A plan to cut the banks out entirely

Many solutions have been proposed for the global credit crunch, but the most novel one yet is circulating in an unassuming academic paper that’s been stirring up a lot of buzz. The idea? That businesses create their own backup currency and leave the banks out of it entirely.

The proposal is set out by Bernard Lietaer and his colleagues in “White Paper on the Options for Managing Systemic Bank Crises.” In it, Lietaer, who is currently a research fellow at the Center for Sustainable Resources of the University of California, suggests that if businesses can’t get the money they need from banks, maybe they should lend it to each other instead. For instance, if the banks won’t lend money to HP to buy processors from Intel, then why not create a credit system that lets Intel lend money to HP so it can buy Intel’s chips?

This would create a second currency, but it wouldn’t require paper bills and coins. It could exist electronically, as a network of credits and debits between businesses. Lietaer argues that a backup currency makes a country’s monetary system much more robust and better able to withstand credit crunches like the one we’re having now.

It would be easy to write off Lietaer as an academic dreamer, except for the fact that one country has actually done exactly what he’s suggesting—75 years ago—and it’s working splendidly. That country is Switzerland, and its introduction of the WIR system in 1934 resulted in the most stable monetary system in the world. “The system is still operating today,” he writes in his paper. “The annual volume of business in the WIR currency is now about $2 billion per year.”

Lietaer says the banks could take part if they wished, and he provides compelling reasons for adopting such a system. “This strategy will avoid repeating the worst part of the 1930s scenario . . . which resulted in massive bankruptcies in the productive economy, intolerably high unemployment and untold suffering,” he writes.

Given how well the banks have served us, maybe it’s time to give Lietaer’s idea a try.