Complementary credit networks and macroeconomic stability: Switzerland's Wirtschaftsring

Abstract

The Swiss Wirtschaftsring (“Economic Circle”) credit network, founded in 1934, provides residual spending power that is highly counter-cyclical. Individuals are cash-short in a recession, and economize by greater use of WIR-credits. A money in the production function (MIPF) specification implies that transactions in WIR form a stabilizing balance that makes up for the lack of ordinary currency. Thus, unlike the ordinary money, WIR money is negatively correlated with GDP in the short run. This implication is confirmed by empirical estimates. Such credit networks play a stabilizing role that should be considered in monetary policy.

Introduction

Large scale moneyless clearing, as portrayed by the Walrasian auctioneer, flourished in the “storehouse” economies of the ancient Middle East and Americas (Polanyi, 1947) when all relevant information could be centralized. Decentralized monetary systems evolved as the information for a complex economy became too great to be centrally managed with ancient information technology (Stodder, 1995a, Stodder, 1995b). Modern IT is again making centralized exchange plausible, however, on sites like http://www.irta.com, http://www.barter.net, http://www.swap.com, and http://www.itex.com.

A few prominent macroeconomists have speculated that computer-networked exchange might eventually replace decentralized money, as well as central banking (King, 1999, Beattie, 1999, Friedman, 2001, Economist, 2000a, Economist, 2000b, World Bank, 2000). The purpose of this paper is not to gauge the likelihood of such change, but to explain why centralized exchange is counter-cyclical.

This paper's subject, the Swiss Wirtschaftsring, or “WIR”, is sometimes called an alternative or complementary currency. It is really a centralized credit system for multilateral exchange, however, with no physical currency. The present paper is not based on a microeconomic search model of a decentralized currency, such as the work of Kiyotaki and Wright, 1989, Kiyotaki and Wright, 1993. Their model has been applied to the conditions under which a national currency is replaced, in whole or in part, by a foreign currency, as in several Latin American and East European economies (Calvo and Végh, 1992, Trejos and Wright, 1995, Curtis and Waller, 2000, Feige, 2003). This dual-currency literature is well surveyed by Craig and Waller (2000).

These Kiyotaki–Wright (KW) type models are not appropriate for our study of the Swiss WIR, however, for at least two reasons. First, KW models show the costs of matching holders of goods with holders of a decentralized and freely circulating currency. But these search costs approach zero for members of WIR, an informationally centralized exchange network. A second point, emphasized in Clower and Howitt, 1978, Clower and Howitt, 1996, Clower and Howitt, 1998, Clower and Howitt, 2000, is that WIR-credit is a consciously designed system of exchange, rather than one that emerges as the lowest transaction-cost medium:

In our view what characterizes a monetary economy is not so much that different transactors all choose to accept the same exchange intermediary for their production commodities, as in search theory, but that the shops they deal with don’t give them any choice. (2000, p. 58).¹

The KW literature models dual-currency equilibrium and does not usually consider persistent shortages of the primary currency. An exception to this is the KW model of Colacelli and Blackburn (2006), analyzing surveys of Argentine users of creditos or localized currencies, during that country's recession of 2002–2003 (cf. Gomez, 2008). These surveys show credito usage especially common among less skilled employees and women, who may be more economically vulnerable. Importantly for the counter-cyclical thesis of the present paper, Colacelli and Blackburn (2006) show that:

• The circulation of creditos was strongly correlated with shortages of the national currency, as was the growth of local ‘script’ currencies in the US depression of the 1930s (Fisher, 1934);

• Real income gains to credito users were substantial, averaging 15 percent of Argentina's mean personal income.

There are hundreds of alternative-currency examples in existence today, described in the literature on local exchange and trading systems, or LETS (Williams, 1996, Greco, 2001, Gomez, 2008); some of these use a centralized credit system with no circulating currency. The Swiss WIR-Bank is the largest such system, operating on the basis of centralized credit, rather than a circulating currency. The WIR is also longer-lived than any LETS or corporate barter network (Stodder, 1998, Studer, 1998).

The thesis of this paper is that WIR exchange has been strongly counter-cyclical within the Swiss Economy. The paper is organized as follows: Section 2 explains how exchange works with WIR-credits and outlines my basic argument. Section 3 translates this thesis into formal propositions and empirical specifications. Section 4 presents the empirical tests of the counter-cyclical thesis. Section 5 summarizes my conclusions and suggests that a WIR-type system – centralized exchange plus multilateral trade credits – should have a similarly stabilizing effect in any advanced economy.