Hat Tip to FT Alphaville reader Chris Cook for drawing attention to an interesting banking model already in existence in Switzerland, which could perhaps be used as inspiration to solve the current crisis.
We refer to the cooperative WIR bank system set up in the 1930s to counter the economic malaise and currency shortages at the time, stemming from the 1929 Great Crash.
As Wikipedia notes, according to the cooperative’s statutes, “Its purpose is to encourage participating members to put their buying power at each other’s disposal and keep it circulating within their ranks, thereby providing members with additional sales volume.”
While the sums involved are relatively small (about a 2bn swiss franc turnover), it has on the whole proved a lasting and efficient model for stimulating the so-called Mittelstand (small-and medium-sized) industry of Switzerland for decades. It is reportedly the oldest and most successful barter system in the world.
The model is based on barter theory, and loosely also incorporates facets of anarchist-economist Silvio Gesell’s free-money theory. The idea is that members conduct business based on reciprocal credit arrangements rather than on the Swiss currency itself. It is a closed barter-circle so to speak, which in times of economic stress, some say, can create a stabilising force for a national economy.
As Heidi Defila, former Vice President of the WIR Bank explained in 1994, the WIR economic circle at first was open to more than just the Mittelstand, including farmers, civil servants and white-collar workers too. All paid cash into the WIR account for which they received a 5 per cent bonus credit. With that they could go shopping with WIR members. Defila adds:
But it was mainly the interest free WIR-credit for extra buying power that served to stimulate the slow turnover of goods. Following free money theory the clearing credits were kept interest-free, thus stifling any tendency to hoard WIR credits. Soon many communities had information offices where volunteers worked for the WIR ideal. Many local groups were founded, one of the first on January 30, 1935 in Zurich.
The WIR organization grew at an amazing rate. By early 1935, it listed more than 1000 account holders actively exchanging goods and services.
In a 2000 economic paper Tobias Studer, an economist at the University of Basle, alluding to the work of James Stodder, economic professor at the Lally School of Management and Technology in Hartford explained:
In periods of economic boom WIR activity shows less-than-average growth, while in periods of recession it shows greater-than-average growth. Over the course of 52 years, there has been another correlation — that between the WIR system and unemployment: while the number of unemployed grows, the activity of the WIR system also grows, playing the role of a stabilizer.
What’s more the advent of the internet, he claims, facilitates the barter-model even more so:
Exchange without monetary payment, such as practiced by the WIR system and numerous other “barter” exchanges, has enjoyed a veritable renaissance with the advent of the internet. One of the principal barriers opposing barter up until now — the difficulty in finding suitable partners for any exchange — has disappeared with the internet, since this medium can resolve, in an optimal manner, the problem of identifying potential trade partners. Using the internet, each supplier can present his or her offers to the entire world with minimal difficulty, at any hour of the day or night. Furthermore, it will be quite easy to update this offering as necessary. The trading exchange assumes diverse functions, including standardization of information on the presentation of clients, products, and services.
The advent of eBay, paypal and other electronic monies or voucher-based systems come to mind for sure. Or as Studer explains:
Methods of payment are evolving in more advantageous directions, as for example direct withdrawals from bank accounts, or payment via “e-cash” or virtual money.
As for the WIR model itself, James Stodder explains in a more recent paper how it can specifically encourage trade itself through its ability to provide much more information to the market than any centralised monetary system:
The WIR bank in Switzerland can be seen as a more sophisticated answer to the same information problem, with centralized credit accounts for each household and firm, and a record of all unmet bids and asks. This is far more knowledge than is available to any “central” bank — the knowledge it has to set the money-supply basis of exchange. Its broad monetary aggregates sit atop the decentralized “real” data in which investors and central bankers are interested. To get at this information, the bank can only scan indirect monetary indicators — ratings of credit-worthiness, and statistical leading indicators.
And for those ready to dismiss the concept as a hare-brained scheme, it’s worth noting some of its and Silvio Gesell’s advocates included Maynard Keynes, whose theories on economic stimulus are currently behind most national defences to the current crisis. As Stoddard points out:
The WIR was inspired by the ideas of an early 20th-century economist, Silvio Gesell. Keynes devotes a chapter of his General Theory (1936; Book VI, Chapter 23) to Gesell’s ideas. Despite criticisms, Keynes acknowledges that this “unduly neglected prophet” anticipated some of his own ideas. This link with Keynesian monetary theory should have made Gesellian banking of some interest to macroeconomists.[2] Only one contemporary economist, however, seems to have studied the macroeconomic record of WIR, the largest and most long-lived bank of this sort. Studer (1998) finds positive correlation between WIR credits advanced and the Swiss money supply, M1. This suggests that WIR follows a counter-cyclical credit “policy,” one parallel to the monetary policy of the Swiss central bank itself.
That said, it’s not like it was all smooth sailing for the WIR bank. As Defila explains severe setbacks did occur. For one, when turnover fell management was inclined to giving out more interest free WIR-credits, which meant the standards applied in granting credits were often far too lenient, eg. there weren’t the tangible reserves to cover them. There were also further stumbling blocks which eventually led to the creation of interest-bearing WIR credits in the 1950s as an incentive for retaining and attracting capital subscriptions. However, it is the fact that the WIR was able to successfully navigate through these challenges that should be seen as promising.
As for application to the current crisis? The FT reported in January how governments were being forced to turn to barter deals as credit to secure food dried up. With a lack of credit still a viable problem, and trade suffering as a result, some sort of mechanism based on this sort of barter-credit system could very well have some useful application.
Related links:
60 years of the WIR economic circle cooperative – Heidi Defila (as published on Exeter University’s website)
Reciprocal exchange and macro-economic stability – Rensselaer Polytechnic Institute at Hartford