James Stodder, (Ph.D., Economics, Yale 1990) Lally School of Management & Technology

1. The Macro-Stability of Swiss WIR-Bank Spending: Balance versus Velocity EffectsInternational Conference on Community and Complementary Currencies, Univ. Lyon, Feb. 17, 2011 James Stodder, (Ph.D., Economics, Yale 1990) Lally School of Management & Technology Rensselaer Polytechnic Instituteat Hartford Hartford, Connecticut, USA

3. I will try to show: A WIR-type system – based on electronic credits – can be self-adjusting. These self-adjusting credits are counter-cyclical for SMEs & Micro-Finance Clients. Larger Companies use WIR less but more counter-cyclically. Their use of WIR is more highly leveraged. Counter-cyclical credits can be good anti-poverty policy. Self-adjusting, counter-cyclical credits can also be non-inflationary.

4. Swiss WIR-Bank, 75 Years Old • Founded during Great Depression, in 1934, around ideas of German-Argentine businessman: Silvio Gesell(1862-1930). • Wirtschaftsring = “CercleÉconomique” • WIR = “WE”in German • Since 1955, Small-to-MediumBusinesses only.

5. In 2008, WIR-Bank had 70,200 ParticipantsTurnover 1.6 Billion SFr ($1.5 b. US) • WIR clients maintain two accounts, one in Swiss Francs (SFr), the other in WIR. • WIR accounts can be used to clear (in WIR) trades only with other WIR clients. • Since 1973, WIR credits cannot be traded for SFr (although this still happens)

6. Distribution of WIR Client-Firms

7. (1) Why are Centralized Electronic Credits Self-Adjusting? - because they are created by trade itself

8. WIR-Credit is Self-Adjusting If I agree to let you baby-sit for me, then my account is debited, and your account is credited, by the same amount. There is no “monetary base” or “high powered money” (reserves within the central bank), or “bank money multiplier.” Bank balances are self-adjusting, growing or contracting in direct proportion to trade.

9. (2) This Self-Adjusting Credit is Counter-Cyclical

10. Long-term Correlation with Unemployment

11. Do changes in GDP lead to changes in WIR? Maybe.

12. Do changes in UE lead to changes in WIR? Not Obvious to the “Naked Eye”!

13. Modern Macroeconomic Time Series Econometrics “Error Correction Models” bring together long-term stability and short-term deviations We can see if short-term deviations in one series lead to later deviations in a second series. Thereby, we can even show direction of causality.

14. Overall, Counter-Cyclicallink is strong: GDP(-)=> WIR-Turnover (+)

15. (2a) Why is Counter-Cyclical Credit so Important to Small and Medium Enterprises (SMEs) and to Micro-Finance Clients? - because they are so credit constrained in downturns.

16. Employees and Owners in Small to Medium Firmscan be shown to have: • Higher Risk of Layoffs & Bankruptcy • Less Access to Bank Credit • WINTER-EBMER & ZWEIMÜLLER “Firm Size Wage Differentials • in Switzerland,” American Economic Review(1999) • TERRA, Maria Christina “Credit constraints in Brazilian firms,” • Revista Brasilera de Economia (2003)

17. GrowthLatin Amer. Microfinance Down Sergio Navajas – IDB (Nov. 2009)

18. Profits Latin Amer. Microfinance Down Sergio Navajas – IDB (Nov. 2009)

19. Defaults LatinAmer. Microfinance Up Sergio Navajas – IDB (Nov. 2009)

20. (3) Why do Larger Firms use WIR more Counter-Cyclically?Because it helps them to hold onto SME customers and suppliers in tough times.

21. Is ↑Turnover in a Recession from ↑Money,↑ Velocity, or Both? The “Quantity of Money" Equation: ‘ Turnover ’ = M * V = P * Q where M = Money (Balances) V = Velocity P = Price Level Q = Goods & Services Purchased

22. Non-Registered Firms may be More Counter-Cyclical In their WIR activity: GDP(-) =>WIR-Turnover (+)

23. Non-Registered Firms may be More Counter-Cyclical In their WIR activity: GDP(-) => WIR-Balances (+)

24. Non-Registered Firms may be More Counter-Cyclical In their WIR activity: GDP(-) => WIR-Turnover Construction (+)

25. Non-Registered Firms may be More Counter-Cyclical in their WIR activity: GDP(-) => WIR-Balances Construction (+)

26. Three Regression Patterns

27. 1. Unemployment Counter-Cyclical Effects Stronger

28. 2. Non-Registered Counter-Cyclical Effects Stronger

29. 3. Non-Reg. show More Counter-Cyclical Balance

30. SMEs are more subject to Credit Risk • Consider Business to Business (B2B) • Trade Credits, on terms like “2% 10, net 30.” • Such Trade Credits, like B2B CCs, are: • A primary form of credit for SMEs in US • Used in a highly counter-cyclical way • Nilsen, J., “Trade credit and the bank lending channel,” • Journal of Money Credit and Banking (2002)

31. (4) Why are more counter-cyclical credit systems more useful to the poor – and vice versa? • Because the poor spend more, and more of their spending • stays within the community.

32. Basic Keynesian Multiplier Y = C + I + G + X – M = a + bY + I + G + X – mY =>∆Y/∆G = 1/(1- b + m) Where b =‘Marginal Propensity to Consume’ and m =‘Marginal Propensity to Import’

33. The Keynesian ‘Multiplier’ is larger for expenditures by poor, who: * spendgreater % of their own income (=> larger b), and * may spend greater % within own community(=> smaller m).

34. Basic Keynesian Multiplier ∆Y/∆G = 1/(1- b↑ + m↓) b =‘Marginal Propensity to Consume’ and m =‘Marginal Propensity to Import’ Effect is to increase Multiplier

35. (5) Why are Self-Adjusting, Counter-Cyclical Credits are Non-Inflationary?- Because they are more counter-cyclicalthan Ordinary Money.

36. US Macro-Stability: Better since WWII, (But Room for Improvement!) 45% 55% 34% 66% http://www.nber.org/cycles.html Source:

37. %∆ Money Turnover [ = %∆ (Money x Velocity) ] is Too Pro-Cyclical % ∆M % ∆ (M x V) % ∆ V

38. (5) The Question of Inflation • To fight inflation, Central Banks are forced to tighten money supply, even if it leads to a recession. • But a more ‘Micro’ Monetary Policy can reach sectors unreached by traditional monetary expansion – without putting upward pressure on prices. • Making up for lost purchasing power is not inflationary, but anti-deflationary.

39. As the internet allows Marketers to go from Broadcasting to ‘Point-Casting’ So WIR system allows Monetary Authority to go from Macro-to Micro-Credit. • Expended WIR credits don’t go mostly to those who already have much, but those who have none. • This is of course fairer (can gain political support). • In addition, it should be anti-deflationary.

40. For previous paper, go to:ewp.rpi.edu/hartford/~stoddjFor Slides, email me:stoddj@rpi.edu