Reciprocal Exchange and
Macroeconomic Stability:
Switzerland’s Wirtschaftsring
(Cercle Économique)
James Stodder, (Ph.D., Economics, Yale 1990)
Lally School of Management & Technology
Rensselaer Polytechnic Institute at Hartford
Hartford, Connecticut, USA
Tuesday, July 12, 2016
1
12-Jul-16
2
Main Idea of Microfinance:
Problem of Credit
for Investments Complimentary
to Human Capital
Recognized by Economists at least since
John Stuart Mill
Tuesday, July 12, 2016
3
But better Access to Credit is not
only a Problem of:
* Microeconomic Efficiency, and
* More Equality of Opportunity …
It can also be a Problem of
Macroeconomic Stability
Tuesday, July 12, 2016
4
Local Currencies arise in every
recession: e.g., “BerkShares”
Tuesday, July 12, 2016
http://www.berkshares.org/heroes/index.htm
5
The Swiss WIR-Bank
Founded in 1934, inspired by the ideas of the
German-Argentine economist and international
trader:
Silvio Gesell (1862-1930).


Wirtschaftsring = “Cercle Économique”

Also, WIR = “WE” – sense of Community

Restricted to Small and Medium Business.
Tuesday, July 12, 2016
6
In 2008, WIR-Bank had
70,200 Participants
Turnover 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)
12-Jul-16
7
What I will try to show:
1.
2.
3.
4.
Why a WIR-type system – based on
electronic credits, not paper money – can
be self-adjusting.
Why these self-adjusting credits are also
counter-cyclical, especially for MPMEs.
Why counter-cyclical credits are better
anti-poverty policy, and vice versa.
Why self-adjusting, counter-cyclical
credits are non-inflationary.
12-Jul-16
8
(1) Why are Centralized
Electronic Credits
Self-Adjusting?
- because they are
created by trade itself
12-Jul-16
9
If too much money, it must be spent
before it loses value:
12-Jul-16
10
If too little money, it is hoarded:
Paul Krugman, “How Did Economists Get it So Wrong?”, New York Times,
September 2, 2009
12-Jul-16
11
Sufficient Money Needed to Effect
All Improving Transactions

Figure 1: The Failure of Double-Coincidence
Tuesday, July 12, 2016
12
But WIR-type Credit is a
Self-Adjusting Money Supply



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 credits grows (or contracts) in direct
proportion to trade.
12-Jul-16
13
Employees and Owners
in Small to Medium Firms
can be shown to have:
• Less Formal Education / Qualifications
• Higher Risk of Layoffs & Bankruptcy
• Less Access to Bank Credit
• More Self-Financing, and thus,
• Less Ability to Diversify to Mitigate Risk
MER, Rudolf, & Josef ZWEIMÜLLER (1999) “Firm Size Wage Differentials
in Switzerland: Evidence from Job Changers,” American Economic Review
Tuesday, July 12, 2016
14
(2) This Self-Adjusting
Credit is Counter-Cyclical
12-Jul-16
15
Long-term Correlation with GDP (PIB)
12-Jul-16
16
Do Changes lead to Changes?
Maybe.
12-Jul-16
17
Long-term Correlation with Unemployment
12-Jul-16
18
Do Changes lead to Changes?
Not Obvious to the “Naked Eye”!
12-Jul-16
19
Modern Macroeconomic
Time Series Analysis


“Error Correction Models” bring
together long-term stability and
short-term deviations
See how short-term deviations in
one series lead to later deviations in
another series – shows direction of
causality.
12-Jul-16
20
My paper tests this theory:




Error Correction Model (ECM) to distinguish
long-term (“secular”) from short-term (“cyclical”)
effect.
I track effects of Unemployment and GDP upon
WIR Turnover
I find a Structural Break at 1973
I find strong counter-cyclical effects, but
mostly pre-1973
Tuesday, July 12, 2016
21
WIR-Credits could not be
‘Discounted’ for SFr. after 1973
“The public perception … was that WIR money
was of lesser quality, since it was offered
publicly at large discounts… [Discounting]
had been tolerated based on the theory that
it created additional turnover and
facilitated members’ ability to ride out
periodic currency-liquidity bottlenecks.”
- (“WIR in the Swiss National Economy”), Prof. Tobias Studer,
University of Basel (1998)
Tuesday, July 12, 2016
22
Simple Error Correction Model:

D(ms) = α (mst – Qt)
long-term effects
+ ∑t β(D(ms (-t))
+ ∑t θ(D(Q(-t))
Short-term (cyclical) effects
Tuesday, July 12, 2016
23
Under normal conditions, Q = Qp

But in conditions of recession, mp is
insufficient, and
Q = Qp + Qs

This implies that changes in mp
Granger cause ms and that the two
are negatively correlated.
Tuesday, July 12, 2016
24
Figure 3: Granger Causality Relationships
-- WIR, Swiss Aggregates, 1950-2003
Note: Numbers are P-values on the null hypothesis of no Granger causality shown by
directional arrow between variables. Solid arrows indicate that this null is rejected at 5 percent
level, with thickness proportional to significance. Broken arrows show insignificance.
Tuesday, July 12, 2016
25
Pre-1973, Counter-Cyclical link stronger:
GDP → (-) → WIR-Turnover
D(LnGDP_Ma2(-1))
Adjusted R2
Sample:
Sample:
1952-1972
1973-2008
-1.9444
-1.838
[-3.241]*** [-2.471]**
0.935
0.718
t-stats in [ ]: ***: p < 0.01, ** : p < 0.05,
*: p < 0.10; o: p < 0.15
12-Jul-16
26
Pre-1973, Counter-Cyclical link stronger:
GDP → (-) → WIR-Turnover
D(LnGDP_Ma2(-1))
Adjusted R2
Sample:
Sample:
1952-1972
1973-2008
-1.9444
-1.838
[-3.241]*** [-2.471]**
0.935
0.718
t-stats in [ ]: ***: p < 0.01, ** : p < 0.05,
*: p < 0.10; o: p < 0.15
12-Jul-16
27
Pre-1973, Counter-Cyclical link stronger:
Unemployment → (+) → WIR-Turnover
Sample:
1952-1972
D(LnUE_Ma2(-1)) 0.1405
[3.635]***
Adjusted R2 0.946
Sample:
1973-2008
0.0430
[2.062]**
0.683
t-stats in [ ]: ***: p < 0.01, ** : p < 0.05,
*: p < 0.10; o: p < 0.15
12-Jul-16
28
Why is Counter-Cyclical Credit
so Important to MPMEs?
- because they are so cyclically
credit constrained.
12-Jul-16
29
Employees and Owners
in Small to Medium Firms
can be shown to have:
• Higher Risk of Layoffs & Bankruptcy
• Less Access to Bank Credit
WINTER-EBMER & ZWEIMÜLLER “Firm Size Wage Differentials in Sw
American Economic Review (1999)
TERRA, Maria Christina “Credit constraints in Brazilian firms,”
Revista Brasilera de Economia (2003)
12-Jul-16
30
Growth for Latin Microfinance Down
CRECIMIENTO IMFs ELF (%)
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
12-Jul-16
Dic-07
Jun-08
Dic-08
Jun-09
Promedio C.A.
42.97%
48.85%
26.34%
-6.98%
Prom. IMFs ELF
41.80%
40.30%
25.70%
13.80%
Juan Carlos Pereira – Omtrix (Sept. 2009)
31
Profitability of Latin Microfinance Down
ROE IMFs ELF (%)
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
12-Jul-16
Jun-07
Dic-07
Jun-08
Dic-08
Jun-09
Prom. C.A.
19.23%
17.59%
16.50%
14.12%
-2.39%
Prom. IMFs ELF
22.40%
19.30%
20.70%
15.20%
8.40%
Juan Carlos Pereira – Omtrix (Sept. 2009)
32
Debt Defaults in Latin Microfinance Up
PAR > 30 IMFs ELF (%)
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
12-Jul-16
Jun-07
Dic-07
Jun-08
Dic-08
Jun-09
Prom. C.A.
4.50%
3.47%
4.29%
4.99%
9.63%
Prom. IMFs ELF
3.30%
2.80%
4.30%
3.70%
5.00%
Juan Carlos Pereira – Omtrix (Sept. 2009)
33
Is ↑ Turnover in a Recession
from ↑ Money, ↑ Velocity, or Both?
The “Quantity of Money" Equation:
M*V=P*Y
where M = Money (or Credit)
V = Velocity
P = Price Level
Y = Real National Income (GDP)
12-Jul-16
Juan Carlos Pereira – Omtrix (Septiembre de 2009)
34
Counter-Cyclical link to GDP is through Velocity:
GDP → (-) → WIR - VELOCITY
D(LnGDP_(-1))
Adjusted R2
Sample:
1952-1972
-1.7157
[-1.733]*
0.474
Sample:
1973-2008
-0.8069
[-3.507]***
0.437
t-stats in [ ]: ***: p < 0.01, ** : p < 0.05,
*: p < 0.10; o: p < 0.15
12-Jul-16
35
Counter-Cyclical link to UE is through Credit:
Unemployment → (+) → WIR – CREDITS
D(LnUE(-1))
Adjusted R2
Sample:
1952-1972
0.1034
[3.607]***
0.941
Sample:
1973-2008
0.0209
[1.296]
0.680
t-stats in [ ]: ***: p < 0.01, ** : p < 0.05,
*: p < 0.10; o: p < 0.15
12-Jul-16
36
Remember, MPMEs more subject to
both Unemployment & Credit Risks
Consider Business to Business (B2B)
Trade Credits, on terms like “2% 10, net 30.”
Evidence that such Trade Credits are:
• more important for SMEs in the US
• used in a highly counter-cyclical way
12-Jul-16
Nilsen, J., “Trade credit and the bank lending
channel,”
Journal of Money Credit and Banking (2002)
37
(3) Why will more counter-cyclical
credit systems be
more useful to the poor
– and vice versa?
- Because the poor spend more,
and their spending stays within
the community.
12-Jul-16
38
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’
Tuesday, July 12, 2016
39
The Keynesian ‘Multiplier’ is larger:
• the more of their income people
spend (larger b), and
• the more their spending stays
within the community (smaller m).
12-Jul-16
40
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’
Tuesday, July 12, 2016
41
(4) Why are Self-Adjusting,
Counter-Cyclical Credits are
Non-Inflationary?
- Because they are
more counter-cyclial
than Ordinary Money.
12-Jul-16
42
US Macro-Stability:
Better, buy Room for Improvement
Average U.S. Business Cycle, 1854 to 2006
Contraction
1854-1919
(16 cycles)
45%
1919-1945
(6 cycles)
55%
34%
1945-2006
(10 cycles)
66%
15%
0
Expansion
85%
10
20
30
40
50
60
70
Months
Source:
Tuesday, July 12, 2016
http://www.nber.org/cycles.html
43
US Money Supply “Too Pro-Cyclical”?
US Money Supply Growth and Unemployment, Quarterly, 1959-2007
Money Supply Growth, Unemployment Rate (Percent)
14
Recession
Unemployment
M2 Growth
12
10
8
6
4
2
0
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
Tuesday, July 12, 2016
44
US Interest Rate Controls “Too Pro-Cyclical”?
US Federal Funds Rate and Unemployment, Quarterly, 1959-2007
18
16
Federal Funds, Unemployment Rates (Percent)
Recession
Unemployment
Fed Funds Rate
14
12
10
8
6
4
2
0
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
Tuesday, July 12, 2016
45
The Question of Inflation




The best current monetary policy cannot ‘cure all
recessions’ without accelerating inflation.
Therefore, to fight inflation, Central Banks are
often forced to tighten money supply, even if it
leads to a recession.
If a more ‘Micro’ Monetary Policy can ‘reach
deeper’ -- to sectors not reached by traditional
monetary expansions -In providing new credit to these sectors, can it do
so without new pressure on inflation?
Tuesday, July 12, 2016
46
‘Reaching Deeper’…


If WIR Microfinance ‘reaches deeper’ -down to the Micro-economies of small
businesses, distressed regions, marginal
workers, and unemployment …
Perhaps it can also ‘reach deeper’ into
the Macroeconomy, down to stabilization
measures impossible for standard
Monetary Policy.
Tuesday, July 12, 2016
47
Closing Thoughts



Do WIR-type systems suggest a form of
‘Micro-Central Banking’ suggested by
Micro-Finance.
Traditional Monetary Policy is based on broad
monetary aggregates (M2) – and cannot
determine the distribution of money.
WIR-Type systems control, not just broad
aggregates, but credit to specific regions
and even individual businesses.
12-Jul-16
48
A closing analogy:



As the internet enables Advertisers to move from
Broadcasting to ‘Point-Casting’ – targeting
specific customers …
Similarly, WIR-type systems may enable Monetary
Authorities to move from changing just MacroCredit to also targeting Micro-Credit.
This can Expand (or Restrict) Credit just where it
can do the most good (or the most harm)!
Tuesday, July 12, 2016
49
For copies of Slides
and/or Paper, email:
stoddj@rpi.edu
Tuesday, July 12, 2016
50