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 there already 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 monetary systems. 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 are they and how 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 for making the 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 currencies can really fulfil the many promises and hopes. 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 fiduciary 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 decades i.e. “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 new idea. More 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 buying power 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 life. As it will be shown in this text, complementary monetary systems are designed to support the real economy, not the financial markets, and they are certainly not 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 nor by the issuer 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 negative 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. 4 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 of the local community 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 of micro 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 credits 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 money. Standard are charges 5 on the transactions as well as conversion fees in case the local currency 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 the money. 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 example is communities that installed barter trade systems based on time credits. Such schemes are sometimes called ‘time banks’ and ‘time Dollars’, because