Friday, March 27, 2009

Program Your Money

The credit crunch may actually be good for business.

No, not in the short term. When money becomes more expensive, it is harder for most businesses to get the capital they need to conduct their most basic operations. Even successful companies borrow money to buy materials, pay employees, and cash in on invoices that have yet to be paid. Without the cash flow provided by banks, it is a lot harder for many companies to function -- much less expand.

With any luck, however, the future of business will be entirely less dependent on banks and the currency they lend into existence. The Fortune 500 will become something other than brand names on piles of debt, and business operations will be characterized more by what companies produce than how much credit their "stories" can earn them on one of the stock exchanges.

Yes, we are watching something melt down. But I'd argue the thing that's dying is not business itself, but a financial parasite -- a speculative marketplace that no longer funds business but instead seeks to extract value from healthy commerce. More a funds vampire than an infuser of needed capital, the investment industry has been exposed as a drag on business. The future of commerce looks bright to me because it may be unencumbered by the weight of this non-productive capital.

This all began back in the Renaissance, when a waning monarchy was looking for ways to preserve its power in the face of a rising merchant class. The merchants were becoming richer than the royals. So the monarchs came up with an idea: chartered monopolies. By granting one of these new companies exclusive province over a particular industry or region, monarchs earned their undying loyalty -- as well as a generous portion of shares in the enterprise. They began to write laws that favored their chartered companies, such as those preventing inhabitants of colonies from creating any value for themselves; colonists had to ship raw resources back to the mother country, where they were processed into clothes or other finished goods.

This model of business-by-extraction carried over to finance as well. European towns had used local currencies for centuries. Farmers would bring their wheat to a grain store, which would give them receipts for the amount of grain to be kept for them. These receipts served as local currency. The system was so efficient, and people were living so well, that people of this era were taller than at any time until the last few decades. By making local currency illegal, a monarch could force people to use his own more expensive "coin of the realm" instead. Instead of being earned into existence, this money was borrowed into existence.

Over the next four hundred years, the business of money slowly grew bigger than business itself. A central bank creates money and charges interest to the next bank down the line, and so on, until it gets to the business that needs it to do something useful. The problem is, more value is being extracted on each level than businesses can produce. There are simply too many institutions -- too many lenders -- to be paid.

As the banking industry grew bigger and less regulated, institutions consolidated, making the notion of a local lender obsolete, as well. Loans are centrally processed by bankers who have little knowledge of the companies or people to whom they are lending -- and little reason to learn about them, since they are simply packaging and selling the loans, anyway.

The house of cards had to fall eventually. The truly amazing thing is how long it lasted. And before we attempt to prop it back up again, we might consider whether there is a better way to do business. I think there is.

The beauty of this era -- this networked, hi-tech, and decentralized world -- is that we no longer have to do everything from the center. The laws and regulations requiring us to run our finances and resources through tremendous industrial age corporations are more obsolete than ever. And real people are beginning to catch on to how inefficient and risky it is to conduct their transactions in this way. They are starting to trust the real world around them more than the mythologies created by the public relations departments of distant corporations.

Moneys are programmed. They behave in certain ways because they have been embedded with certain biases. Today's credit crisis, for example, is no more the fault of particular bankers' behaviors than the underlying biases of the centralized, monopoly currencies we use. At least that's the opinion of a growing population of citizens and businesses turning to the use of what they call "complementary currencies" -- alternative, net-enabled, bottom-up money systems that let them accomplish what money loaned out by the central banks just isn't letting them do anymore.

Complementary currencies treat money as a utility, rather than an asset class. Their bias is towards functionality instead of savings, transaction instead of speculation. In 1995, as recession rocked Japan, unemployment rose and currency became scarce. This made it particularly difficult for people to continue to take care of their elderly relatives, who often lived in distant areas. The Sawayaka Welfare Foundation developed a complementary currency by which a young person could earn credits for taking care of an elderly person, and then spend them on the care of their own relatives in distant towns. At last count, the alternative currency was accepted at 372 health centers throughout Japan, and all administered by a simple piece of software. Close to a thousand alternative currencies are now in use in Japan.

In October 2008, as the credit crisis paralyzed business lending, companies started signing on to barter networks in droves. One system called ITEX, which allows businesses to trade merchandise, reported a 37% increase in registrations for the month of October alone. Utilizing more than 250 exchange services now available through the Internet, companies can barter directly with each other, or earn US-dollar-equivalent credits for the merchandise they supply to others. This bartering already accounts for 3 billion dollars of exchanges annually in the United States.

Local currencies have spread far beyond the experimental fringe to over 2100 US towns at last count, both because of the new scarcity of dollars as well as the availability of software and tools. Beginning a local currency requires no store of capital -- it is as easy as visiting the websites for local economic transfer (LETS) systems or Time Dollars. In one town, for example, there's a tiny organic cafe called Comfort that is seeking to expand. John, the owner secured a second location for a sit-down restaurant, but doesn't have enough money to renovate the space. Although he has great credit, he can't get a loan from any of the banks in town. Even though the bankers know him, they don't have lending authority from the conglomerates that own them. So what's John to do?

John has turned to the community for help. He invented "Comfort Dollars" that people can buy at a discount of 20%. If you spend $1000, you receive $1200 in Comfort Dollars that can be spent at the restaurant. John gets the cash infusion he needs to complete his expansion -- and for cheaper than the bank would charge him. The local community gets a 20% discount on food they would be buying anyway, as well as the chance to invest in making their town better. This is a 20% return on investment, payable as fast as the investor and his family can eat.

The Comfort Dollars scenario reveals just how much of the current mess has resulted from the way we "outsourced" our finances to begin with. The real problem underlying the global financial meltdown has much less to do with low efficiency, bad labor, or poor innovation than it does with the decreased utility of the financial industry itself. Money has stopped working properly -- at least in its capacity to lubricate transactions. The sad part is that money is working exactly as it was designed to.

Once we accept the fact that the money and banks we have grown accustomed to using are not the only ways to generate capital, we liberate ourselves and our businesses from a finance industry that has enjoyed a monopoly over our commerce for much too long. They have not only abused our trust through corrupt self-dealing, but abused their privilege through systemic usury. Businesses are only obligated to support their employees, owners, and customers -- not an entire finance industry.

The financial meltdown will help many businesses realize that their priorities have been artificially skewed towards making bankers and investors happy -- and their own communities less so. As we start to finance locally or from our own non-local communities, our services will become more finely tuned towards them as well. We will get better at what we do, rather than obsessed with growth (to pay back lenders) or financing (to achieve that growth through acquisition).

This is all good -- at least for businesses that have any remaining connection to a community or core competency. It will be possible to scale companies appropriately rather than to infinite expansion. It will be easier to take and share profits rather than watch them be extracted by last year's lenders. It will favor local and connected businesses instead of big chains operated from afar by corporations behaving as if it were still the 1500's and they had a royal imprimatur on their business license.

The future of business -- real business -- is bright as it has been for close to a millennium. It just might not be reflected in the Dow Jones Industrial Average for quite some time, if ever. That's because instead of earning money, we'll be creating value.