Reversion to Barter, Private Currencies, Offers Informal Stress Index for Investors

by Nigel Bolton-Shaw on September 3, 2012

The Wall Street Journal recently carried an article entitled, “For Spain’s Jobless, Time Equals Money” that shows how people respond when society has difficulty providing basic services including employment and basic banking.

People often turn to age-old solutions including various forms of barter. It happened in the 1970s and it is happening today.

The import is not purely theoretical. Over time such systems can weaken and shrink a modern banking system. Knock-off impacts can affect stock markets, bond markets and even tax collecting.

What you’re looking at here is basically the growth of a gray economy of sorts, divorced from formal 21st century governance. Again, the impacts may be significant.

Nonetheless, as the Journal notes, the trend is swelling. At its simplest, such efforts involve various forms of notional currency – basically just paper notations to keep track of services and customers

Here’s how the Journal describes the phenomenon:

Even though she’s one of millions of young, unemployed Spaniards, 22-year-old Silvia Martín takes comfort in knowing that her bank is still standing behind her. It’s not a lending institution, but rather a time bank whose nearly 400 members barter their services by the hour.

In the Catalonia region of Spain, a restaurant and a community garden are part of an experiment in alternative cash–they are accepting a home-grown currency called the Eco as well as the Euro. WSJ’s Ilan Brat reports.

Ms. Martín, who doesn’t own a car and can’t afford taxis, has relied on other time-bank members to give her lifts around town for her odd jobs and errands, as well as to help with house repairs. In return, she has cared for members’ elderly relatives, organized children’s parties and even hauled boxes for a member moving to a new house.

The time bank not only saves her cash, she says, but also lifts her spirits by making her feel “part of a community that’s taking some positive action during hard times.”

As Europe’s leaders struggle with a five-year-old economic crunch that has saddled Spain with the industrialized world’s highest jobless rate, young Spaniards are increasingly embracing such bottom-up self-help initiatives to cope. The diverse measures—some commonly associated with rural or disaster-zone economies—supplement a public safety net that is fraying under government austerity programs.

The Journal explains that in addition to time banks, the Spanish are focused on barter markets, local currencies and charity networks.

Co-ops and communal gardens are becoming more popular as well. These efforts harken back not just to the 1970s but to the 1930s and earlier, when various alternative forms of money and currency were pioneered.

There are at least two high profile pioneers when it comes to alternative economics and both had a good deal of influence during the early and mid 20th century.

The first was Silvio Gesell who pioneered the idea of currency that would lose value if it wasn’t circulated. The idea was to get money moving vigorously within a moribund economy.

The second innovator was Major CH Douglas who came up with the idea of social credit. It was his perspective that governments had a responsibility to provide workers with a certain amount of income every year. Social credit currency units, un-backed by metals, were to be circulated without debt.

Mutual credit offers an even simpler concept. One joins a group or coop and receives a credit line. Spending from the credit line creates the unit of currency. The currency does not include interest and is un-backed by precious metals.

Both Douglas’ and Gesell’s ideas were popular in the mid 20th century, especially just before and after World War II. They received some limited implementation.

There is no doubt that such systems are becoming more popular as the current economic crisis continues. The Journal tells us that the number of alternative currency and time “banks” in Spain now totals nearly 300.

Despite the potential destabilizing effect that these systems can have on the host government, the larger effects can be seen as stabilizing, as they allow people to feel more in control of their own circumstances once again.

The Journal quotes José Luis Álvarez Arce, director of the economics department at the University of Navarra, as saying, “For people who can’t find work, these kinds of possibilities of exchanges and mutual help can help make bearable a situation that otherwise would be unsustainable.”

Greek alternative currencies and time banks are emerging because of the stress that country is under. There are reports of similar scenarios in Italy as well.

For those who are trying to judge the severity of the financial crisis around the world (and especially in Europe), the emergence of these alternative currency systems can provide a kind of statistical barometer revealing social and economic stress.

It is another indicator, therefore, of the viability of an economy in these stressful times and its potential growth or lack thereof – and one that investors would do well to watch.

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