Earlier this month Prof. Richard Werner posted a video on YouTube, which I thought was quite good in explaining the way banks create money, but I felt moved to post a response to it that provides some fundamental concepts and clarifies what is required to start regional alternatives to dominant centralized banking system and political fiat monies. I recommend that you watch Werner’s 10 minute video, and then contemplate my responses.
Prof. Werner makes many good and important points in this lecture, about how money is created and allocated by huge banking institutions which gives them enormous power over governments, people and the economy. Yes, control of money needs to be decentralized and democratized. Public and community banks are important elements in achieving that but they exist within the current dominant paradigm of creating money by making loans at interest, which is a fundamental flaw that forces a growth imperative. Debt grows exponentially as time passes so there is never enough money to enable all borrowers to pay what they owe. A distinction must be made between “exchange credit” and “investment credit.” The former should be allocated without interest to producers based on the value of goods and services each is able to sell immediately or in the near-term; the latter should be the reallocation of existing money from savers to entrepreneurs. The exchange function can best be organized as credit clearing circles, like the original WIR cooperative circle that Werner mentioned, then these various circles can be networked together into a global system of exchange. I have been articulating these points and more for the past several decades, most recently in a webinar I conducted for the University of Hertfordshire in November 2021: 2021-11 Transcending the present political money system–the urgent need and the way to do it. (https://beyondmoney.files.wordpress.com/2021/11/2021-11-hertfordshire-preso.mp4). The Q&A that followed is at https://beyondmoney.files.wordpress.com/2021/12/herts-qa.mp4.
Thank you for the insightful comment, Thomas. What are your thoughts on the concept of interest in general? Is a interest-based financial system doomed to always end with enormous inflation culminating in financial collapse?
That’s a very good question. One must distinguish between primary interest that banks impose on “borrowers” in the process of creating debt-money, and secondary interest that is demanded by those who hold existing money when they lend it to others for whatever purpose.
The primary interest causes debts to banks to grow exponentially because the interest payments do not, for the most part, go toward consumption expenditures but to ever expanding pools of capital held by “capitalists.” Thus, the money supply available for repayment to the banks is always deficient unless the banks create more money by making more “loans” to stay ahead of the extinction of money that occurs when principal payments are made. The empirical evidence of debt growth over time clearly supports this; I call it the ‘usury conjecture,” which I hope will eventually be proven mathematically and/or through some realistic model of the system.
The so-called “business cycle” that oscillates between inflation and depression is natural result of that inherent flaw in the centralized, interest-based debt-money regime. The interest must be paid, one way or the other. Quantitative easing by the various central banks amounts to life support for that failing system. It is essential that the new system be ready to take over before the plug is pulled on the old one or it dies in a chaotic collapses.
Capital can dominate only when exchange media are scarce, either naturally (commodity money like gold and silver) or artificially (centrally controlled debt money). When exchange media are abundant there is no basis for demanding interest. That abundance derives from reconnecting to the real economy of valuable goods and services. As E. C. Riegel clearly showed, only producers are qualified to issue (credit) money. That is money that producers SPEND into circulation and is accepted by others as payment based on the issuer’s credible promise to accept it back as payment for their own goods and services that they are ready, willing and able to deliver immediately or in the near term. That credit money can take the form of currency vouchers (physical or digital) issued interest-free by individual producers, or more effectively, issued jointly by the members of credit clearing circles. Those circles can then be combined into a global network of exchange in which trade credits are allocated and controlled locally but are globally useful as payment. I outline that system toward the end of my previously mentioned webinar (https://beyondmoney.files.wordpress.com/2021/11/2021-11-hertfordshire-preso.mp4). Once that system is in place, interest on secondary “loans” will give way to returns on equity shares as a way of funding capital formation.
Riegel remains obscure but there is more to be learned from his legacy works that from any other source I know of. My annotated précis of his, Private Enterprise Money, can be found at https://beyondmoney.files.wordpress.com/2021/10/thg_precis-of-pem-1.pdf, and his main works can be downloaded from my website at https://beyondmoney.net/library/.
The history of the WIR system is actually transparent. Unfortunately, nothing more can be found about it on the WIR Bank website. I had already published some of the results of my research 10 years ago (2012) (pages 65-66):
See also my review of Dubois’ book (in German only):
Click to access zfsoe-online-archiv-folge-184-191.html
The WIR founders had acquired a licence from some businessmen (including Kurt Zube) in 1934 – as had the JAK founder. This licence was actually superfluous, since these licensors had copied the concept of the so-called “Ausgleichskassen” or also “Arbeitsgemeinschaften”, which had been widespread in Germany and in Austria since 1931 (until the final ban in 1934). At the end of 1932 there were about 50 WIR-like schemes in Germany. A few months after its foundation, the WIR system changed its concept, making the licence of Zube and his business partners superfluous. In the 1960s, there was still a legal dispute between Kurt Zube and the WIR system, but it came to nothing.
Today, WIR-Bank continues to offer the WIR-system (CHW) alongside its “normal” banking operations (on a CHF basis). The decline in CHW turnover that has been observed for years is rather a consequence of the general interest rate reduction, which has made the CHW system less attractive for many participants.
I do not dispute what you say there but the difference between the WIR process and that of “traditional barter exchanges or LETS” seems to me to be more apparent than real.
Both achieve the fundamental objective of allowing producers/providers to monetize the value of their goods and services interest-free, and to use it instead of conventional political money to pay one another.
Based on your description I understand that the WIR admin grants a loan in WIR credits based on collateral assets (a second mortgage on real estate, as I understand it). The WIR credits are created and credited to the member’s account in advance of a member spending them. Is that correct?
Commercial trade (“barter”) exchange exchanges:
In a commercial trade exchange, instead of a loan of trade credits being credited to a member’s account, the member is granted a line of credit up to some limit that is decided according to an algorithm that assesses credit worthiness and capacity to provide value. There is no collateral asset that guarantees the line of credit except for a credit card on file that can, by agreement, be charged if there default on that account. The line of credit amounts to a pre-authorized loan that becomes real only when purchases are made and only to the extent of the debit balance on the account. That “loan” is backed only by the value (in goods and services) that the member has available to sell. Any member that has a debit balance is a “debtor” as you express it.
So both systems enable the members to monetize the value of their goods and services free of interest and to use their own credit instead of conventional political money to pay one another and to clear their their balances. That must be the primary objective and function of any exchange alternative.
The practical difference between WIR loan and the Trade Credit line of credit seems to lie mainly in the level of security. I will grant that having real estate as collateral provides a lower risk of loss due to defaults, but, on the other hand, that makes credit less available, particularly to those who lack such collateral, even though they may have a perfectly sound business that is capable of providing the promised amount of value to the trading community. There is that tradeoff to be made between making credit liberally available (which is desired) and avoiding losses due to defaults (which one would want to avoid). On that question I agree with E. C. Riegel that it is better to err on the side of liberal credit to empower producers to exchange what they have without using political money which someone must borrow into existence and pay interest on.
That said, I have been critical of most trade exchanges for allocating credit lines that are, in many cases, too high. They do this to entice prospective members to join, and the negative result of that is credit debasement and/or sluggish circulation. They also tend to give themselves (the system account) preferential status by granting themselves excessive credit. The high “system debt” becomes another drag on the system. The model membership agreement that I’ve proposed in Appendix A of my book, The End of Money…, proposes standards of practice in the allocation of credit including a requirement that the same algorithm be applied to all accounts, including the system account.
Thanks again for your input.
Thank you for your contribution to the discussion. Your description of credit creation and thus money creation in the WE system is correct. In contrast to a multilateral barter exchange system, in the WIR system the credit process creates an additional money supply. In the barter system, the aggregate money supply is by definition always zero (positive balances = overdrafts). I cannot judge whether the effect is the same in both systems.
In the WIR, in the case of a mortgage credit, the credit and the additional money is secured by the future value of the house yet to be built. Most loans in WIR are mortgage loans.
The WIR system is often compared to economist Knut Wicksell’s model of the cashless “ideal bank”. There is only one monopolistic bank (lender and money creator) and all participants have an account with this bank.
Further, it is significant that the loans in WIR-money were and still are not provided without interest. The interest rate is only lower than the usual bank interest rate.
Dear Hugo, it is not correct to conclude that a multilateral barter exchange system creates no money. True, the total of debits always equals the total of credits on the ledger but, that is also true of a bank ledger. It does not mean that no money has been created. In fact, the money supply in a barter exchange at any point in time is the total credits on the ledger, just as the money supply on a bank ledger is the total amount of “deposits.”
In Chapter 12 about Credit Clearing in my book The End of Money…, I showed that the money supply can, and does, fluctuate upward and downward in accordance with the amount of credit needed at any time to enable transactions. That illustration is repeated in my monograph, https://beyondmoney.net/monographs/credit-clearing-pure-and-simple/.
Consider the difference between a “loan” and a “line of credit.” When a bank, like the WIR bank, makes a “loan” they create a deposit to your account. But no money has been added to the economy until you spend that “deposit.” As long as it just sits in your account it’s as if it had not even been created, except that you are paying interest from day one of the so-called “loan.”
When you have a line of credit at a bank, you are preapproved to spend up to a certain limit; no money is created until you do that, and the amount of the loan is only the amount that you have drawn against your credit line. In a commercial trade (barter) exchange, you also have a preapproved line of credit and the money supply increases when a member uses some part of their credit line to make a purchase. If then they make a sale which reduces their debit balance, the money supply in the system is reduced. My above mentioned illustration makes that clear.
The fact that WIR, as presently operated, takes the conventional banking approach of loans made at interest makes it part of the dysfunctional money and banking system. See my article on the usury conjecture, The Usury Conjecture on the centralized, interest-based, debt-money system. (https://beyondmoney.net/2022/06/03/the-usury-conjecture-on-the-centralized-interest-based-debt-money-system/)
Just a thought!!
I am always more than a little dubious when I read claims that banks have ‘enormous power over governments’ as it is politicians who have created the ‘monetary rules’ that currently pre-dominate. More than that in fact, politicians and bankers are flip sides of the same coin – they need each other. In brief, the politicians grant banks issuing privileges and legal protections and in return, the (central) bank grants the State all of the funding it demands. To my mind it is always the politicians who should take by far the greater share of the blame for the current malaise – they could change the rules of the game if they chose. The reality is that they don’t want to, as their ‘power to impose’ would disappear along with the money if they did so.
Yes, Peter, I agree and have said the same in my own writings, but even though politicians nominally have the power, in reality, it tends to be the other way around because one does not rise up in politics without the support (financial and otherwise) of the existing power elite.
good to see that you are bringing back the important WIR-system into the discussion. With regard to this Swiss complementary currency, there are many misunderstandings especially in the English-language literature that are repeatedly reported unchecked (by Stodder, Lietaer, etc.) and again also by Prof. Werner and in your comment to his YouTube video.
The WIR-system, which has existed since 1934, is explicitly not a multilateral barter or credit clearing system in which the participants grant each other credit, multilaterally and indirectly. In the WIR system there is only one central lender (WIR Bank), which creates the complementary currency “WIR francs” out of nothing usually as a long-term loan against standard banking collateral of the borrower (often mortgage credit). This puts the WIR money into circulation, which then finds its way from the borrower through payments to his suppliers into the WIR circuit. The repayment of the loan to the bank again leads to the elimination of money. Due to this credit function of the WIR head office, this system has also been subject to Swiss banking supervision since 1936.
The other misunderstanding is the persistent narrative that the system is based on the teachings of Silvio Gesell (free money). But that is another story.
Dear Hugo, thanks for clarifying that matter. Yes, I have been aware that WIR currency is created by the WIR Bank in the way that you describe, but is that the way it was at the start? I do not have any documentation on the original practices of the the WIR Economic Circle Cooperative. I do know, and have stated it elsewhere on this site, that the original intent of the WIR appears to have been subverted from the mid-1990s when WIR received a conventional bank charter and the alternative currency and clearing aspects were de-emphasized. According to Prof. Tobias Studer, who was on the WIR advisory board, and who wrote a book on the WIR, (https://reinventingmoney.com/wir-information/), WIR membership and trade volume was growing rapidly in the early 1990s, then, with the bank charter, that came to a halt. If you have any documentation on the early operations of WIR I’d like to see it. I know John Zube’s father, Kurt Zube is reported to have been involved somewhat in the founding of WIR but I’ve not found any written details, but maybe a more diligent search of John’s archives (https://www.panarchy.org/zube/money.index.html) would uncover something.
This report by Susan Witt is informative about more recent practices: https://beyondmoney.net/research-and-reviews/wir-current-operational-realities/.
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