The Journal of Risk Finance

Short monetary systems: take a risk, create money

Michael Mainelli,
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Michael Mainelli, (2012) "Short monetary systems: take a risk, create money", The Journal of Risk Finance,
Vol. 13 Issue: 4, pp.280-284, https://doi.org/10.1108/15265941211254426
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JRF INDUSTRY INSIGHT

13,4
Short monetary systems:
take a risk, create money
280
Michael Mainelli
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Z/Yen Group Limited, London, UK

Received May 2012
Accepted May 2012
Abstract
Purpose – The purpose of this editorial is to examine fiat currencies and common tenders
(trade-based money) from a risk perspective. The editorial encourages risk managers to consider the
distributive benefits of a multiplicity of currencies and urges them to examine common tenders both
old, such as the Swiss WIR, and novel, such as capacity exchange monies, as risk management tools.
Design/methodology/approach – The editorial is based on research conducted for the City of
London Corporation in 2011 into capacity, trade and credit which examined new architectures for
commerce and money.
Findings – The editorial links Freiwirtschaft movement ideas with some characteristics of common
tenders. Further, it considers whether some simple regulatory approaches might make such common
tenders more useful.
Originality/value – Of note, the author suggests that a modern alternative to government regulation
might be an audited ISO accreditation standard for “good currency” or “good common tender”.
Keywords Monetary policy, Regulation, Currencies
Paper type General review

The Journal of Risk Finance
Vol. 13 No. 4, 2012
pp. 280-284
q Emerald Group Publishing Limited
1526-5943
DOI 10.1108/15265941211254426
Analysts slowly rediscover as the various financial crises since 2007 unfold, as they
did in the 1930s, a need to reframe the role of money. Debates about the crises have
blamed too much credit growth, too much fiat currency and too much laxity in
regulating money. Debates about the cure recommend more credit growth and more
fiat currency but, this time, greater vigilance in regulation. Basel III means that fiat
currency money supplies are going to be more entwined with international banking
regulation (Mainelli, 2011). Some suggest that taking quantitative easing “all the way”
might mean zero-leverage “utility” banks (Mainelli and Manson, 2011). The implication
of zero-leverage would be that the regulatory view of credit would be inordinately
focused on fiat currency credit. But there are other forms of credit and money outside
traditional banks and regulatory structures. Money is created when people trade debts.
A debt is the provision of credit, based on trust. Surely we want to increase trust and
credit, but fiat currencies are only one form of credit, and based within a relationship to
an issuing government.
Some commentators have begun to raise questions about the need for competition
and variety in credit. For example, in a Bruegel blog post, “Europe needs to drop
its resistance to non-bank credit”, Nicolas Véron (2012) argues that “encouraging
non-bank credit provided through the private sector should be a major public policy
objective”. Véron was arguing, mostly, for Europe to be careful about suppressing
what the USA would term “shadow banking”. Meanwhile, an unintended consequence
of the European interpretation of Basel III, the CRD IV, is that corporates who have
traditionally traded derivatives on an uncollateralised basis will now need to post
 collateral reducing credit. Bob Giffords and I (Mainelli and Giffords, 2009) argued that Short
the promotion of competition, then supervision, then regulation should be the order of monetary
reform discussion, all with an objective of promoting open markets with smaller, more
diverse players. Regulators should distinguish between supervision (knowing what’s systems
going on) and regulation (saying what should go on). In derivatives trading there is
a great need for supervision. The markets are opaque. But simple supervisory
solutions could include mandating the use of a handful of deal registries using a global 281
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legal entity identifier system to which regulators had open access. Too big to fail is
too big to regulate. Regulators should promote diversity and break up concentrated
points of failure, as well as ensure they know what’s going on, before resorting to
micro-prudential homogenisation that reduces credit they are willing to provide to one
another.
Faced with regulatory initiatives drying up credit, commentators have begun to raise
a question reminiscent of the Great Depression, “should people create their own money?”
Towns in the USA, Germany and Austria did create their own money. Collectors’ books
today show over 1,700 scrips existed in the USA during the Depression Era. Though
these movements were repressed, e.g. the Wörgl experiment in Austria, they have left a
legacy, most notably in Switzerland, that raises wider, important questions.
In a study on capacity, trade and credit (Mainelli et al., 2011) we explored issues of
currency when looking at capacity exchanges. A capacity exchange was defined as:
[. . .] a membership-based system within which companies can trade available capacity in the
form of goods, services and infrastructure within and across industries, using common tender
as a medium of exchange.
As we examined these systems, e.g. a number of barter and reciprocal trade providers,
we found that many issued their own monies, or “common tenders”. Most notable of
these was the Swiss WIR.
Founded in 1934, WIR (Wirtschaftsring-Genossenschaft – economic circle
cooperative) is a cooperative bank facilitating multilateral trading between, and
extending credit to, over 60,000 member SMEs. WIR was set up as a result of the
adverse economic and monetary conditions of the Great Depression to stimulate trade
and create purchasing power between participants, primarily SMEs, thereby enabling
local economic growth and reducing unemployment. WIR acts as a “central bank”
issuing its own currency – the WIR franc (CHW), which is pegged to the Swiss franc
(CHF) and released to members through loans and mortgages backed by collateral.
CHW are created on the strength of the contract with the borrower plus the willingness
of a community to accept the money as a payment for goods and services, rather than
through state/central bank authorisation. The bank regulates the amount of WIR
francs in circulation. WIR francs accounted for 0.2 per cent of CHF M1 in 2009.
WIR acts as a “commercial bank” and has been subject to relevant banking
regulations in Switzerland since 1936. WIR provides a range of banking products
(including business loans and mortgages) to its clients in CHF or CHW or a combination of
both. CHW are used by participants to exchange goods and services within the WIR
exchange. Since every WIR credit is matched by an equal and opposite debit, the system
as a whole must net to zero. Circa one in five SMEs in Switzerland is a WIR member, of
which one third are from the construction industry. While some participants accept CHW
as 100 per cent of the payment for their goods and services, the minimum rate of CHW
 JRF for every transaction is 30 per cent up to a value of 3,000 CHF; and subject to agreement
13,4 between the parties beyond that threshold. Transactions in CHW amounted to CHW
1.627 billion in 2010, representing circa 0.3 per cent of Swiss GDP for the same year, or
involved in over 0.6 per cent of Swiss GDP as CHW’s average rate of acceptance is usually
between 30 and 40 per cent of the total amount.
Using 56 years of WIR data on participants, CHW in circulation, turnover and
282 credit, Stodder (2009) demonstrates the counter-cyclical nature of WIR credit, showing
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that WIR credits are most likely to be accepted when ordinary money is in short supply
and suggesting that the purchasing power created through WIR could become an
instrument of effective macroeconomic stabilisation. Recent media pieces on Swiss
SME WIR participants in the financial crises tell stories of how increasing CHW/CHF
ratios have stabilised business.
So from one side we have local exchanges or barter exchanges growing and
increasing the variety of credit, from another we have calls for the shadow banking
system to provide more credit. In all cases we have people in trade creating their own
monies, leaving us with some interesting questions. Perhaps the biggest question for
macro-economists is why should “tax scrip supply, i.e. national fiat currency, plus
bank debts ¼ money demand”? A focus on fiat currencies as money, often driven by a
simplistic desire to understand and relate tax revenues to the economy, means that fiat
currencies are given quasi-monopoly status. But there are other questions, mostly
unresearched in any depth:
.
Are multiple competing currencies both fiat and private better or worse, and for
which purposes, than semi-coercive, monopolist fiat currencies?
.
Can we bank, as the WIR, without fractional reserve or leveraged banking?
.
Money is a store of value, but does that make it “better” if money is a long-term
store of value?

One of the more interesting excursions into reform was the Freiwirtschaft movement,
largely of the 1910s and 1920s which inspired the WIR. Silvio Gesell (1862-1930) was a
German economist who found fertile ground for his ideas in Switzerland. As an
emigrant to Argentina in his 20s he had experience of unstable currencies. He returned
to Germany and began thinking about the role of the velocity of money in determining
price levels. After the First World War he began writing about monetary reform, with a
one week term of office as Finance Minister of the Bavarian Soviet Republic
(Bayerische Räterepublik) in 1919 during its very brief lifespan of a few weeks. Gesell’s
core ideas for Freiwirtschaft were three. “Free trade, free land and free money”.
Personally, I might add “free information” for a modern mantra.
Free trade we understand today, though Gesell also meant free movement of
labour, but free land and free money require some explanation. By free land Gesell, like
Henry George in the USA before him and with some echoes of the Social Credit
movement, meant only public institutions could own land; land was held by
communities. Land could only be rented, not purchased, though perhaps on a very long
lease. The implications of free land were that longer-term stewardship was encouraged,
land prices would not inflate, and society controlled the basic productive resource, land.
By free money Gesell meant for money to be issued for a limited period at constant
value (neither inflation, nor deflation). The implication was that the velocity of money
had to be kept up otherwise the issued money expired, and that long-term saving
 required genuine investment; one could not sit on cash to exploit rents. If you cannot Short
store money then you need to avoid the temporal mismatch and debasement. You need to monetary
have a claim on productive assets, not just currency. The idea of demurrage,
as popularised by Bernard Lietaer, or negative interest rates on money, means that systems
money has to circulate. We get there awkwardly today with fiat currencies when interest
rates are below inflation rates. Gesell and “free money” were explicit. 0 per cent or even
negative interest rates keep trade flowing as people need to trade into productive assets. 283
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Nobody has a God-given right to sit on money as a store of wealth. Money needs to be a
store of value, but a long-term period is not necessarily better than a short-term period.
Gesell’s 1918 warnings included a letter published in Berlin’s Zeitung am Mittag –
“If the present monetary system, based on compound interest, remains in operation,
I dare to predict today that it will take less than 25 years before a new and even worse
war”. A prophetic warning even today. But what was so important about Gesell? Gesell
put his finger on the nub of a deep problem. According to Freiwirtschaft, a price system
with large volatilities is dysfunctional, price stability is favoured. With more stable
prices, “wobbling” is a positive, self-stabilizing, mechanism. But with large swings,
asset bubbles and such, our monetary system is about speculation, not price discovery.
Cause of boom and bust? Perhaps after being long-overlooked, John Maynard Keynes’
prediction is coming true – “I believe that the future will learn more from the spirit of
Gesell then from that of Marx”.
Interestingly, proponents of reform to fiat currency and leveraged banking often fail
to realise that in their reforms they may fail to provide governments with effective tax
systems. Current taxation systems are intertwined with the idea that the pre-eminent
form of money should be tradable tax scrip. Freiwirtschaft would emphasise the
importance of land as the basis of taxation, moving away from income and corporation
tax, and giving governments a more solid basis of taxation less interventionist in the
economy.
From a risk perspective, a wider, more variegated ecosystem distributes risk better
and provides more resilience than a monoculture. In the capacity, trade and credit study
we simulated a commercial system where goods and services could be purchased for a
mixture of fiat currency and common tender (such as the approach of the WIR or Ithaca
Hours). The simulation indicated that combining common tender and fiat currency as
means of exchange seems to create complex relationships between acceptance and faith
in common tender and fiat currency. As evidenced in geographic areas where multiple
currencies co-exist, this complexity can be surmounted if the benefits of trade are
sufficient. Clearly, in a world where we hardly understand currency fluctuations,
the scale of our ignorance is large. However, there are many areas, e.g. biology, where the
complexity of interactions is large and our ignorance high, yet we encourage diversity
and competition. Unless you believe in some intrinsic value in a global currency, perhaps
you should explore a richer multiplicity of currencies.
The key difference between modern local exchange trading systems or modern
capacity exchanges from 1934 Switzerland was that the Swiss put regulation of the
CHW on a par with the CHF. Both were permitted to co-exist. A modern alternative to
government regulation might also be an audited ISO accreditation standard for “good
currency” or “good common tender”. Communities form when people are prepared to
be indebted to one another. When these debts are traded independently a form of
money often arises as the system to manage indebtedness and its obverse, trust.
 JRF We want to encourage communities, localism and a multiplicity of human interactions
in order to generate wealth and well-being. Rather than suppressing common tenders,
13,4 perhaps we should be encouraging shorter monetary systems that do not store
long-term value and open competition among community and fiat currencies.

References
284 Mainelli, M. (2011), “Money in a time of choleric: basel blows the bubbles”, Journal of Risk
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Finance, Vol. 12 No. 4, pp. 348-50.

Mainelli, M. and Giffords, B. (2009), The Road to Long Finance: A Systems View of the Credit
Scrunch, Centre for the Study of Financial Information, London ( July).
Mainelli, M. and Manson, B. (2011), “Small enough to fail: a systems approach to financial
systems reform”, Journal of Risk Finance, Vol. 12 No. 5, pp. 435-44.
Mainelli, M., Rochford, S. and Von Gunten, C. (2011), Capacity, Trade and Credit: Emerging
Architectures for Commerce and Money, City of London Corporation, London (December).
Stodder, J. (2009), “Complementary credit networks and macroeconomic stability: Switzerland’s
Wirtschaftsring”, Journal of Economic Behaviour & Organization, Vol. 72 No. 1, pp. 79-95.
Véron, N. (2012), “Europe needs to drop its resistance to non-bank credit”, Bruegel, Brussels,
16 April, available at: www.bruegel.org/nc/blog/detail/article/744-europe-needs-to-drop-
its-resistance-to-non-bank-credit/

About the author

Professor Michael Mainelli, PhD, FCCA, FCSI, originally undertook aerospace and computing
research, followed by seven years as a partner in a large international accountancy practice and a
spell as Corporate Development Director of Europe’s largest R&D organisation, before
co-founding Z/Yen (www.zyen.com). Z/Yen operates as a commercial think-tank that asks, solves
and acts on strategy, finance, systems, marketing and intelligence projects in a wide variety of
fields, such as developing an award-winning risk/reward prediction engine, helping a global
charity win a good governance award or benchmarking transaction costs across global investment
banks. His third book, co-authored with Ian Harris, The Price of Fish: A New Approach to Wicked
Economics and Better Decisions, was published in 2011. Michael Mainelli can be contacted at:
Michael_Mainelli@zyen.com

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