The Mutual Credit Clearing System: An Idea to avoid the consequences of financial crises in Business
We are so accustomed to using and needing money for everything that we find it hard to imagine how we could operate without it. And it yet worse in the business world.
What if I tell you that for 80 years a group of small and medium Swiss entrepreneurs have exchanged goods and services between them without money created by their central bank (Swiss francs)? and what if this system has allowed them to emerge unscathed from the economic crises that have affected both businesses (and citizens) in other parts of the world?
It is not fiction; it is a reality. And it works. But as it often happens with transformative ideas that challenge the status quo: not many people talk about them.
So in this post I will tell you how this wonderful idea works: The Mutual Credit Clearing System. Let’s start with the example of this group of Swiss entrepreneurs and their invention: the WIR Bank.
The Mutual Credit Clearing System and the WIR Bank
The WIR Bank was created in Switzerland in 1934, as a cooperative focused on improving conditions for small and medium Swiss businessmen, although after 2000 and thanks to its success, it also began to offer services to a wider audience.
After the Great Depression in the US, the Swiss economy was in serious trouble: thousands of people suffering from unemployment and small and medium enterprises with serious economic problems.
In this context, 17 business owners decided to act and seek a solution that would allow them to stay afloat, rather than sit and wait for someone in government to do something… or worse, until their business is in bankrupt.
The solution they implemented was to create a credit union that would allow them access to money even when traditional banks circulated very little because of the crisis.
The word WIR comes from Wirtschaftsring which means economic circuit. In addition, the word WIR in German means “we”. ¿Nice name, ah?
The basic elements of a Mutual Credit Clearing System
Mutual Credit Clearing System sounds like a tongue twister, but in reality, it is very useful to unlock economies.
The system works very simply: debits cancel your account credits, in other words, sales cancel purchases. When you sell something, your account balance increases (you receive credit). When you buy something, your account balance decreases (you experience a debit).
I steal the following phrase from Wikipedia (in Spanish) because it explains the idea very well:
“The effect is like a loan without interest, any debt becomes income for other members of the system, and the total sum of all balances in the system is zero.”
In short, those who participate in the system know that by selling their products, they receive a credit that they can later use to buy other products and services from other participants of the system.
Likewise, the person who makes a purchase and ends with a debit in their account, can then sell a product or service and “tie”.
When creating the system participants must agree on certain basic points:
- Each person involved must have an account in the system
- The two people who make the transaction must agree on the price of the product or service and on its quality.
- The sale amount is credited to the seller’s account.
- The same purchase amount is debited from the customer’s account.
- If a person has a debit to his account, he or she must sell something to compensate.
- If a person has a credit, he or she should buy something to compensate.
These are the basic elements.
Of course, the creativity of human beings is infinite and, sadly, is often used to abuse the good ideas. If a person enters the system, purchases products and services and then leaves, he would be abusing the trust of others by not providing or selling anything later.
The community or group that is implementing the system can create rules to prevent this type of behavior, for example, a maximum amount of debit account and a maximum period of time to compensate.
How does the WIR Bank work?
The WIR is a complementary currency created by business owners who decided to partner. They define, only as a reference, than 1 WIR is equivalent to 1 Swiss franc. The WIR is not convertible for francs but this allows them to better represent its value.
The system requires that each participant give a guarantee at registration (to prevent those who want to “play smart”, as I mentioned before). They have special rules and monitoring to prevent abuse.
Each participating business is free to decide the amount of WIR accepted for their products or services. It can be 100% of the price or only a portion (example: 50% in WIR and 50% in Swiss francs).
All participants have access to a database where they can search for products and services offered by other participants of the system (like a market place). Currently, more than 60,000 small and medium businesses use it, and now the idea is also being implemented in other parts of the world, as with Bangla-Pesa in Kenya.
To keep learning
This post is too little to put in all the details, but I invite you to learn more about this system in the eBook: This is the Mutual Credit Clearing System.
It is important that we learn more about these solutions and start thinking how to implement them to solve our daily problems.
The solutions are out there, you just have to brace up!
