C H A P T E R 7

Practical Cases Today: Embryos of a New Economy

THERE ARE TWO major obstacles preventing the practical conversion of our interest-based money into a means of exchange which would serve everyone. First: Few people seem to understand the problem, and secondly, successful experiments are thinly spread all over the world in comparison to "normal" money trade. Taken as a group though, these experiments are not only encouraging evidence that everyone can do something immediately, but they also provide us with a picture of what a transformation from the "bottom up" would look like. If enough people understood what issues are at stake, it would be possible to change our money system without state support. The models we are about to discuss differ in function - savings and loans on the one side, and exchange of goods and services on the other as well as in their scope from local to nation-wide.

At a local level, the Canadian LET System offers an interest free means of exchange for groups, communities, villages or suburbs with a minimum of 20 and a maximum of 5,000 members.

The Swiss WIR-Wirtschaftsring (Economic Cooperative) shows how a practically interest-free accounting system for the exchange of goods and services can bring significant advantages to small and middle sized firms.

The Danish and Swedish JAK systems provide countrywide interest-free savings and loans schemes under conditions significantly better than those available from commercial banks.

Taken together these models prove that an interestfree money system which fulfills exactly the same functions as an interest based money system is practically possible. It proves that those who use it can benefit from such systems otherwise they would not continue to exist.

THE LET SYSTEM

In every village, every city and every region there are people with abilities and resources which are not used in the established economic system, yet there is a demand for such abilities and resources. An exchange network which advertises through billboards, newspapers, data banks, radio, or other means, gives people the chance to share these skills with one another, and enrich the life of the community in the real sense of the word, without using the established money system.

Of all exchange models LETS is the most widely used. There are hundreds of LET Systems in the U.S.A., Australia, Europe, New Zealand and many other countries. The first was established by Michael Linton in January, 1983, in Comox Valley, Vancouver Island, British Columbia, Canada. In 1990 the organization had around 600 members with a yearly turnover of $325,000 "green" dollars. These green dollars are the unit of payment for LETS, and are equal in value to the normal Canadian dollar.

Whatever a person may be prepared to pay for a task or piece of work is credited to the account of the one who performs the task and debited to the account of the person who buys the service. Interest is not paid for either credits or debits. Since the value of the normal clearing unit - the green dollar is equal to the Canadian dollar, inflation works as a circulation control since unused credits devalue at the rate of inflation. Because everyone is responsible for the cooperative debts, namely for unpaid debts, it is important that people know each other and learn to trust each other.

Limiting a LET System to a locality makes sense at the start of a program until more people learn to come to terms with the responsibility the system demands. Unfortunately it has not been possible to pay taxes in green dollars. If such payments were made possible then the local municipality or county would become partner of the LET System and would be able to finance investments in green dollars.

The advantages are obvious: Local people grow richer and the state or municipality gets access to an incredibly inexpensive work creation program. Legally LETS does not impinge upon the established legal system in most countries, neither does it go against the monopoly of the state to print money, because it is no more than a local barter club or bookkeeping system. LETS fills a gap in the market left by an economic sys- tem which is always in search of the cheapest production location, destroying in the process the local autonomous economic structure. It is true that the free world market offers benefits and that it has contributed to the prosperity we enjoy today in many parts of the world. However, it is also true that this prosperity has been created at the expense of workers in the so-called "low-wage countries," at the expense of non-renewable energy sources and the stability of regional economic structures.

It is important, therefore, to renew the local and re- gional economy. The economic ups and downs of the world market can be counteracted only if the internal economy of a region or a locality acts as a stable complementary system in balance with the global exchange of goods. The stronger the entire economic system, the stronger its in- dividual elements can be.

In this respect, LETS is a locally based answer to the power of large corporations and state monopoly systems who have become highly problematic for small political and economic structures. The LET System is immune from local or international recessions, interest on debts, thefts and money shortages. The world money system can collapse; the dollar or DM can lose their value; unem- ployment may rise, but the green dollar still functions be- cause it is guaranteed one hundred percent by work and by goods, and only functions if people cooperate in a direct exchange. Its main strength is that it cannot be used for the purpose of speculation, or one-sided enrichment.

The advantage of LETS is that it is limited only by the time and energy a person is prepared to invest. These features can be decisive criteria for the introduction and extensive application of LETS, when interests are high and money is in short supply. Experience has shown that the people who are excluded from the normal economic system turn out to bring unusual talents when they join the LET System. Part-time occupations and hourly-rate jobs ranging from baby sitting, nursery and garden work, window cleaning, fruit preserving, to spring cleaning are some examples of LETS exchanges.

At first, LETS met with significant opposition. Left- ists thought it was a plot of the right, and to the right it sounded like a communist takeover. Some business people thought it was a trick to take money from them. Men appeared more suspicious of the proposal, but women were significantly more pragmatic. "We should see if it works for us, and if it does, then why not use it?" Most mem- bers were fascinated because the system is easy to use, and because it has a self regulatory growth potential which is dependent on the number of transactions the system can absorb.

LETS can be combined with the existing money sys- tem quite easily. The origin of green dollars is totally de- centralized and is related from its root level to the creativity of those who earn it. Because green dollars cannot leave the local area to buy Japanese cars or dresses from Hong Kong, every commercial transaction encourages the de- velopment of local resources. An unemployed mother in Courtney expressed her satisfaction this way: "... it gives me the feeling I am doing something for the community, because every time I buy something with green dollars, I know I am helping someone improve their financial situation."

THE WIR NETWORK AND SIMILAR ASSOCIATIONS

Switzerland has had a country-wide exchange network since 1934 whose goal is to provide enterprises with reasonable credits and to help its members to get higher turnovers and profits. The WIR (pronounced vir - short for "Wirtschaft" = economy in German) was founded by sympathizers of the Free Money System, the so-called "Freiwirte" (Free Economists). As an exchange ring the WIR works on the same basis as the LET System and similar to barter clubs: a cashless accounting system is run by a central office, cash withdrawals of deposits are not allowed and, therefore' credits can be interest free.

In 1990 WIR had about 53,730 members, 16,788 official accounts and a halfyearly turnover of about 0.8 billion WIR, as the unit is called. The WIR, as a unit of payment, has the same value as the Swiss Franc. Because WIR money needs information to function in order to connect up supply and demand, the administrative group publishes a monthly magazine as well as three catalogues per year, showing products and services offered within the system.

The WIR defines itself quite openly as a support system for middle-sized business in competition with stronger and larger enterprises, helping those companies to fight an ever larger and intervening government. The organization is structured like a bank, and has its main office in Basel, seven regional offices throughout Switzerland with a total staff of one hundred and ten employees. Payments are made with forms not unlike normal bank cheques, with credit cards and bank forms. All transactions are either credited or debited by the central office. Savings do not accrue interest, and loans are charged only a minimal fee. Money is "created" in that a transaction takes place, exactly as described for the LET System. The difference here is that it is a nation-wide system and that it is limited to business. In 1990 the costs of the WIR organization were covered by a quarterly membership fee of eight Swiss Franks or 32 SFr per year, plus costs of 0.6 - 0.8 % for every transaction.

In spite of an almost 60-year success in Switzerland the cooperative barter system has not been repeated in any other country in Europe. There are several reasons for this. In Germany in 1934, after countless "clearing houses," "clearing societies" and "exchange banks," organized basically on WIR Ring principles, had attracted many ordinary people, a commission of inquiry under the chairmanship of Mr. Schacht (then president of the German Central Bank) dictated legislation against the "misuse" of cashless payment systems in 1934. Paragraph 3 of this legislation spells out that cash withdrawals must be possible from any accounting system. This hit the core of the exchange rings. After this legal defeat and in spite of so many difficulties, no one expected that a commercial barter club would establish itself in Frankfurt/Main, the main banking centre of the German Federal Republic. The "Barter Clearing and Information" (BCI) group, although far more expensive in its services than the WIR Ring, has been successful. Instead of a 32 SFr (approx. US $18) annual fee, the BCI charges DM 480 (approx. US $300) the first year. Unlike the 0.6 to 0.8% per transactions that the WIR Ring calculates, the BCI charge 1 to 2% per transaction.

The BCI is not considered a bank by the German Federal Supervisory Board because it only deals with goods and the exchange of services, and uses money only to calculate the value of the transactions. Its turnover in 1990 was DM 102,000,000 of which 30 million were barter fees. In contrast to WIR, the BCI has a consulting department to advise customers, and makes sure that companies do not carry negative balances for too long. After twelve months, accounts which show a minus have to be balanced. This allows those who have accumulated a positive balance and want to leave the system, the possibility of a compensation in German Marks after a period of six months and only if they leave the system. This feature overcomes the cash convertibility problem of the German credit laws, the problems of non-convertibility of the Swiss WIR currency into Swiss Francs, and the problems with members who do not want to be part of the system any more but cannot get out because they have high deposits, having provided services and goods for others in the system.

THE J.A.K. COOPERATIVE BANKS IN SWEDEN

The initials J.A.K. stand in Danish for land (jord), work (arbete) and capital (kapital), a movement which started in Denmark during the 1930s. At that time, most Danish farmers were heavily in debt and although their farms were productive, they could not hold on to their properties. Together with traders and producers, the farmers developed their own interest-free currency and banking system. Soon, it was clear to them that the new system could make their farms profitable again. Fearful that this example would become widespread, the Danish government prohibited the new currency from 1934 to 1938.

Today, the Danish and Swedish schemes (which started anew in the 1960s and 1970s) are basically similar and offer the same lending advantages, but they have different organizational methods. In Denmark, there are small JAK banks which offer standard services. In Sweden, the scheme operates through the postal banking service.

The long term socio-political aim of the Swedish JAK cooperative is to make interest unnecessary so that an economy can exist in balance with nature, without inflation or unemployment. Members are distributed all over the country. Early in 1991, the Swedish JAK group had 3,900 members and a total turnover of 34 million Swedish Crowns (about US $ 15 million). Already in 1993, the membership had risen to 38,000 and the turnover to 600 million Swedish Crowns (SEK). Since everyone saves, at least as much as they borrow, it is obvious that the total system maintains a constant balance.

Figure 19

Figure 20

Figures 19 and 20 show two examples of loans with different amounts, comparing bank loans with JAK loans over the same period of time. (33) Obviously everyone is better off when reciprocal saving and lending actually works without interest. Participation in the J.A.K. system, up to the total amount of a loan, makes unquestionable sense. Some people save above that commitment voluntarily, giving those who need a loan the opportunity to borrow before they save. People who only want to save, however, lose (through inflation) and, therefore, seldom participate. The two examples depicted on pages 125 (figure 19) and 126 (fig. 20) show a small short-term loan and a larger, long-term loan. All amounts are in Swedish Crowns (SEK).

EXAMPLE 1: A SEK 17,000 loan over three years, at 3.4 % effective cost, is still significantly cheaper than an identical bank loan at 16.1 %.

EXAMPLE 2: A larger credit, however, SEK 399,640 would cost 1.7 % over 20 years, compared to an average bank loan costs of 13.1 %.

In both cases, borrowers have not only the better con- ditions but additionally, a respectable savings of about 60 % of the loan at the end of the established loan maturity. In January 1990, the Ministry for Islamic affairs in Kuwait confirmed that the principle of the JAK system was compatible with Islamic economic principles. Since then, a substantial proportion of the JAK membership comes from the Arab world.

From a legal point of view, the JAK system is possible in Sweden because a registered association is allowed to keep and administer deposits and transactions.

ADVANTAGES AND DISADVANTAGES OF ALTERNATIVE MONEY AND CREDIT SYSTEMS

Exchange rings, barter clubs, and savings and loan as- sociations are embryos of a new economy because they offer advantages to their members, otherwise no one would use them. Goods and services worth US $2 billion are bar- tered yearly in the U.S.A. Taking into account the growing number of transactions, based on barter, between Eastern and Western Europe, as well as industrialized and developing countries, it is estimated that between 10 to 30% of the world trade is barter trade. Everywhere barter trade allows an additional volume of trade which would not be possible within the normal monetary system. The basic features of all exchange or barter systems are very similar:

Members hold an account in a central office.

Accounts are held in fictive clearing units (green dollars, WIR, etc.) and their value is identical to the national currency.

An overdraft up to a particular limit is allowed, and members with positive balance become de facto lenders.

Positive credit balances receive no interest, loans are interest-free, or (compared to market interest) carry very low interest.

Cash deposits are sometimes allowed, and cash withdrawals are basically not allowed, or are limited.

Members inform the central office about all transactions by telephone, in writing, or through electronic mail.

The central office administers all settlements.

The central office is paid by either yearly contributions and/or a fee per transaction by buyer and/ or seller.

The participants determine the price of the clearing unit themselves.

The central office can demand a reserve to cover a loan against losses, and for cases of misuse.

The central office is responsible for coordinating and informing members of credit and lending needs.

Needless to say, barter and exchange systems, special- izing at a local, national or international level, have ben- efited greatly from the new information technology. The notion of a free exchange of goods and services as envis- aged by Gesell and Proudhon, is now much easier to imple- ment where information travels fast to any place in the world.

It is important to understand that barter clubs reverse today's banking principles. They reward those who ex- change goods and services with interest free money and punish those who sit on their surplus money. It does not pay to keep green dollars or WIR sitting on an account, since there is no interest to be gained. If the group who uses the barter system is closely representative of the total market, then this economic microcosm will function well. An economy which would consist of a hundred decentral- ized barter clubs would have to pay only the costs for clearing and information, instead of the heavy load of interest.

Experience shows that excessive lending, i.e., long- standing negative accounts, can be just as dangerous as a high saving rate, i.e., long-standing positive accounts. To prevent the first from occurring, a deadline can be used to urge people to balance the extreme negative accounts, stipulating, for example, that negative balances have to be paid in the normal currency after one year, to be paid into a trust account, until a positive balance has been achieved.

To prevent the second from occurring, a parking fee would be introduced to encourage people to part with their savings. Many exchange ring systems tend towards stag- nation because too many members save too much. The LET System in Comox Valley and other localities grew to a point and then stagnated suddenly when the possi- bility for meaningful investment disappeared. However, economic activities would liven up the moment credit becomes available to members.

Therefore, the exchange should be linked to a bank- ing service. To simplify bank procedures for those with a large credit surplus, and to make negotiations for credit seekers easier, it would be possible to establish credits in green dollars (or the respective unit of barter). Large risks would have to be correspondingly assessed and covered by risk premiums and brought into balance with a posi- tive credit balance.

The reward for the individual who saves would be no extra money or interest - but rather the possibility to keep his or her money without loss on a savings account. In that respect, a parking fee as circulation incentive pro- vides the system with an impetus similar to interest. What disappears are the multiple credit back payments and, with them, both the unhealthy growth of the economic sys- tem and the interest-based one-sided advantages for money lenders as we know them today.

Two important problems need to be mentioned:

(1) The first is tax evasion. This was a prevalent prob- lem among the commercial barter clubs in the U.S.A. some years ago. As a result legislation has been passed in Washington, D.C. allowing tax officials to look into the accounts of all members of a barter club.

(2) This leads to the second problem, namely that of the right to privacy. A perfect central accounting system would not only be an ideal instrument for economic transactions without the heavy load of interest, but also an ideal supervisory system for a totalitarian government. Such a perfect quantitative and qualitative information service has been the dream of societal planners in both East and West. Already in 1897, Solvay suggested a cashless economy, based on centralized accounts, which would register every movement in people's lives, and actually draw a diagram of their activities, and of everyone's actual relationships. In the 19th century, it was technically impossible to deal with the amounts of information necessary for such a scheme, but (as everyone knows) the situation has changed drastically in the last few decades.

A cashless money system carries the implicit possibility of checking up on the diagram of everybody's activities through the records of all transactions from their bank accounts. We should be conscious that a state monopoly, combined with a totally cashless monetary system, could become very dangerous, indeed, for our personal freedom.

In summary, I would like to restate my proposal: The combination of an exchange ring, like the LET System or WIR exchange ring - with a savings and loans association, like the JAK System - but based on a park- ing fee or circulation incentive to help all necessary transactions does not exist today, although it would be quite easy to bring into existence by linking together the longstanding practical experience with these two systems. Thus an interest-free money system would be created which would provide all the possibilities covered by the normal money system:

(1) Exchange
(2) Lending
(3) Saving

Different attempts with alternative money systems are politically meaningful, because they help us to understand how money works and the purpose money serves in our life. Practical experiences are important, because they encourage people to make changes on a wider basis. However, so far none of these attempts have changed the major problems caused by today's money system in the world economy. Therefore, the aim to introduce fundamental monetary change at a national and international level should be among our highest political priorities for a just world.