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Privatizing Currency

February 12, 2010

Bill Woolsey offers insight on how to privatize currency, which has inspired me to write up how I understand creating a business-to-business currency (like the Swiss WIR) work. Here is an excerpt from Professor Woolsey:

The first step is to permit banks to issue hand-to-hand currency on the same terms as transactions accounts–checkable deposits. Most importantly, the Fed should accept hand-to-hand currency, whether paper notes or token coins, for deposit into reserve accounts on the same terms as checks. Just as a bank receiving checks drawn on another bank can deposit them into its reserve account, a bank should be able to deposit currency issued by another bank for deposit. Of course, the Fed should clear the currency exactly as checks are cleared–decreasing the balances in the reserve accounts of the banks which issued the currency.

Here is a step-by-step of my understanding:

  1. A participating business (business A) takes out an insurance policy on their invoices based on their creditworthiness and their claims on third parties.
  2. Business A opens a checking account at a clearing house (i.e. the WIR Bank), exchanging the insured invoice for checkable funds, and pays it’s supplier (business B) in full.
  3. Business B then has the options of either receiving payment in national currency by opening up an account with the clearing network and cashing the insurance (incurring interest rate penalty and banking fees), or it can in turn pay it’s suppliers with the clearing funds.
  4. Business B clearly has an incentive to pay its suppliers in clearing funds, to avoid the costs associated with receiving national currency.
  5. Each business in the chain then only has to open a checking account in the clearing network, and each will have the same option offered to business B.
  6. At maturity, the invoice is paid to the clearing network by the insurance company, and at that point, and businesses that have claims on that policy can cash out without incurring interest penalty.

Thus, a new currency is born.

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