Rethinking Money

Bank customers use an automated teller machine (ATM) in Hollywood, on July 20, 2012 in California. Bank of America profits sw
Bank customers use an automated teller machine (ATM) in Hollywood, on July 20, 2012 in California. Bank of America profits swung higher in the second quarter, the firm announced this week, reporting a net income of $2.5 billion on July 18. That was up markedly from the same period last year, when one-off accounting charges - designed to guard against liabilities - saw the bank post a loss of $8.8 billion. AFP PHOTO/Frederic J. BROWN (Photo credit should read FREDERIC J. BROWN/AFP/GettyImages)

Business is the backbone of the U.S. economic engine. Access to credit is the life blood of any industry or commercial venture. Thriving enterprise, on whatever scale, from startups to multi-nationals all need loans or lines of credit from time to time to survive. Since the economic downturn banks have made it more difficult to attain much-needed capital. As a consequent job creation has been stunted.

There is a fascinating example from history that may serve the business community today.

Opinions abound as to why Switzerland enjoys such apparent economic strength. Many suppose that it's because the country was neutral in the Second World War and didn't have to suffer the economic and social consequences. Or whimsically, that it has something to do with some magical ingredient in their Alpine drinking water.

The truth of the situation is far more compelling. A major contributor to Switzerland's buoyancy is a business-to-business currency and the banking institution behind it. The story of this success has its initiation during the bleak days of the Depression.

Two Swiss businessmen, Werner Zimmermann and Paul Enz, got together with a dozen or more other business associates to decide what they could do to address the financial crisis of the 1930s. They had each received a notice from their respective banks that their credit lines were going to be reduced or eliminated; hence bankruptcy was inevitable. They realized, however, that business A needed the bank loan to buy goods from business B, which in turn needed money to buy materials from its own suppliers. So they decided to create a mutual credit system among themselves, inviting their clients and suppliers to join.

Here's an example in very simple terms: A baker who needed flour and eggs incurs a debit from a local farmer in exchange for these goods; with that credit the farmer gets hardware from the local supplier for the barn he is repairing and the baker supplies the local car repair shop owner with baked goods for his family, bringing the baker's balance back to zero. All these transactions take place without being mediated by conventional money.

The country's banks mounted a massive press campaign to try to squelch this revolutionary idea. Miraculously, the campaign failed and this ingenious system saved the businesses involved. These people went on to create their own currency, the WIR, whose value was identical to that of the national money, but had the distinguishing feature that it didn't bear interest. A cooperative was set up among the users to keep the accounts dealing with that currency. Over time, the system grew to include up to one-quarter of all the businesses in Switzerland.

Although the value of the WIR is pegged to the Swiss franc (1 WIR = 1 Swiss franc), but all debts in WIR have to be settled in WIR. There is no convertibility into national currency. Participants can also borrow, that is, secure lines of credit from the cooperative in WIR currency at low-interest rates ranging from one to one and a half percent. All such loans need to be backed by inventory or other assets.

The interesting feature of the WIR is that the currency issuance automatically tends to be counter-cyclical. During a recession, when regular banks reduce lending, businesses use more WIR to meet their needs. When the economy heats up and the commercial banks are lending Swiss francs again, the number of WIR in circulation tends to decrease. This feature is effective at smoothing out the booms and busts in the Swiss economy and has contributed significantly to Switzerland's economic stability.

Jürg Michel, President of the WIR Bank, sums up the core attractions of WIR in the 2010 Annual Report: "Trust is an invaluable asset, especially for a bank. This trustworthiness is confirmed by both private and business clients in a representative survey. The WIR clearing system as the central anchor in our business model has been based for over 76 years on the trust in this currency. The WIR system, oriented towards small and medium enterprises in Switzerland, enables a unique economic network amongst the participants."

Today, the WIR Bank employs 205 people at its headquarters in Basel and seven regional offices. While individual memberships ceased in the late 1950s, some 60,000 businesses, an estimated 16 percent of all Swiss enterprises, were trading in WIR francs in 2010. While depositors are mostly small and medium-sized business owners, it is interesting to note that over a third of all construction companies in Switzerland -- a massively capital-intensive sector -- use WIR.
2 Currently, the volume of trade in WIR annually is 1,627 billion WIR, which is just under $2 billion. This is a 1.4 percent increase beyond the previous year.3 Switzerland's Gross Domestic Product (GDP) for 2010 was estimated at 395 billion euros so WIR's turnover was approximately 0.32 percent of the Swiss GDP.

Business is conducted by check, credit cards and the Internet. Mobile phone payments will be available soon. Transaction fees are paid on each deal. Interestingly, the WIR is the credit card in Switzerland that operates in two currencies.

WIR members have access to an internal database to search for goods and services of all descriptions. Next to each business listing is the percentage of the price it is willing to accept in WIR and whether the rate is open to negotiation.

Professor James Stodder of the Rensselaer Polytechnic Institute has conducted several econometric studies proving that the secret for the country's legendary economic stability is the WIR currency, circulating among businesses in parallel with the national money. His study proved that the WIR contributes significantly to the stability of the Swiss economy and its low unemployment rates by providing "residual spending power that is highly counter-cyclical."
4 "Growth in the number of WIR participants has tracked Swiss unemployment very closely, consistently maintaining a rate of about one-tenth the increase in the number of unemployed."5 This means that when the conventional Swiss franc economy slows, job losses are spontaneously reduced as more people join the WIR economy.
Professor Tobias Studer, from the Center of Economic Studies at Basel University, Switzerland, considers the Stodder research a breakthrough: "For the first time, an independent American researcher has arrived at a surprising conclusion: Far from representing a factor of disturbance for the national monetary policy, the credits created by WIR constitute a support of the National Bank [the Swiss central bank] in pursuit of its monetary policy objectives."

Stodder adds, "So when conventional banks are cutting their credit because there's a big lack of financial confidence, and banks are essentially closing their doors to small creditors, there's no question that historically these periods are ones in which cooperative currencies spring up. It happened during the Great Depression, and it's happened again during the current world downturn."

WIR in the United States

The WIR's success has inspired some innovators to take action. An application of the WIR model, although on a very small local scale but inspired nonetheless by the Swiss prototype, has taken root in Burlington, Vermont, spearheaded by the Vermont Businesses for Social Responsibility (VBSR) program. "Quite literally, from my studies of bio-mimicry I've been applying what I've observed to the monetary system. And, a fiat monetary system simply doesn't resonate, but mutual credit does indeed. Mutual credit really looks to excess capacity where things are being wasted or unused and turning them into inputs. As the saying goes, linking unmet needs and unmet resources within a given community," says Amy Kirschner, Marketplace Manager for VBSR.

She explains that every business or industry has a cycle. Few businesses are busy all the time, so they take their trade excesses, things like empty seats in classrooms, matinee screenings in cinemas, off-peak times at restaurants, empty meeting spaces, unsold advertising and sponsorships, and offer them as employee bonuses and benefits and as promotions without having to use conventional money. Business can find new suppliers and customers, using VBSR trade credits.

"More than 1,500 businesses in Vermont already have access to a system through which they can find new customers using their excess capacity to pay for their unmet requirements," she adds.


1. WIR Annual Report (2010).

2. James Stodder, "The Macro-Stability of Swiss WIR-Bank Spending: Balance and Leverage Effects," paper submitted to Swiss Journal of Economics and Statistics (2011).

3. WIR Annual Report (Raporte de Gestion) (2010), 12.

4. James Stodder, "Complementary Credit Network and Macro-Economic Stability: Switzerland's Wirtschaftsring," Journal of Economic Behavior and Organization, 72 (October, 2009), 79-95.

5. James Studer, "Reciprocal Exchange Networks: Implications for Macroeconomic Stability," paper presented at the International Electronic and Electrical Engineering (IEEE) Engineering Management Society (EMS), Albuquerque, NM (August 2000), 3.

6. Tobias Studer, "Le Système WIR dans l'optique d'un chercheur Américan," WirPlus.