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BurConf2954AdjCr
Originally uploaded by tomazgreco.

Organizer, Chris Lindstrom and others at the Burlington conference.

On Thursday, June 8, there was a conference, Complementary Currencies: Money for Local Living Economies organized by the E. F. Schumacher Society and held on the campus of Champlain College in Burlington, Vermont. Details can be found at
http://ccit.wji.com/tiki-read_article.php?articleId=65

Besides the keynote address by Bernard Lietaer, there were presentations by Krista Vardebash, Susan Witt, Annette Riggs, Paul Glover, Eric Harris-Braun, Arthur Brock, Julian Darley, and others. I gave a presentation on the state of the complementary currency movement. That presentation was recorded and I will try to get a copy of the audio record at some point to post on this blog. The power point slide show is available now on my reinventingmoney webiste.

This conference was preceded by three days of meetings of the Open Collective 2006 for the local currency community, of which I was able to attend only the final day. My input to that process included a report on the Swiss WIR Bank and discussion of their current practices and recent developments based on Philip Beard’s translation of the 1998 book by Tobias Studer and my conversation with Prof. Studer during my 2005 visit to Basel. I also helped to guide the exposition of the CES online trading network, for which originator Tim Jenkin gave a guided tour at long distance from South Africa via Skype. This was a remarkable use of this available web tool (Skype) to overcome half a world of distance to provide a presentation that worked as well as if Tim had been present right there in the room with us.

One of the attendees at both events was Phillip Dimitrov, a young project manager who is working with Daniel Evans of the XO barter software company in New Zealand. Phillip gave a presentation that described the XO software and its capabilities. It seems to be a very well designed and full featured program for managing credit clearing exchanges. XO is a proprietary product but it is being offered free of charge to non-profit organizations.

Frequent Flyer programs are what are generically referred to as “loyalty programs.” Their primary purpose is to stimulate customer loyalty, that is, to keep customers coming back to make subsequent purchases rather than going to a competitor. These programs typically provide the customer with some sort of rebate on purchases. These rebates are seldom in cash, and most often are in the form of vouchers that can be used as partial or full payment on subsequent purchases. Ideally, a voucher credit should be acceptable in payment on a par with cash, without restriction, but that is usually not the case. In an effort to maximize their loyalty effect and minimize their costs, the issuer of loyalty points, such as frequent flyer miles, will typically impose many restrictions as to when and how vouchers may be redeemed.

In the case of frequent flyer programs, only a certain number of seats are made available for frequent flyer awards on each flight, and often the number of seats so available will be based on the number of seats that are available as the departure date approaches. It is my experience that on some airlines booking must be made more than two months in advance in order to assure an award flight. If you desire a less restricted reservation, at least one airline, Delta, is increasing the number of miles required for an award flight. The normal number of miles for a domestic flight is 25,000, but few flights are available at this rate. If, however, you are willing o pay 50,000 miles, you can probably get the flights you want.

Considering the vast number of miles that the airlines have issued, it is probably safe to bet that this kind of “credit inflation” will only get worse as time goes on. The problem may be mitigated to some degree as the airlines recruit “partner” businesses to not only issue miles, but to redeem them, as well. But any such program that depends upon continual growth is a “Ponzi scheme.” Is that in fact the case with frequent flyer programs? It’s hard to say without detailed figures for each airline. The key question is, how long would it take the airline to fully redeem its outstanding issue of frequent flyer miles? The numbers that need to be looked at are (1) the number of miles outstanding in relation to (2) the number of round trip flights flown monthly or annually.

Another factor that bodes ill for FF programs is the fact that the competitive advantage that loyalty schemes are supposed to provide disappears when everybody starts doing it. Such was the case in years past with supermarket stamp programs like S&H Green Stamps, Top Value Stamps, etc.

One further point: is it proper to refer to frequent flyer miles or loyalty points as “currency?” Well, that depends on how you define “currency.” While they are to some extent transferable, they are not generally spendable. On the other hand, value can be obtained for them, but only from a limited number of entities, and only with restrictions. The technical and narrow definition of currency is “anything that is commonly accepted in payment.” On that basis, loyalty points, including frequent flyer miles, do not qualify. I would prefer to not muddy the waters with loose terminology, and would urge that frequent flyer miles be categorized as loyalty vouchers, not currencies.

From the desk of Bob Meyer at Barter News… 05/23/06

The World’s Largest Private Currency Continues To Soar!

Airline frequent flier miles (FFM) are without doubt the largest private currency in the world. Here’s a quick update on the ever-evolving currency and some of their future challenges ahead. (For a look at other type of private currencies see our Secondary Capital Section, http://www.barternews.com/secondary_capital.htm.)

It was in May 1981, 25 years ago, that American Airlines introduced the first frequent flier program—a program designed to build loyalty among its passengers. No one envisioned what would eventually result from such a marketing idea.

Today more than 130 airlines issue FFM and 120 million travelers worldwide have accumulated 14.2 trillion frequent flier miles, according to editor and publisher of Inside Flyer magazine Randy Peterson. That’s enough FFM for 568,000,000 flights.

According to the U.K.s Business Guardian publication, a frequent flier mile has a value between 1-cent and 6-cents each. At 3-cents each, the 14.2 trillion miles have a value of $420 billion!

Frequent flier miles are major sources of revenue for the airlines. In the U.S., carriers annually sell about $2 billion FFM to other businesses to use as customer rewards. Thus, people who rarely fly have the ability to earn miles when using credit cards, taking out a mortgage, eating in restaurants, or buying flowers.

Interestingly—disconcerting if you really think about it—the sale of FFM is the most-profitable part of many airlines. Yet the actual cost of fulfilling these “free” tickets is minimal…less than $15 on average, according to an article the April Harvard Business Review titled “Your Loyalty Program is Betraying You.”

Joseph C. Nunes, associate professor of marketing at the University of Southern California’s Marshall School of Business and co-author of the Harvard Business Review piece, says in the short term the frequent flier mile programs are in good shape.

Longer term, however, could be a different story as credit cards and/or mortgage companies may one day wake up and say, “To heck with enticing customers with FFM. They’re costing us too much and consumers aren’t as attracted to them as they once were. We’re going to compete on price instead.” (That’s what happened years ago to the Green-Stamps-for-products redemption program.)

Additionally, fulfillment could become a major problem as airline fleets are decreasing in size. The legacy carriers of the world—such as United or American—had a combined fleet that was 22% smaller at the end of 2005 than in mid-2001, according to industry trade group Air Transport Association.

While there is little chance of fulfilling on 586 million flights as long as the industry continues selling $2 billion of FFM annually, the following story shows United is taking a small step in the right direction.

“Choices” Air Currency Launched By United

In an effort to make FFM more attractive, United Air Lines has launched a separate new form of air currency it calls Choices miles. The new program offers complete transparency in that there is no waiting, no black-out dates, and no seat restrictions or other conditions attached.

Choices can only be earned by using a Chase United Mileage Plus credit card. Although the miles can be used for flights on United, or hotel and car rentals, they must be booked online at http://www.united.com.

The Choice miles can also be used, at a penny-per-mile, toward payment of a previously purchased flight made at http://www.united.com. It’s only a matter of logging into the web site and transferring Choice miles against the billed airfare, i.e. the credit card balance is reduced when miles are credited against it.

Example: A ticket is purchased using a Chase Mileage Plus credit card via United’s web site for $299. When the bill comes you log on to united.com and transfer 20,000 of your Choice miles to apply against the $299, reducing your bill and ticket payment to $99. (Unlike a regular award ticket, you also earn FFM on the transaction.)

Thomas H. Greco with Prof. Tobias Studer in Basel, Switzerland in May 2005.

Prof. Studer’s book about the Swiss WIR Bank is now available in English. This excellent translation by Prof. Philip Beard of Sonoma State University, is a “must read” for any student of money, banking, complementary currency, or exchange alternatives. – T. H. Greco

WIR and the Swiss National Economy
by Prof. Tobias Studer
Department of Economics
University of Basel, Switzerland
Basel, 1998
Published by the WIR Bank, Basel

Title of German original: “WIR in unserer Volkswirtschaft”

English Translation: Philip H. Beard, Ph.D., Sonoma State University
Rohnert Park, California 94928
© 2006

The $3 download can be accessed/ordered at lulu.com, specifically, http://www.lulu.com/content/301348; a printed copy can be ordered at http://www.lulu.com/content/268895 for the price of $15.00.

[This blog entry is based upon recent (April 2006) correspondence between me and several others in the monetary transformation community.]

There are a number of developing software systems that can enable a private, independent exchange network to be built. These are coming from both the grassroots, not-for-profit sector, as well as from the commercial “barter” or trade exchanges and are now being activated.

One notable example of the former is the CES system that has been developed by Tim Jenkin in South Africa (http://www.ces.org.za/index.asp). Tim deserves much credit for actually building and operating a platform that will enable mutual credit clearing exchanges to network together on a wide (even global) scale. Tim has provided a way for exchange alternatives to go mainstream and really make a difference in people’s lives. There are still a number of issues that need to be addressed in making the network perform effectively and to avoid problems. Tim and I, along with a few others, have been discussing these. Some differences of opinion exist, but here are some of my thoughts on the matter.

The most well-know type of mutual credit clearing system is LETS (Local Exchange Trading System) that was originated more than 20 years ago. I consider LETS to be a brand name, and indeed, LETS originator Michael Linton does too. One should note the specific design features that are prescribed in the various LETS documentation. I prefer to use the generic term “mutual credit clearing system” to describe the kinds of cashless trading circles that have evolved from the original LETS concept. Most of the hundreds of LETSystems that have been started have deviated at least somewhat from what Linton would consider LETS. Credit clearing is the highest level in the evolution of reciprocal exchange (which is the main purpose of money) and we should clearly recognize it as such.

In a paper prepared for a conference in New Zealand, Tim Jenkin states that CES “is a new money system that attempts to link diverse complementary currency systems into a global network that will one day challenge and, hopefully, replace the unhealthy global money system.” That is my hope as well, but if local systems are going to interoperate smoothly, they must conform to some common standards and protocols. Yes, we want to preserve local system autonomy while creating a globally useful exchange network, but it makes sense to not try to mix things that may not becompatible. Unless proper standards are adhered to, there will develop imbalances that could jeopardize the entire network. As a comparison, if you want to generate your own electricity that’s fine, but if you want to feed it into the grid, it had better conform to the agreed upon network standards, i.e., it must be the proper frequency and voltage, and the interface should have proper safeguards like circuit breakers and surge protectors, etc. to protect the network from local anomalies. You get the idea. There is a science of networks that we need to be cognizant of.

Other remaining issues that must be dealt with:
1. Limits on account debit balances (and possibly credit balances, also).What should they be and how to set them?
2. Dormant accounts. When does one recognize a “bad debt” and write it off?You can’t just pretend that someone who died three years ago is still alive, even if he’s still breathing.
3. Balance of payments problems among the various local systems. Just as individual accounts must be held within proper limits, trade imbalances between local systems cannot be allowed to become extreme.
4. How do these procedures and protocols get enforced?

We are literally reinventing money, and we must therefore understand sound principles of money and banking, AND APPLY THEM. Yes, practice can inform action and we have hundreds ofyears of experience with money and banking that can inform what we do. We’re reinventing money and banking on the basis of a different set of (more humane and beneficent) values. The dysfunctions inherent in the dominant system stem less from a lack of understanding than from political interference and manipulation. We’re not starting from scratch here. There are sound banking principles and past monetary and banking experience that can be applied in addressing the issues mentioned above. The main task is to get the FINANCIAL architecture right. The programs can then be written to conform to that.

The social, political, and economic are all inseparable aspects of human relations. Change in one aspect causes changes in the others. The main issue here is how to create systems of reciprocal exchange that empower people generally, not just some elite group. I think the key lies in organizing on a foundation of small, human-scale, autonomous units AND networking thoseunits into something that is globally useful, something akin to how we have networked micro-computers into the internet and worldwide web. Keeping power at the base level requires that these units be small (perhaps less than 150, as per the rule that Malcolm Gladwell describes in The Tipping Point) and that people stay active and take responsibility for what happens in their group.

A currency is anything that is accepted as a means of payment, i.e., a medium of exchange.

Money is first and foremost a medium of exchange.

Except for full-bodied coin, every currency is a credit instrument.

In the modern world, virtually all money is credit money — money is credit; credit is money.

A currency, in order to hold its value at par, should be issued on the basis of goods and services already in the market or on their way to market, not on the basis of long-term debt (see the “real bills doctrine”).

A currency may manifest in various forms, e.g., paper notes, token coins, or bank account balances (“deposits”), but the substance remains the same, credit.

The credit represented in a currency is denominated in terms of some value unit, e.g., dollars, euros, yen, etc.

National currencies are typically credit instruments (liabilities) of the respective national central banks.

National currency units are typically undefined causing confusion between the currency (liability) and the measure of value (unit).

[to be continued]

I am in the process of writing The Complementary Currency Handbook. This book provides important guidance in addressing critical issues that relate to the creation and management of complementary currencies and credit clearing exchanges.

Here are some basic questions that need to be asked about ANY currency:

• Who is the issuer?
• How is it issued into circulation?
• What is the basis (foundation) of issue?
• What is the amount currently in circulation?
• What are the terms of the (explicit or implied) contract offered by the issuer to the users of the currency, i.e.,
  What does the issuer promise?
  What is the form of redemption?
  What are the limits, if any, on the amount that may be issued?
  What is the duration of the contract? Is there an expiration date?
  Are there any fees, conditions, or limitations associated with redemption?

Money is, first and foremost, a medium of exchange, something we use to pay for the things we buy.
Money has evolved over time, from:
1. commodities that are valuable in themselves, to
2. symbolic “warehouse receipts” or claim checks for commodities in storage somewhere (including deposits of gold or silver in banks), to
3. credit created on the basis of some assets pledged as collateral, such as a house when you get a mortgage from a bank.

Today, virtually all money is credit money.

The process of money creation takes place in banks when banks make “loans.”

But ultimately goods and services pay for other goods and services; money is just an interediary device that facilitates the process. Money has become simply an information system that offsets your debits from purchases with credits from your earnings.

Mutual credit clearing is the process that is making conventional money obsolete.

For complete background on this subject, see www.reinventingmonry.com