisation “Wirtschaftsring” [economic circle]. 0’000 Some 5 enterprises are participating in the “WIR” system that is the equivalent of some 16% of all SMEs in the country. The currency “CHW” [ Swiss WIR] is fiat ney mo [ Giralgeld] at parity to the Swiss Franc [CHF]. The CHF and CHW combined balance -­‐ sheet of the WIR Bank reached CHF/CHW 3,72 billion in 2009 (WIR, 2009) and it increased to CHF/CHW 4,013 billion in 2012 (WIR, 2012). The total transaction turnover of 13 the complementary currency “WIR” reached CHW 1,6 billion in the year 2009 and decreased to 1,46 billion in 2012 (WIR, 2012). The bank does not explicitly position itself as a social-­‐, ethical or sustainable bank but as a full-­‐service co-­‐ operative community bank aiming at supporting their members and the small and middle-­‐size business sector in Switzerland. A quote by Bernard Lietaer in the 2009 annual report is interesting: “Scientific research has proven that WIR-­‐ money increases the stability of the Swiss economy” (WIR, 2009).

A global complementary monetary system has already been conceptualised and it has been proposed as ‘ready-­‐made’ for global implementation. It is called “The Terra Trade Reference Currency” (TRC), “Terra” for short; this complementary currency system and reference currency [e.g. for trade contracts] was proposed to be managed ordinated and co-­‐ by a private organisation, “TRC Alliance”, that is to be established (Lietaer, 2004). Bernhard Lietaer, economist, , researcher currency expert and change , agent sees “ the Terra” as a supra -­‐national complementary currency initiative with the potential to remedy systemic issues of national monopoly currencies. He engineered the “Terra” for enabling better balancing of economic cycles, supporting nvestments i in less developed countries, and for motivating reversing economic thinking from short-­‐term to long-­‐term and thus making sustainability a real ity.

The unit of account -­‐ “Terra” -­‐ is backed by a basket of e.g. a dozen major commodities and services. This composition of goods would make the “Terra” much less volatile than most major currencies (Lietaer, 2004) or currencies backed by a single product [e.g. the old gold standard]. e H estimated that a basket including as little as six major , commodities would already reduce volatility by a factor of four compared ntional to most conve currencies. e Th “Terra” is thus more inflation resistant than national currencies. A demurrage of e.g. 3.5% to 4% p.a. is charged to the holder of “Terras” and corresponds to the cost incurred for storing the physical commodities included in the ‘Terra basket” (Lietaer, 2004). The demurrage mechanism keeps the “Terra” on, in circulati helps to activate commercial exchange and , investments and it produces the necessary funds to cover the operational cost of the currency system. 14

According to Lietaer (2004) demurrage “counteracts e th boom/bust fluctuations of the business cycle, thereby improving the overall stability and predictability of the world’s economic system”. The following description of the “TRC” inherent mechanics are based on Lietaer’s (2004) white paper:

In a recession period turnover of an enterprise decreases, inventory increases, production slows down, employment reduces, and currency is scarce here i.e. t is need for credit. To satisfy that need for money the enterprise can sell its surplus [commodity] inventory to RC “T Alliance” and in turn receives the much-­‐needed currency in “Terras”. The “Terra” receiving enterprise pays its suppliers and other creditors and in they turn are inclined to pass the “Terras” on as quickly as possible in order to avoid demurrage. This behaviour revitalises velocity and should thus stimulate the economy.

In contrast to economic depression, the boom period is characterised by enterprises having a lot of cash available “Terra i.e. s” from booming sales. The need for building inventory for being able to quickly ing respond to continuous demand increases. Hence, due to demurrage, the enterprises are inclined to divest surplus “Terras” by converting “Terras” to national currency “TRC at -­‐ Alliance” and pay for this currency exchange . a fee of 2% “TRC-­‐Alliance” procures the national currency bringing by stored commodities to the market. This process steers the volume of “TRC-­‐Alliance’s” commodity storage that in turn influences the economy cyclically anti-­‐ (Lietaer, 2004).

“The Terra Trade Reference Currency” system is designed to start with a participant’s sale of commodity to “TRC-­‐Alliance” in exchange of “Terra” ney. mo The commodity seller, so as to avoid demurrage, brings the “Terras” instantly into circulation by making payments. The system comes to an end when the “last user” converts s hi “Terras” to national currency (Lietaer, 2004).

Barter trade, seems to enjoy a big revival on a global scale in the professional for-­‐profit economy. Such trading is sometimes ountertrade also called c or compensation-­‐trade. Keys and Malnight (2012) reported “that in 2011 over 15

400’000 companies worldwide used bartering stimated to earn an e USD 12 billion on unwanted or underused assets”, they mentioned that “professionals from doctors to electricians are trading their services for goods, services other or ‘trade credits’ which can then be used to pay for business expenses whether printing, advertising or ”, travel intermediary barter service providers and specialised Internet platforms are facilitating such cashless barter trade across the world.

Loyalty bonus systems are frequently implemented marketing tools to build customer relationship and loyalty. Members yalty of such lo schemes are granted points for their purchases the from suppliers associated to the scheme. Bonus points are then redeemed against free products and services. The points represent monetary value but cannot verted be con to national currency. The best known such systems are frequent flyer loyalty programmes of airline companies. In essence air-­‐miles schemes are complementary currency systems as today air-­‐miles not only redeem air travel f but a big variety o merchandise and services, and earning air-­‐miles is also no more exclusively linked to flying.

Probably the biggest amount of complementary currency circulates in the Internet denominated as ‘cryptocurrencies’. The best known such currency might be “Bitcoin” (Nakamoto, ). 2008 The unit of account is “Bitcoin” [BTC] and is accepted as means of payment for Internet facilitated trade but also for physical transactions in many parts of the world. Payment for physical transactions of goods and services is instantly made from the payer to the payee with the help of a app smart phone ., as there is absolutely no physical money such as metal coins or paper notes.

“Bitcoin” is a -­‐ peer to-­‐peer currency hout wit the intermediary of a bank or other co-­‐ordinating body that incur . cost It “is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for and a trusted third party” the participants themselves produce the currency in the Internet as ring a st of programming language (Nakamoto, 2008). In the language of in the “Bitco ” 16 community this production is denoted “Bitcoin mining”. In essence, the miners’ ‘ make their computers available to “Bitcoin” the currency system for continuously process ing “Bitcoin” transactions. For this sharing his of computer CPU the ‘miner’ is rewarded with a service fee that is credited in “Bitcoins” to his “wallet”. The financial benefit to the ‘miner’ is the difference of the value of mined “Bitcoins” in local currency minus his own computer cost [e.g. depreciation, electricity etc.] incurred during the time his computer has been servicing the “Bitcoin” currency system. Today, and instead of mining, participants can purchase “Bitcoins” at electronic marketplaces, such as “bitcoin.de”, that function as “Bitcoin” stock exchanges. In May, 2013 the currency fluctuated from EURO 77.06 to r EURO 98.62 fo one BTC (Bitcoin.de).

It s i said that the computer algorithm currency behind the will keep the total amount of circulating “Bitcoins” at a stable number in the far future. There is a mystery about who is hiding behind the pseudonym ‘Satoshi who Nakamoto’, created the “Bitcoin” currency. There are yet many speculations. t The lates rumour credits Shinichi Mochizuki, a Japanese math genius, for having innovated “Bitcoin” Bräuer, ( 2013).

The exact total number of complementary monetary systems including all their variants that st exi worldwide is unknown. Experts estimated that alternative money systems are increasing, both in number as well as in volume of transactions. “Today, there are thousands of such currencies worldwide. Hundreds of Time Banks operate in 22 countries. And in the United States alone, there are already 700 business to business complementary currency systems in which 500’000 businesses participate.” (Lietaer, 2013). The association “Regiogeld” lists 35 alternative monetary systems plus 20 new schemes in preparation for Germany alone (Regiogeld, 2013).

Discussion

It is said that a new monetary system ncept based on the co of “free money” would generate benefits for all parties involved: the manufacturers of products 17 and services, the consumers, the working and the retired people, state, the the poor and rich the . The listing of main advantages that a complementary monetary system would offer includes: “the elimination of inflation, the increase of social equity, the decreasing of unemployment, the lowering of prices -­‐ by 30 50%, an initial economic boom and thereafter onomy” a stable ec (Kennedy, 1995, p.34). It almost sounds that living in an economic paradise could become a reality by the implementation of alternative . currency systems

Environmentalists are promoting local currencies because they are convinced that they help to reduce transportation , and emissions which reduces the carbon footprint, and furthermore because closeness between production and consumption raises awareness of potential ecological issues of manufacturing (Volkmann, 2009 cited in Hoffmann, ). 2010 Closer relationship between manufacturers and consumers reduces . anonymity It is thus likely that the understanding for having a shared responsibility for the societal and gical ecolo impacts of production and consumption develops. Mutual acceptance of the implementation of sustainable solutions ould c thus emerge easier.

From the perspective of the “Social my” Solidarity Econo [SSE] movement the conventional monetary system that is built on debt and interest the is opposite of what SSE is aiming for. The redistribution of wealth from the poor to the rich (see above, Kennedy, 1995) is detrimental to solidary values. Therefore Arnsperger (2013), a SSE scholar, sees complementary monetary systems and social banks, as they have been fined de by various authors (e.g. Brodbeck, 2013; Weber & Remer, 2011; Benedikter, 2011), as means to support to growth and achieve potential breakthrough of the s vision held by the promoters of a more social and solidary economy and society. However, if SSE is to become “more than wishful thinking” national states h need to a muc greater extent than today accept and foster principles inherent in SSE and protect the development of these ideas “as part of the in common good”, order to help y solidar values to penetrate “nationalized money creation and public banking” (Arnsperger, 2013). The ‘commoneers’ riticis c e the current state of affairs. They have thus lifted monetary ssues i and monetary innovations onto their agenda ECC ( 13). 18

Nevertheless, it can be argued that support from the legislators and paradigmatic changes are still required and they should be welcomed if complementary monetary systems and social banking want to escape fast from their niches and aspire to become mainstream.

Hoffmann (2010) cites several authors that concluded that most of the claimed advantages of community currencies had never clearly been proven and “metrics had remained ‘sketchy’ st” at be or were based on anecdotal rather than empirical evidence. Furthermore and despite some remarkable growth, all alternative monetary systems are still mall of extremely s scale and negligible in comparison with the official currency and compared to the regionalised gross domestic product. Many organisations that run complementary monetary systems might not dispose of adequate statistical data and research capability to analyse its effect on the regional domestic product. Furthermore, it remains to be estimated how much of the sales in a complementary currency network is cannibalisation of purchases so far paid for with EUROS, how much is incremental business to the region, and how much of the variation is in sales the result of factors unrelated to the currency . system

These are probably major reasons why “the concept of local currencies remains at the fringe of economic and political fmann, thought” (Ho 2010). Worldwatch Institute cites ecology and economy researcher Robert Constanza “who has not found any currency that has had a significant impact on a region’s overall economy” (Worldwatch). The author too was unsuccessful in his search for [publicly and freely available] empirical research data that would prove, beyond reasonable doubt, the claimed benefits i.e.: increasing economic wealth and economic stability, decreasing unemployment, reduced inflation, higher quality social equity, decreasing prices, ical ecolog improvements, and sustainability advantages in general.

Reasons for lack of research might be that there are no complementary currency systems in place that are of adequate size and and spread that have been in operation for a period long enough to provide adequate samples satisfy to the 19 requirements for reliable and valid longitudinal research. Nevertheless, there is some data related to local complementary available currencies e.g. “Chiemgauer” and “WIR”, both of these examples seem to provide some proof of validity of, at least, a few of the claims.

Despite e th successes of some local currencies and barter systems, local currencies seem like going back in history. They set regional boundaries and are in this respect means of protectionism. uestion It remains a q how widespread an ideal currency region should extend. Encouraging consumers and business-­‐to-­‐ business to primarily trade with locals ng and so locki out the ‘strangers’ is, from an economics point of view, potentially favouring a suboptimal use of resources. This may allow for higher factor cost and could hinder full exploitation of comparative advantages of ‘cross border’ trading. Local production of goods does not necessarily offset the ecological cost of transportation e for th imports. Thus it remains to be proven if tions and under what condi local ncies curre can fully stand scrutiny of sustainability and in fact from an economic as well as from an ecological and social perspective. For promoting local trade alone, marketing strategies might be as effective and ent maybe more effici than the relatively complex currency systems. However, due to lack of data, this suggestion remains too and obviously a hypothesis.

These potential disadvantages of alternative currencies might in fact not be a real problem. So far, only a limited share of local exchange e is don by means of local currencies. Large-­‐scale and frequent mports i into the regions are still accomplished. Thus, ‘global’ market forces are, to a very small degree only, replaced by regionalisation -­‐ and co operation based on the and rules procedures of complementary currency systems. And, therefore, incremental mutual benefits for the participants can regionally emerge while the advantages of a national currency and of ‘global’ trade remain.

The success of any local money scheme heavily depends on the and size quality of the participating outlets that accept the currency and on the number of consumers that use the money vouchers, trate and thus demons loyalty to the 20 local economy and trade. A major factor of uld success, that sho not be underestimated, lies in the enthusiasm and stamina of the core group of initiators and their followers. On the one hand, the decisive commercial question to the trade outlet and the potentially participating es business is whether the cost of participation in the scheme is less than the incremental sales margin generated through the alternative money. On the other hand, however, it ould sh not be neglected that the social intrinsic and ecological values inherent in a complementary monetary system might be very r appealing fo trade utlets o , maybe not least for marketing purposes. The schemes itself may be regarded as social enterprises and they are as -­‐ such NGOs and not for-­‐profit organisations. This perception appeals to many people and to society to a great . extent

Fee income, donations from sponsors and a lot of volunteering must cover the cost for professionally managing an alternative money scheme. It is thus questionable if small volume complementary monetary systems could sustainably perform at break/even large without a proportion of voluntary work. However, it can be argued that volunteering is a value in itself and local monetary systems provide valuable and much welcomed opportunities for volunteering and learning. The transaction fee necessary to cover full cost might, without volunteers, easily become prohibitively high and thus threaten the continuation of the scheme. Size is rtant therefore an impo variable for the continuous existence and sustainability of an alternative monetary system.

From the perspective of an individual , business loyalty schemes such as -­‐miles air and others could be a more efficient marketing tool for relationship building, bonding, and for achieving incremental sales than alternative money schemes, that are relatively challenging to manage and sometimes can lack professionalism and IT support.

However, it shall without doubt, be clearly admitted that complementary monetary systems have more and higher level objectives including intrinsic values in mind than sheer sales promotion. There are undoubtedly regional economic benefits if buying power is used within a given region and thus creates 21 regional income, tax receivables, and employment. ocial S benefits emerge by bringing people of a region closer together, communication and co-­‐operation, feelings of belongingness and of being jointly responsible for the ds nee of and societal impacts on the region might increase, and, thus, joining forces for production and consumption is encouraged. It can enrich trustfulness and quality of life within the community and stabilise . society An alternative money scheme can provide an excellent fundraising opportunity to the benefit of local charities and other no t-­‐for-­‐profit organisations if it achieves to generate “gift money” from surplus fee ncome i as e.g. the “Chiemgauer” scheme has shown.

Furthermore, people that engage themselves in the democratic management of the currency system find a suitable platform for education in , economics for practicing business administration, and for business training. An example is again the “Chiemgauer” system that was tudents initiated by s and teachers of a Waldorf school. They created a student firm that issued and brought into circulation “Chiemgauer” ouchers v for the first time in January 03 20 (Waldorfschule Prien; Erziehungskunst, 2012). The scheme started with 30 member consumers and 20 shops and enterprises (Chiemgauer).

Many -­‐ so called local currencies are convertible to the national currency at a fixed rate and can in fact be considered national currencies linked to special rules and are not really currencies in their own Nor right. are ‘cryptocurrencies’ the same as most of the ‘conventional’ complementary ystems currency s that have been examined in this paper. It has become evident that Internet currencies such as “Bitcoin” are subject to high fluctuation in speculation value and thus vulnerable. Something ‘conventional’ alternative money wants to avoid. A main objective of ‘cryptocurrencies’ is the elimination of es intermediari and related transaction cost in order to enable -­‐ direct peer to-­‐peer exchange .

As it has been demonstrated: complementary monetary systems, demurrage, “gift money”, local exchange [barter] systems, and the making available to business and society a variety of need specific private currencies could be efficient and effective opportunities to alleviate deficiencies of the current 22 conventional monetary systems that are monopolies state of national s and controlled by central banks and the banking system. Nevertheless, onetary m reality is yet far from the ideas of complementary . currencies he T current national currency systems circulate astronomically huge amounts of money, are extremely complex, globally interwoven, they and are getting out of control but are, at the same time, resistant to fundamental change.

Reasons might be: paradigmatic, political, economical, psychological, as well as feasibility and ‘too big to . fail’ myth Monetary innovations such as complementary currencies might, for sometime to come, remain experimental. Despite potential local importance and iation, public apprec practical spearheading local currency initiatives belong s – as yet and unfortunately so – by and large to the domain of pragmatist hobby economists er, that, howev could be the innovators and early change agents of future monetary reforms. Although experts like Lietaer and others have provided important scholarly contributions, there is no law that paradigmatic changes me have to co from academia. However, before alternative currencies will grow to their full potential the challenge to academia is to provide ting more data on exis implementations. Successes, failures and challenges should be thoroughly researched and evidence of the claimed benefits must be provided levant before the re stakeholders might take up the ideas. Stakeholders to win over are: politicians and legislators, leading economists, bankers, multinational s, enterprise trade associations, government administrations, central banks, NGOs, institutional investors, mathematicians, part of the Internet community, the media, and society at large. But, why waiting for them?

As the “Bitcoin” example has shown, big scale revolutionary innovations that could lead to the replacement of today’s self-­‐serving conventional financial systems might come from Internet freaks, mathematicians, rom and f civil society movements, rather than from the exponents ng of the leadi coalition of the current global monetary and financial system.

23

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About the author

Heinz Brodbeck has been a director with the global energy At group Shell. the age of 64 he earned a doctorate in business administration from Strathclyde University, Glasgow, UK (2012 UK University of the Year) for his thesis and research on brand values management and employee behaviour in social banks. He holds a MBA (Open University, UK), an MSc in communications management (University of Svizzera italiana, , Lugano) and a BBA. In 2010 he studied at the Summer School for Social Banking in Florence (Institute for Social , Banking Bochum, Germany). Today Dr Brodbeck is consulting , and volunteering and active in the Waldorf school movement. His thesis discusses Living the Brand in Social Banks http://goo.gl/z9E0X .

Copyright: Heinz Brodbeck, Schönenberg, Switzerland, 2013

Inquiries please : to [email protected] or [email protected]

How to cite this article: Brodbeck, H., 2013. Complementary Monetary Systems – ‘Homoepathic Medicine against economic Collapse’ [Online]. Institute for Social Banking, ISB Paper Series No. . 11 Available at http://goo.gl/6azYL

End of article

New book about the business model of Social Banks

Heinz Brodbeck. Values in Internal Marketing. Living the Brand in Sustainable Banking – ‘Avoiding ext the n financial Crisis’. Baden-­‐Baden, Germany: NOMOS Verlag, 2013. Available at http://goo.gl/z9E0X

Published in Nomos’ series: ‘Wettbewerb und Regulierung von Märkten und Unternehmen’. The book is based on empirical research conducted at Summer School for Social Banking, LS Florence; G Bank, Bochum; ABS Alternative Bank Schweiz, Olten; and The others. study has looked at the social enterprise sector, has applied quantitative and qualitative research s method for the examining of social banks compared to conventional banks.