The ECB so far has refused to sufficiently increase the money base to meet the increase in the demand of money and as a result euro zone money-velocity has contracted. We are basically in a monetary disequilibrium. Normally we would say an excess demand for money can be reduced in two ways. Either you can increase the money supply or the price of money can increase sufficiently to reduce the demand for money until it matches the supply of money. An increase in the price of money of course means a drop in all other prices – deflation.

However, there is a third option – we could also increase the supply of money substitutes. This could be in the form of free banking – privately issued money – or through different forms batter systems. I have also earlier examined the impact ofthe so-called M-Pesa system in Kenya and how M-Pesa likely has increased money-velocity (reduced money demand) dramatically in Kenya. I suggested that could offer a partial solution to the euro crisis. A similar idea could be to create a system similar to the Swiss Wirtschaftring system (WIR).

WIR is basically a barter club of corporations and households and in a sense WIR functions as a parallel currency in the Swiss economy. Here is a description from a paper by Wojtek Kalinowski:

“The Swiss currency known as the WIR is by far the oldest and most important complementary currency presently in circulation. It remains, however, largely unknown. Created in 1934, it is currently used by approximately 60,000 small and medium-sized businesses found in all economic sectors, but primarily building, commerce (wholesale and retail), and manufacturing … In 2008, the volume of WIR-denominated trade was 1.5 billion Swiss francs …a figure that makes it far superior to any other parallel currency but which is still only an insignificant portion of the global monetary mass (0.35% of M2 in 2003).”

What I find particularly interesting with the Swiss experience is the counter-cyclical nature of the use of WIR. In a 2009 paper by James Stodder “Complementary Credit Networks and Macro-Economic Stability: Switzerland’s Wirtschaftsring”  it is demonstrated that there is a clear negative (positive) correlation between GDP growth (unemployment) and the turnover of WIR. Hence, this indicates that WIR tends to help equate money supply and money demand (reduce monetary disequilibrium). If you have studied George Selgin’s theory of Free Banking then you should not be surprised by this result.

Time for WIR in Greee or Ireland?

The deflationary trends are very strong in some euro zone countries such as Ireland or Greece. So what is needed is an increase in the money supply, but as the national central banks do not determine the local money supply (that is firmly in the hands of the ECB) that option does not exist. However, a WIR style system could be a second or third best solution for doing something about the monetary disequilibrium in these countries.

Obviously, it will likely be far too little to end the crisis and the best solution obviously still would be for the ECB to significantly ease monetary conditions. However, that should not stop deflation and crisis hit euro zone countries from removing legal barriers to the introduction of WIR style systems. Furthermore, one could easily imagine that euro zone governments and central banks could move to facilitate the creation of WIR style systems in their countries.

Obviously, this kind of discussion would not be necessary if the ECB moved to reduce monetary disequilibrium, but times are desperate – and that is why you for example see the reemergence of the old Irish punt certain places in Ireland (See here).

Finally I should add that some proponents of local currencies and WIR systems see them as a kind of “small is beautiful” system and a system to protect local producers. I strongly disagree with this kind of protectionist view and in that sense I completely agree with the views of George Selgin. See here.

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Update: See also this paper by James Stodder.
Update 2: In the comments below James Stodder recommends Irving Fisher’s book on “Scrip Currencies” and Georgiana Gomez’s recent book (2009) “Argentina’s Parallel Currency: The Economy of the Poor”. I knew Fisher’s book before, but was unaware of Gomez’s book (so I ordered it…)