STRO promotes a sequence of Complementary Currency systems that fits the different levels of social and economic organisation. Each of these has clear limits wherein the advantages must outweigh the disadvantages.
At the social and local level a community can use a time-based exchange that stimulates the social qualities of the community and values the efforts of all participants equally. For higher levels of specialisation and organisation STRO has developed three different systems: Controlled Currency System (CCS), Valuable Local Currency (VLC) and Circuit of Consumers and Commerce (C3).
Essential differences in these methods are the elements of backing, emission and circulation.
2.1 CCS = Controlled Currency System
The CCS is a highly social and community-building model of mutual exchange. The major difference with most LETS or Trueque-systems is that the local currency is distributed in the form of a loan, which must be renewed every 3 months. All participants are given a loan for the same amount of units, called the ‘basic credit’. The amount of the basic credit can be adjusted upwards or downwards in the future.
In this way the emission of the local currency is clearly under continuous control. This is essential for a policy of loosening or tightening the total amount in circulation, simply by augmenting or diminishing the amount of new loans. In case the total amount must be diminished existing loans are not re-issued, or re-issued with a lower value.
The credits are formalised in contracts that represent a debt that is ultimately cashable in national currency, if necessary. This creates a stronger backing for the local currency.
By introducing flexible credit-amounts apart from the basic credit, the CCS evolves into a VLC (see 2.2).
In Rubem Berta, a neighbourhood in the Brazilian city Porto Alegre, loans worth an equivalent of about 30 Reais (10 euros) are issued. The local currency, Rubi, can be spent at local fairs, for local services such as the painting of apartments, donated to the churches and partially spent at local shops.
Every three months the contract has to be renewed or repaid. This gives a moment of contact to see if members might use help to learn either spending or earning their Rubis. If it appears that people have become a member just to spend without discussing their debts with other members, legal steps might be taken.)
At this moment some 5,000 Rubis are in circulation and the system is moving towards a VLC.
2.2 VLC = Valuable Local Currency
VLC is a highly innovative combination between a CCS and interest based growth compulsion.
The analytic background of the method is that in the formal economy interest charges on credits push the economy towards competitiveness and growth, because the economy as a whole has to produce extra to be able to pay the interest and at the same time is forced to capitalise the speculative circuit.
This mechanism, has of course two main negative aspects: on the one side it forces the economy into unsustainable growth (or financial crisis) and on the other side it is a way of expropriating value from the productive economy by the owners of financial capital.
The VLC is an attempt to introduce the growth drive that is created through interest-charges, but at the same time to keep these values in the ownership of the community, and re-invest them in local production.
In the VLC, the credit debts have an ‘interest’ charge, although a better denomination for these might be ‘forced community savings’. Through this interest, debts are augmenting and at the moment the accumulated debts and interest are cashed, they are the driving forces for development. This is very much comparable with the international effects of debts, but with the major difference that this driving force is pushing the community development forward instead of some impersonalised development elsewhere on/in the world wherever the financial markets see fit. It is a community based investment program in which the community owned debts, and demand to repay them, stimulates investments.
The amounts of local currency that are paid as interest-charges are used to form the Local Development Fund, that is owned by the persons who paid these charges and is used for risk-sharing local investments. A form of social control towards successful entrepreneurship is introduced, because the returns on these investments depend on the performance of the local entrepreneurs,
In a VLC system the local currency is non-convertible with national money.
A VLC programme starts with loans to entrepreneurs in national currency, with interest payable in local currency. The ‘interest’ payments create a scarcity of local currency that results, for those who have debts, in a pressure to obtain it. Therefore, scarcity is what makes the local currency “valuable” and equally as attractive as a national currency.
When businesses have to pay their interest in local currency, they are offered (partial) refinancing these local currency debts with new loans in local currency. This leads to the increase of the local currency debts and therefore to an increase of spending abilities of the local currency, and an increase in the demand for (low-cost) loans in local currency.
The participation of a formal financial institution is required to manage the demand and supply of the local currency, as well as the regular activities of management of credit portfolios.
VLC in practice
The first step of starting any local system is to make people know and trust the local currency, that is why STRO works with the Bonus/Fomento method. In Fortaleza (North-Brazil) a pilot-project has been conducted with positive results. Instead of using a grant from a donor to build a school in a conventional way (use the money to pay for the building-project), 88% of the money has been substituted by local currency. The money has been used to give loans to local enterprises in national currency that were repayable in local currency. At the same time, the constructors and suppliers of the school were paid in local currency, which they could spend at the enterprises that had the loans and others that also accepted the local currency. The project ended when all loans were repaid. Evaluation from the University of Bahía showed that the project resulted in an extra economic activity of 87%. This is in comparison with a project where the money was spend directly, without calculating the impact of the emitted credits, which are of course also an extra impulse, because in a conventional spending of the money these credits would not have existed.
At www.strohalm.org/fomento one can see a flash animation of this method.
In Honduras a project is running in which the local currency is permanently in circulation. COMAL, STRO’s local partner in Honduras, is a cooperative that buys products from farmers and distributes them to over 400 small member-shops. Credits are given in a mix of national and local currency to several agro-industrial projects, representing a value of approximately €40.000. The local currency can be spent among others at the shops; the shops pay COMAL with it for the products they supply. COMAL, in turn, pays the farmers partly in local currency that they can spend again at the local shops.
2.4 C3 = Consumer and Commerce Circuits
C3 is a hybrid of the internal administration and integrated bank-accounts that large companies use to diminish their financial costs, and the ‘negative interest’ or ‘Liquidity-Tax’ experiments realised in 1956 in Lignières en Berry in France and of course in the famous Wörgl experience. These experiments showed that forced local spending because of the use of a local currency, combined with accelerating the local circulation by charging the possession of currency, results in significant economic growth.
C3 combines the elements of a consumer-loyalty program in which producers offer consumer-members a bonus to attract their money into spending inside the Circuit. This money is used as backing for internal liquidity-units and owned by the Circuit that compensates the businesses where the consumers buy with the digital units. The units can be used for purchases elsewhere in the local or regional network. In an internal accounting system, the digital units are being transferred when transactions between members are taking place. Just as in barter-networks, no conventional money is needed for these transactions.
An important difference between C3’s and Barter Networks is the inflow of consumer money, which permits the total or partial convertibility of Internal Liquidity Units into money with deduction of the amount paid as bonus to attract the money. A financial institution guarantees the exchangeability of the internal units. As more and more internal liquidity units circulate internally, more and more national money is stored in the bank as backing. The bank can use this money to realise a low-cost credit program to finance investments by the member companies.
In order to create a strong and dynamic system, the C3 method uses the following two instruments:
- A charge on positive balances (“demurrage” or “Liquidity-Tax”) to stimulate and accelerate transactions within the system. Positive balances are taxed with a 1/30% Liquidity-Tax per day. The Liquidity-Tax accelerates the circulation of the internal liquidity units, and at the same time generates an income for the system. This system is used to provide the means for extra bonuses to consumers, to pay for professional staff, to reduce the risk premium on loans to members and/or to finance community projects.
- A Bonus/Malus system: Consumers that buy the Internal Liquidity Units with money get extra Units as a bonus. Thus, the bonus attracts the inflow of money. This bonus is balanced by a “Malus” that will be charged to whoever converts the Units back to money and by the Liquidity-Tax. Because the Malus members prefer to spend locally if the extra costs are not higher than buying outside the region (see box: What is the flavour of your tractor?).
Internal Liquidity as credit
An innovation in the C3 method that is being introduced in Brazil is the availability of Internal Liquidity Units that are not backed in money, but in guarantees in money. In this way the C3 can offer extra liquidity to its members, without being limited to the availability of money, which is generally scarce in countries as Brazil.
The C3 can thus opt to issue Internal Liquidity as credit, but only when the member has a solid and liquid guarantee. A Financial Institution or an insurance company must issue this guarantee.
The insurance branch is involved by providing contracts that allow collective insurance of internal credit at very low costs. Since Brazilian interest rates are immense, cheap credit is the key for success.
C3 provides the possibility to allow international trade between C3’s, even in different countries. To avoid the same effects of under-use of potentials in weaker regions and maintain the focus on local economic activity, the inter-C3 transactions are subject to rules highly similar to the Bancor-concept proposed by Keynes’ in 1944 in Bretton Woods Rules to optimise world trade while at the same time allowing and stimulating every nation to optimise its internal economy.
C3 in practice
Currently STRO researches C3 pilots in a great diversity of situations and also with diversity in methodology: