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
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
2
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
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3
Local Currencies arise in every
recession: e.g., “BerkShares”
Tuesday, July 12, 2016
http://www.berkshares.org/heroes/index.htm
4
Sufficient Money Needed to Effect
All Improving Transactions

Figure 1: The Failure of Double-Coincidence
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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.
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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
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In 2003, WIR-Bank had
77,000 Participants
Turnover of 1.7 Billion SFr ($US 1.28 B.)



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 not openly traded
for SFr (although this may still happen)
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8
Long-term Correlation with Unemployment
3.0
240
2.5
200
Turnover
Unemployed
2.0
160
1.5
120
1.0
80
0.5
40
Tuesday, July 12, 2016
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
0
1948
-
Unemployed Workers (Thousands)
WIR Turnover in 2000 Swiss Franks
(Billions)
Fig. 2. WIR Turnover and Numbers of Unemployed, 1948-2003
9
Did WIR “de-link” from M2 around 1973?
3.0
840
2.5
720
Turnover
M2
Tuesday, July 12, 2016
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
120
1964
-
1962
240
1960
0.5
1958
360
1956
1.0
1954
480
1952
1.5
1950
600
1948
2.0
M2 in 2000 Swiss Frnks (Billions)
WIR Turnover in 2000 Swiss Franks
(Billions)
Fig. 4. WIR Turnover and Money Supply, 1948-2003
10
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)
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11
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
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Simple Error Correction Model:

D(ms) = α (mst – Qt)
long-term effects
+ ∑t βt (D(ms (-t))
+ ∑t θt (D(Q(-t))
Short-term (cyclical) effects
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Under normal conditions, Q = Q1

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.
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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.
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Table 4: Pre-1973, Counter-Cyclical link:
GDP → WIR-Turnover
D(LnGDP_Ma2(-1))
D(LnGDP_Ma2(-2))
Sample:
Sample:
1952-1972
1973-2003
-1.9444
-1.4894
[-3.241]*** [-1.884]*
-0.5876
2.5289
[-1.035]
Adjusted R2
0.935
[3.116]***
0.723
t-stats in [ ]: ***: p < 0.01, ** : p < 0.05,
*: p < 0.10; o: p < 0.15
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Table 5: Pre-1973, Counter-Cyclical link:
Unemployment → WIR-Turnover
Sample:
1952-1972
0.1038
[2.717]**
Sample:
1973-2003
0.0430
[1.999]*
D(LnUE_Ma2(-2))
0.0482
-0.0527
Adjusted R2
[1.379]
0.921
[-2.472]**
0.711
D(LnUE_Ma2(-1))
t-stats in [ ]: ***: p < 0.01, ** : p < 0.05,
*: p < 0.10; o: p < 0.15
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Is WIR Turnover
More Counter-Cyclical than
National Money & Credit?
Comparable specifications show:

No counter-cyclical effects for Swiss Money
Supply (M2).

No counter-cyclical effects for Swiss Banking
Credit as a whole.

No Structural Break at 1973 for either one.
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The Question of Inflation




The best current monetary policy cannot ‘cure all
recessions’ without accelerating inflation.
Therefore, Central Banks are often forced to
tighten money supply during 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?
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However, ‘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.
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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
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21
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
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US Macro-Stability:
Better, 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
23
Closing Thoughts



WIR-type systems may be a form of
‘Micro-Central Banking’ suggested by
Micro-Finance.
Traditional Monetary Policy is subject to
the Limitations of Aggregation.
WIR-Type systems control, not national
monetary aggregates, but credit to
specific regions and even individual
businesses.
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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)!
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For copies of Slides
and/or Paper, email:
stoddj@rpi.edu
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