Big Money for Small Businesses
Big Money for Small Businesses
A short history of money—and the story of how Swiss WIR Bank is protecting small and mid-sized companies from the pressure of continuous growth.
WIR Bank is an unusual financial institution. In contrast to almost any other bank, it does not focus on ever-faster growth. Instead, its objective is to help business owners and their staff make a decent living. WIR Bank – the “WE Bank” – keeps regional economic circuits in Switzerland well-oiled by offering excellent loan conditions to small and mid-sized businesses. By now, 50,000 such businesses have an account with WIR Bank, and its annual turnover is far from negligible at a whopping 1,5 billion Swiss francs.
In order to understand the significance and principle of WIR Bank, we have to go back to the basics. Let’s take a look at how money actually works.
The principle of money
Money is an entitlement to future possession. Whether it is a piece of metal, a scrap of paper, or a number written in a certain spot in the books of a bank, it is nothing more than a promise: If you dispense it, you will get a piece of bubble gum, a computer, or, if the number in the account is large enough, a villa on the Côte d’Azur.
Money is an immensely useful invention. For example, it saves the bubble gum producer the trouble of finding a store willing to trade a computer for, let’s say, 58,913 pieces of bubble gum. Money enables us to offset diverse commodities against each other—from X-ray machines to tutoring hours, concert tickets, a porta-potty, or bubble gum. This has been the principle of money for as long as it has existed.
But in order to be able to make bubble gum, the producer does not only need a machine that will mould the gum but also large amounts of sugar, food dyes, and all kinds of chemicals. Before she actually starts selling, the gum producer cannot yet afford all these things, so she must borrow money. She does that in the firm belief that she will make more money selling the finished bubble gum than she spent on the machine and ingredients. After all, she wants her sales revenue to pay her rent, buy her coffee, and a lot of other things. Otherwise, why would she bother to make that much bubble gum?
The bubble gum producer needs capital—say, 100,000 euros. She borrows the money and now is 100,000 euros in debt—in other words, her debtors are entitled to a payback of 100,000 euros. Debt and credit are always a zero-sum game: if a credit is accumulated in one place, debt is accumulated somewhere else.
Now, normally nobody would lend money without the assurance that they will get back more than they lent. And because our bubble gum producer can pay back the borrowed sum in small instalments only, she does not only pay interest but compounded interest. The lender will say that “the money is working”—but in reality, of course, it is the bubble gum producer and her staff who are working. By the time the gum producer has paid back the loan, she will have given the lender perhaps 20,000 euros more than she initially borrowed. Thus, the lender’s wealth increases, because in the meantime he has used the bubble gum producer’s interest and compounded interest payments to issue more loans.
Small businesses left behind – or not?
The bubble gum producer is thus compelled to make a significant profit in order to be able to repay the loan, which leaves her with two basic options: either she sells each piece of bubble gum at the highest possible price or she produces a large amount of bubble gum at a low unit price. Except for niche markets, capitalism favours cheap products, which are best produced with large machines and little staff. In an extreme case, we would end up with only a few bubble gum producers that cater to the entire world. Since such large corporations are considered safe investments, banks offer them loans at much better interest rates than they would to a small company—and with their enormous wealth, they make even more money.
This kind of system often leaves small businesses behind—and along with them, the jobs they provide. But what if people want to keep on living in their village or small town? What if the bubble gum producer does not have the ambition to become the world’s leading bubble gum company—if all she wants is to make a decent living for herself and her staff? What if the small business owner does not want to gear her suppliers and staff toward massive productivity increases just to be able to keep up with interest and compounded interest payments?
Now, finally, back to WIR Bank. The co-op has come up with a system that eases the constant push for growth. It makes loans to small and mid-sized companies, but it hardly charges any interest. In fact, interest is used almost exclusively to cover the administrative cost of the loan. Every borrower gets the same low-cost loan, which also slows down the race for profitability. WIR Bank is thus able to alleviate the pressure on small and mid-sized companies to expand continuously, and it makes sure that companies and jobs stay in the region. Prospective WIR Bank customers must meet only one condition: they must be a small or mid-sized business headquartered in Switzerland. The bank administration determines each individual applicant’s eligibility; that way, they keep out the big players.
A bank to support regional economic circuits
WIR Bank also supports its customers by promoting commerce between them. Trade is done in WIR francs, a virtual currency that exists only on the customers’ digital bank accounts. Here is how this works. Let’s say a Swiss herbal lozenge manufacturer needs a new cabinet for his office. Online, or in the Bank’s member magazine, he finds a carpenter who is also a WIR Bank customer. The lozenge producer orders the cabinet from her, let’s say at a price of 2,000 Swiss francs. Upon delivery, 2,000 WIR francs are debited to the lozenge company account, while 2,000 WIR francs are credited to the carpenter’s WIR Bank account. The money is thus created at the moment that a transaction happens in the real economy. Now the carpenter can go and buy wood somewhere else using her WIR francs—or she could use the money to throw a party. Overall, the whole thing works like a seesaw, always remaining a zero-sum game: The credit on one person’s account is a debit on someone else’s.
WIR accounts accrue no interest, giving the participants no incentive to save the money. On the contrary, it encourages them to spend their WIR francs sooner than the “real” interest-bearing francs they have at another bank. It also means that they will do business with other WIR Bank customers as much as possible. Capital flight is impossible, because it is prohibited to exchange WIR francs for real francs. Whoever does, gets the boot. Thus, the system supports regional economic circuits and counteracts the trend toward ever bigger, ever faster, ever leaner companies. There will never be a financial bubble, because only actual economic transactions can be charged. The money does not work here, only people do.
In the current low-interest market, the way WIR Bank works does not seem very spectacular. But during the recent financial crisis, when everyone was talking about a credit crunch, WIR Bank was booming. That could happen again soon, and not just because of turbulence on financial markets. As transportation costs continue to rise and turbo-growth reaches its sheer resource limits, the era of regional economic circuits will dawn—and with it, perhaps also the era of the WIR Bank system. Essentially, WIR Bank trims money back to what it had been for millennia: an immensely useful invention to offset goods and services against each other.