Historically, barter has often played a role when monetary systems have failed. When no-one trusts the money, people tend to start exchanging goods directly without any money changing hands. These tend to be short lived “en extremis” situations until faith is restored into the monetary system. With the obvious flaw to any barter system being that you need a happy coincidence of opposite requirements to enable a barter trade.
We all have a natural affiliation with barter as particularly as children we have swapped or traded with friends. Historically, self sufficient communities would have only operated with barter which would have brought cohesion to communities as people exchanged the product of their specialized labour amongst themselves. In fact it has been argued that during periods of colonisation, indigenous communities that accepted their new master’s money were likely to collapse much faster than if they remained on a community barter system.
For a barter system to be able to scale and go beyond the coincidence of opposite requirements the participants must accept credits within the particular system, by doing this participants can defer purchasing power from present to future. This “credit” or “common tender” thus becomes money as a means of exchange rather than money as a source of capital and is therefore an investment in the continuity of that particular barter community. Therefore each barter community is backed by the productive capacity of its members.
In today’s economic environment where companies find it difficult to access credit it is easy to conclude that most companies would find it beneficial to trade unused capacity through a barter exchange for the common tender or credit of that exchange, however sovereign currencies are likely to continue to be more effective than a private currency such as trade exchange credits. Governments are unlikely to encourage barter systems, because an efficient large scale barter systems could be a threat to government and central bank issued fiat currency.
However, barter or “capacity exchange” is a much bigger part of the global economy than you might think. The city of London recently brought out a research study titled “Capacity trade and credit: emerging architectures for commerce and money” on December 8th 2011. The report defines a capacity exchange as “a membership based system within which companies can trade available capacity in the form of goods, services and infrastructure within and across industries, using common tender as a medium of exchange.” A capacity exchange enables cashless trade through barter.
Capacity exchange or countertrade accounts for 20% or more of world trade although the US department of commerce believes it is 25% with it being as high as 50% in certain eastern European and African countries. This may be governments who have certain trade restriction or trade embargos i.e. I give you my oil for your telecommunications equipment. Or this may also be SME’s who do not have access to credit
By effectively creating credit, capacity exchanges have a credibility issue which is the same for any credit monetary system such as the prevailing fiat currency system that underpins the global economy and banking system.
It seems logical to me that I should be able to exchange my credits within a capacity exchange for conventional fiat currency such as US$ or GBP, or perhaps even for gold, this might make it easier for customers to accept the “barter credits” as they can be exchangeable for real currency at any time. This also means the “exchange rate” will imply a counterparty risk of the capacity exchange failing.
One enduring example of a barter community or “capacity exchange” is the WIR multilateral commerce network, started in Switzerland in the 1930’s, which has 60,000 member SME’s and facilitated 1.6 billion CHF of transactions in 2010. WIR is subject to Swiss banking regulation, overseeing the allocation of “WIR Francs”, and is for Swiss national companies only.
An example of the emerging architecture in “capacity exchange” is Ormita Commerce Network, that was founded in 2007, and now has 218,700 members from 54 countries and facilitated $2.6 billion of transactions in 2010. Ormita started as a software provider for retail and corporate barter trade, but then acquired some of its clients and now operates as a franchise. Transactions can be for anything from travel and hospitality to commodity purchases or legal advice.
The Local Exchange Trading Systems (LETS) are community based not for profit networks, started in Canada in 1984, designed to strengthen community relationships and give opportunities to the unemployed in the community.
The internet greatly enhances the future of barter due to online digital payment and accounting mechanisms enabling electronic issuance and distribution of a system’s credits combined with the scalability of online trading communities. Whilst the idea of community barter systems is attractive, I do think that highly credible and regulated national and international barter or “capacity exchanges” are the only way to achieve a critical mass and a viable alternative to fiat currency.
As the obvious flaws in our current fiat monetary system take us from one banking and monetary crisis to the next, I think the development of highly credible barter or capacity exchanges is really important. Perhaps the Swiss government has long recognised the need for a successful barter system as a safety mechanism in case of fiat monetary breakdown!?
Ralph Hazell, CEO , The Real Asset Co.
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