Creating your own currency used to be the stuff of children or dictators, but in times of economic crisis, alternative forms of money have a point, says Sophie McBain
ONCE YOU’VE HAD your espresso and pastry at Café Sitifis, a small Mediterranean joint near Brixton Market, you can settle up in a number of ways: cash, card… or Brixton pound. Rather than bearing the Queen’s portrait, Brixton notes are illustrated with images of Brixton’s landmarks and celebrities; the organisers say they scored a real coup last year when local boy David Bowie agreed to appear on the new B£10 note.
According to the Complementary Currency Resource Centre, there are 236 alternative or complementary currencies around the world, which run alongside mainstream fiat currencies. These include local currencies like the Brixton, Totnes, Lewes and Bristol pounds in the UK, digital currencies like Bitcoin and trade currencies like WIR and Ormita, which have grown out of business-to-business barter exchanges.
‘The last time we saw this number of currencies proliferate was back in 1929,’ says Michael Mainelli, co-founder of commercial think-tank Z/Yen. During the Great Depression around 400 scrip currencies were issued in America in response to money shortages, with similar experiments scattered across Europe, too. Then, as now, the projects were founded on the realisation that one way of tackling failings in the financial system is to print different money.
An alternative currency may sound slightly seditious, anti-capitalist even. However, the ideas that are most likely to revolutionise the way in which we think about money are not those dreamed up in anarchist squats or launched by mysterious cyber-punks, but those that originate closest to the current financial system. This might explain how Spear’s ended up in a slick executive office in the City, the heart of capitalism, listening to Mainelli argue that the Bank of England just a few hundred metres away ought to give up its monopoly on UK money to make space for competing currencies.
Mainelli is interested in how alternative currencies can help to facilitate trade between businesses. It’s already estimated that a fifth of world trade is non-monetary, and that this is worth $100-150 billion to the global economy. There are many reasons why businesses may prefer to exchange goods without the use of cash, but one is a shortage of finance.
One of the most successful barter circles, in which SMEs exchange goods and services, was founded in 1934 by sixteen entrepreneurs in Switzerland and is called Wirtschaftsring-Genossenschaft (economic circle cooperative) or WIR. Today, WIR has expanded to include 60,000 enterprises, a fifth of SMEs in Switzerland, and WIR transactions came to CHF1.627 billion (£1.05 billion) in 2010. The exchange programme now has a central bank which issues WIR francs as well as business loans and mortgages.
It’s not the only such project. A similar barter exchange is Recipco, which covers trade between governments, corporations and NGOs using the Universal Trading Unit as common tender. The largest barter operation is Ormita, established in 2001, which spans 42 countries and in 2011 handled transactions worth over $3 billion. The closest Ormita office to the UK, in Italy, was launched in January.
Ormita’s CEO Daniel Evans explained a recent transaction. It involved Italian wine company Giovanni Zini, which wanted to begin exporting to China but faced considerable start-up costs. This is a common scenario, says Evans: ‘Much of our barter trade is East-West because the West has no cash, but the East does.’ To solve this problem, the wine company was able to acquire a booth at an expo in China, magazine advertising in China and hotel rooms on barter. In addition to this, Ormita will provide a number of translation, marketing and co-ordination services free of charge. To pay for this, Giovanni Zini can sell its wine on barter within Ormita. Unlike other barter exchanges, Ormita doesn’t have its own currency; instead, companies bartering their goods are credited the cash equivalent to spend within Ormita. Ormita charges a fee of 7 per cent of barter deals.
The Swiss government was unusual in embracing WIR early on, rather than treating it as a threat to the franc. Mainelli hopes that other countries, including the UK, will follow Switzerland’s lead. These alternative currencies contribute to economic growth by boosting business and have the additional benefit of making the biggest difference when the economy is struggling. ‘The Swiss have done a lot of studies to show that when the economy’s good and banks are lending, WIR doesn’t do so well, but when times are tough, businesses say, “We’d like to trade, but I guess that means we’d have to create money.” And this counter-cyclical aspect is exactly what you want.’
Illustration by Vince Fraser (vincefraser.com)
NOT ALL COMPLEMENTARY currencies are aimed at business-to-business spending. The Brixton pound, set up as the recession deepened in 2009, aims to boost spending in the local economy. Research by the New Economics Foundation has found that on average supermarkets and large chains spend only 10-12p of every pound earned in the local community, so local currencies are aimed at encouraging both consumers to buy from small independent shops and local businesses to source their goods locally. With a dozen pubs closing every week in the UK and most of our high streets turning into tired facsimiles of one another, you can see why the idea of a local currency appeals.
According to Susan Steed, an NEF researcher, the Brixton pound is one of the largest complementary currencies in an urban setting, with around £70,000 in paper notes in circulation. Electronic money, known as pay-by-text, was issued for the first time in 2011; individuals topping up their pay-by-text account get 10 per cent free each time. Meanwhile, if businesses change back their electronic B£ for sterling, they are charged a fee of 10 per cent, so there’s an incentive for businesses to try to spend their B£, perhaps by finding local suppliers.
At Café Sitifis, Steed paid for our mint teas electronically. She whipped out her iPhone to send a message to the pay-by-text number. For a tense few minutes the three of us stared at the proprietor’s iPhone while the screen remained blank and the two of them checked they both had reception. Then the payment confirmation text came through.
Noureddine Lalmi, Café Sitifis’s owner, has decided to save up his B£ for his next holiday. The people behind the Brixton pound still have to research whether the currency is having a real impact on local spending, but Lambeth Council has estimated that the launch of the Brixton pound was worth around £150,000 in positive media coverage.
TAKING THE CONCEPT of electronic money much further than the Brixton pound’s pay-by-text is Bitcoin. Bitcoin is not the world’s first digital currency, but it is the most influential. This is partly because unlike some other digital currencies, like Linden Dollars in Second Life, you’re not restricted to blowing your digicash on a flash new car for your avatar: you can buy things in the real world too — and not only illegal drugs and guns on the shadow internet but delivery pizzas, hotel rooms and alpaca socks.
It’s also attracted attention because of the mystery surrounding its creation. Bitcoin was set up in 2009 by a cryptographer called Satoshi Nakomoto, although this isn’t thought to be his real name and no one has yet succeeded in tracking him down. It seems he created Bitcoins because he believed that central banks and governments could not be trusted to safeguard money. (Hidden within the code for creating Bitcoins was a reference to a newspaper article: ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.’) Nakomoto also released an essay criticising conventional currency and the way banks create bubbles through reckless lending.
Bitcoin probably offers the most radical alternative to mainstream currency. There’s no possibility of quantitative easing and no central bank. Bitcoins — and the harder you focus on this, the fuzzier the detail becomes — are designed so that they are released at an ever-diminishing rate until 2140, when they will reach a maximum of 21 million. They can be ‘mined’ by anyone able and willing to give up computer memory to validate Bitcoin transactions.
This is quite an unusual way of structuring a currency. For a start, the number of Bitcoins in circulation, unlike WIR or Brixton pounds, is not related to economic activity. This means the value of Bitcoins has fluctuated hugely, often depending on the hype surrounding the currency. Until 2010, Bitcoins were worth less than a few pence. The first time that Bitcoins were used to buy a ‘real’ object was when a Florida computer programmer ordered two pizzas for 10,000 Bitcoins. By 2011, this same number of Bitcoins was worth over $250,000 — until one of the major Bitcoin exchanges was hacked and their value plummeted to next to zero again. If Nakomoto had thought he was creating a currency immune to speculative bubbles and painful bursts, he was wrong.
‘You should understand that with Bitcoins you’re chasing a belief rather than a payment instrument. As a payment instrument it could all go to zero in one day,’ says Simon Lelieveldt, an independent banking and payments consultant. A successful hacker or even national governments closing down Bitcoin, as one US senator has already advised, could cause the currency’s value to plummet.
Whether it’s Bitcoins or sterling, the key thing underpinning any currency is trust. Because money rarely has any intrinsic value, trusting that it will still be able to buy things tomorrow requires believing in the competence and honesty of the authority issuing and regulating the currency — it’s why some still yearn for the gold standard. Between Libor scandals, EU crisis talks, debt ceiling disagreements and endless quantitative easing, there’s little sign that disgraced banks and debt-ridden governments will win back public trust any time soon — and this makes alternative currencies all the more interesting.
Without outside regulators, there is always the risk that the authorities operating alternative currencies will abuse their privileged position, perhaps by printing too much money or by not carrying out proper credit checks. Mainelli believes that alternative currencies will be much more likely to survive and be able to offer users the kinds of guarantees they need if they are regulated. Currencies don’t have to be regulated by government directly — many projects are anti-big business and big government — but could be governed by an accreditation body, similar to the British Standards Institute, which audits anything from hairdryers to credit cards.
Funny money may be able to do things that other money can’t, but before converting your savings into Bitcoins, it’s worth considering this: you might not think the government is brilliant at safeguarding your money, but whom would you trust to do a better job?
Read more by Sophie McBain