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Barter Systems

Before exploring barter we need to acknowledge that barter existed in all primitive societies before money and some 50% of all production and transactions still take place outside official money-based GNP-measured sectors of the world's economies.  In 1995, the UN Human Development Report estimated unpaid production at $16trillion simply missing from global GDP figures.  Yet barter is considered  archaic and quaint by many in our modern economy.  After the money system has become entrenched in a culture, barter markets that still exist are considered crude and impractical especially for societies with high financial turnover.  Barter can also be dismissed as a way of keeping the tax authorities out of a transaction.  It certainly is used that way by corporations and governments, but it need not be.  Good modern barter systems can make it easier for tax authorities to receive the transaction information they require to do their job and at the same time reduce the confusion about who owes what tax to whom.

What changed everything about barter is the fantastic growth and capability of modern networked computers.  A system that handles all items, goods and services, that hundreds of millions of people want to buy or sell and allows transactions to be made easily, quickly, and at low cost, is now perfectly feasible. (See for example, Hazel Henderson, "Information the World's Real Currency Isn't Scarce", Ch. 9, Building a Win-Win World,  Berrett-Koehler, 1996.) 

But some kinds of barter are much more important than what could arise simply out of the advantages bestowed by the technological imperative, important as they are.  We return to this subject after thinking more about money.

1. First, a little primer on money.

When US politicians tell you that it is "your money" they are spending, they mean that you know how to use it to benefit yourself better than the government does.  Nobody doubts that part is true.  But can you spend it as wisely as good government could spend it for public goods, for purposes that benefit everybody?   It is almost impossible for individuals to coordinate a single large project to benefit everybody.  

Beyond that, there is a deeper problem with the assertion, "It's your money".  Next time a politician says that to you, say, "If it is my money, why can't I create it the way the banks do?  Or let me put it this way.  Speaking for all of us hard working Americans, 'If it is our money, why do you politicians let the banks create it and not the American people?  Why has the Congress given its own constitutional authority to the private banking industry?'"   Politicians answer this way, "You have to earn it, but you can't create it."  

You'll rarely hear the honest answer coming from the lips of a politician, which is: "Frankly, I don't understand how the banks create money."  Think that is an exaggeration?  The former Chairman of the House Committee on Banking and Finance, Henry Gonzalez, admitted to me privately that he was hazy about how it all worked. 

A second idea about money is that poverty (lack of money) is different from lack of wealth. Money flows to where it can earn the greatest return, generally now into the coffers of industry, particularly the financial industry.  Across the nation, small and rural communities, generally with low incomes and little capital, are starved of cash.  They put their pay-checks and receipts into banks now linked nationally and globally.  Then the banks lend this out worldwide.  At average global interest rates the local depositors can't afford to borrow back their own deposits.  This accounts for part of the large US poverty gap.  Two other components of the poverty gap are: (1) the general process that interest-earning money makes the rich  richer (those who have it get more) and (2) some hardworking Americans are disabled, in poor health, have crushing family responsibilities or are down on their luck.  Sometimes they whine.  Some are lazy. 

There are two billion people on planet earth who earn less than $2 per day.  That's  33% of the world's population.  In poor countries the percentage in this little-money class is far higher, a majority ranging from 50% to 95%.  If they had nothing to rely on but $2 per day they would all starve.  They are not all starving although their material incomes and resources are meager.  For food and beverages they depend on sustainable small plot and cooperative farming, gathering, some hunting and fishing, and often remote labor-intensive water retrieval.  For basic goods or trade, they manufacture by hand with little machinery.  They are not saintly. There is some crime.  

Barter can be an alternative source of "money creation" that benefits those who need it most.  

2. The role of banks in the creation of money

A short explanation of how banks create money is this.  Subject to reserve conditions (the percentage of funds they must keep to pay out when demanded usually 8% or less) imposed by the governing Board of the Federal Reserve System (which are not serious limitations to large money-center banks), bank members of the Federal Reserve System can borrow to finance "reasonably acceptable" loans (those that are well collateralized, make a good business case, or serve a standard purpose) at low, often zero, interest cost and charge lenders substantial interest.  US banks collectively receive about $22 billion  (1998 data point) of extra cost-free revenue going to their bottom line every year by this creation of money out of thin air.  Your money sitting in your demand deposit bank account is treated as the bank's reserves.  To many people who have studied this situation that seems like a lot of your/our money.  The extra revenue should belong to all taxpayers and the whole country, not to the Federal Reserve System. 

3. The role of the Fed in the money system 

The Fed at one time adjusted the reserve requirements of banks to curb or expand bank lending and thus control the money supply.  The banks complained about Fed reserve requirements, since reserves are "non-working money", that is, not profit producing.  Banks continually push to get requirements reduced through their association, the Bank for International Settlements in Switzerland.  So successful is this lobbying that the 8% rule has been cut to as little as 3% in some countries.  That leaves central banks including the Fed now, as a practical matter, with only one tool that it can use to keep the economy on even keel, short term interest rates.  The news media can more easily deal with a single numerical measure, the short term rates.  Virtually every news program, certainly every business news program, tells us what the number is for the particular rate that is being featured that hour, what it has been, when and how likely the Fed is to drop it or increase it by various amounts.  This leaves an impression with the radio/TV audience that that rate is very important for everybody.  The reality is that the Fed employs interest rate controls with the primary intention of helping the financial industry or, in a crunch, hurting the financial industry as little as possible.  Another Fed tool, open market operations, plays a useful role, but the news media almost never mention what is going on in the Fed's open market operations.  

The Fed now controls far less of the money supply than formerly.  The huge credit card debt nationally of $500 billion is outside of the Fed's control.  Mortgage debt of about $5 trillion is only indirectly controlled by short term interest rates that the Fed does control.  Along with other developments that the Fed does not control, these do affect long term mortgage interest rates. 

5. Network-Based Barter 

The most efficient, user-convenient, and transparent markets, which carry the largest gross trading interests of both buyers and sellers in a commodity (or, for more generality, we use "item" rather than "commodity"), will naturally become the monopoly market for that item.   That has enormous implications. Let's illustrate how this could happen with oil, that most ubiquitous and liquid commodity for which the world's thirst seems insatiable.  

6. OPEC's power, prior to the 2003 US invasion of Iraq, enabled this possibility

"OPEC Oil Market" - an example that clarifies barter benefits

Imagine it is 2002 -

The eleven countries of OPEC control 60% of the world's oil reserves and 40% of world-wide oil consumption.  The oil market is dollarized.  That is, OPEC countries buy and sell most oil for dollars.   If OPEC were to start its own oil barter market for countries and large corporations, demand for oil is so large and persistent around the world that many countries would do very well exchanging their own commodities or export items directly for oil.  This is particularly true for underdeveloped countries that are short of dollars most of the South countries which often get little for their various commodities on world markets.  OPEC could make sure that the best oil prices bartered for a wide variety of highly desired items, including manufactured products of many industries and a wide variety of agricultural crops would get most grades of oil, most of the time, at the best exchange ratio.  

All traders and dealers in oil in all countries would have to follow the offerings of an OPEC sponsored barter market and jump in quickly to trade as soon as each saw even a slightly better deal for him/herself.  In a highly liquid market like oil, traders who want to stay in business have to act promptly to close a deal where the price is better for them with a differential as small as a fraction of one percent.  Even the US with its pro-free market ideology and its need to import almost half of its oil consumption would not curtail any transaction on, or usage of, an OPEC Oil Barter Market.  This market would become the dominant marketplace for oil, with prices (exchange ratios for other items) typically up to 10 or 15% better than any other market offers and even able to retain an advantage in the long run of one or two percent lower prices than other markets. 

With a market that large, trading over $200 billion dollar-equivalents per year, it could then also become a major market for non-oil exchanges as well, if OPEC took advantage of the inherent efficiency, transparency, and reliability of transactions on a modern automated marketplace and did not swamp these natural advantages by shortsighted regulations.

After November 2002, Iraq required payment in Euros for purchasing its oil.  If this had been allowed to stand, the other ten OPEC countries might well have proceeded down the same path.  It was at this point that the US and UK agreed to invade Iraq and take over its oil.  One outcome of the occupation of Iraq by the "coalition" is that the weakened OPEC cartel may come under the domination of the buying cartel, OPIC, the Organization of Petroleum Importing Countries.

7.  Other Large, Coherent, Affinity Groups Could Become Barter Powerhouses 

Any affinity group of many millions (preferably a few hundreds of millions) of people who would work together cooperatively and coherently and -- for whatever common historical, cultural or financial reasons persistently do so under pressure -- could operate what in other circumstances would be called a buying or selling cartel, but now is a bartering cartel.  Such an affinity group could realize advantages similar to those of the OPEC Oil Market example.  No doubt in time there will be several, perhaps a dozen of such large alternatives to money systems, that will bypass central banks and national currencies.  (See, "The Path to Living Economies", Duane Elgin, Hazel Henderson, Richard Perl, et. al, Social Venture Network, October 2001)

8. Skirting Society's Barter Trap 

Any effort to introduce convertibility to a national currency or a basket of currencies into one of these barter markets would simply play back into the hands of the nation states' currencies and banking systems.  The orientation of mainstream economists, university economics departments and textbooks (supported by their trade associations, and the economics professionals entrenched in most corporations and government departments and agencies) is that every item whether goods, service, or information -- has a dollar or money equivalent value.  Few economists seem to understand basic aspects of modern barter systems that will allow the bypass of money systems for things most people need.  Banks and nation states money systems are no longer monopolies, since people can go around them with electronic, money-free trading systems. (See Hazel Henderson, "Keys to Poverty Reduction," World Affairs, New Delhi, India, Apr.-June, 2001.)

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