Co-operative money and banking systems: Back to the Future

Ethical Markets Community Development Solutions, Ethical Markets Review

Pat Conaty – Co-operatives UK

New attempts to introduce local money systems can be seen with every serious recession or depression over the past two centuries. The 1820s, 1840s, 1870s, 1890s, 1930s and 1980s all kicked off monetary reform action – sometimes just confined to the locality level but considered during the 1870s and 1930s at the national level with the development of monetary reform parties in North America. Since the beginning of the banking crisis from 2007-08, there has been a revival and a growing level of interest in local currencies internationally. In some parts of the world these local money systems are developing growing links to local traders and in many regions of Europe, North America and South America, local government interest is growing in complementary currencies and community banking services.

In a growing number of market towns and city districts, local currencies based on paper scrip have developed like the Ithaca Hour and the Lewes pound – each linked to a local market town or city.  Links with credit unions and local banks are now being seen for the first time since the Great Depression.  For example, the Ithaca money is supported and promoted by the Alternatives Federal Credit Union in Ithaca, New York and a broad spectrum of local high street businesses and service providers are now active members. Just over the border in the western Massachussetts, Berkshares is the local scrip money for the Berkshire county and is supported and promoted by both local banks and business traders. Scrip currencies like these are now in circulation in Detroit, Washington DC and are developing in many other towns and cities internationally.

There are different social and economic types of currency models and most have has their earlier historical counterparts like the National Equitable Labour exchanges developed in England in the severe depression of the 1830s and the Time Store developed in Cincinnati, Ohio in the USA in 1828. It should be noted that most local currencies have begun with big ambitions but either failed or remained marginal and eventually withered away.

A brief review of this earlier history is important to see the current enthusiasm for local currencies in the broader context of what has gone on earlier and why these experiments remained experimental and did not become mainstream. Some schemes have been so successful that they were banned by central banks and their success influenced profoundly the thinking of the two leading economists of the 20th century, John Maynard Keynes and Irving Fisher. Indeed their respective monetary reform proposals to national governments drew profoundly from the practical success of co-operative money systems.

Local money, local banks and interest-free lending: 1775 to 1875

The industrial revolution led to a competition for precious metals. Coins became scarce between the late 1780s and 1820. Paper money issued by country banks in Great Britain developed rapidly to fill this gap and some cities introduced their own coins, like the Lady Godiva half penny in Coventry from 1792. During the Napoleonic wars the metal shortage became worse and the British mint stopped new coinage completely and did not resume production for 20 years until 1816.

The Bank of England also suspended the convertibility of £1 and £2 notes into gold from 1798 to 1821. These notes issued during this warfare period were simply printed and not based on any specie assets or interest-bearing bonds.

In the first half of the nineteenth century and as in other industrialising countries, local currency was commonplace in the UK and based upon about a thousand local banks. Each market town had a local commercial bank supported by local people and local traders and each bank produced its own local paper money to support the local economy. The local money was used to promote and support directly the local economy and to link up local businesses and farmers.  While the system was not problem-free at all, local money helped promote the economies of market towns and cities and was a source of pride. However in England this local exchange and trading system was phased out from 1844. Over the next 60 years this curtailing of a connection between local money and local banking was a factor underlying the steady demise of the local British banking sector and in the twentieth century a growing number of mergers led to the emergence of a powerful oligopoly of a handful of global banks dominating the national UK market. So how did this change take place?

The early nineteenth century country banks were private banks supported and capitalised by industrialists in major cities and towns outside London. Their paper money from ten shillings to £1 was based on fractional reserve practices and debt based. Their notes were convertible to Bank of England notes at a discount. Local paper money became widespread but during the depressions of 1816-19, 1825-31 and 1835-42, there were a number of bank panics. These reoccurring bank failures and fears about inflation led to the Bank Charter Act of 1844 that removed the production rights of any new issue of local paper money from banks in England and Wales and transferred national currency provision exclusively to the Bank of England.

Prior to this change, the early Co-operative movement experimented to try to develop an interest and debt free co-operative money system based on the Labour theory of value (the then conventional theory of value by economists from Smith to Ricardo). Indeed Adam Smith in the Wealth of Nations called for the usury laws of the UK to lower the maximum interest rate to 5% as he argued that charges above this level would be excessive and extract value from enterprise and impact adversely on the market economy.

During the 1816-19 depression, Robert Owen, a successful industrialist in his own right, set out his vision of Villages of Co-operation and Mutual Unity. While not moving MPs to action, the Owen’s proposals for land, money and corporate reform inspired the development of the Co-operative movement in the UK and the USA. A key monetary reform element of this vision was the labour note, an alternative to debt based bank money with an hour as a new standard of value.  Owen worked with Josiah Warren in the USA and Warren developed the first time based currency linked to the exchange of locally produced goods. The Cincinnati Time Store opened in 1827 and operated relatively successfully until 1830 as a retail store with a 4% to 7% mark up on goods priced in the labour involved in production.

Owen returned to England in the late 1820s and led the development of the National Equitable Labour Exchanges which were set up and operated from 1832-33 in London and Birmingham. Like with the Cincinnati Time Store, Labour money was denominated in hours of work and the labour exchanges operated as warehouses for goods sold in units of time. The difficulty with time as a unit of value is that it is not a standard measure as the skill level, effort and capacity of people varies with training, age, experience and effort.  Additionally the warehouses had high development and transaction costs for storage, insurance, staffing etc and as co-operative businesses they did not prove to be viable. A decade later this early co-operative shop system was succeeded by the consumer co-op model developed by the Rochdale pioneers in 1844. The ingenious quarterly ‘divi’ system of this model drove the early development of the co-operative movement internationally.

The vision of a co-operative money system, not based on interest, continued for a time. There was reason to believe that this vision could be secured as there were indeed a growing number of interest-free lending organisations operating successfully during this period in Great Britain and Ireland – including the popular terminating building societies for buying land and building houses. By 1870 there were about a thousand terminating building societies and they had become the lead provider of mortgage finance for skilled working class people before being eclipsed by the modern building society that catered for the growing middle class.

Dating back to the first ones developed in Birmingham and the West Midlands from 1775, terminating building societies were mutually owned rotational savings clubs that ensured that all saver members who continued to save, eventually secured an interest free loan to buy a plot and build a house. For both housing and smaller loans, Starr-Bowkett societies were introduced in the depression of the 1840s by Dr. Thomas Bowkett in London, spread fast and operated on a co-operative basis, until they made illegal in England in the late 19th century because of the lottery prize aspect. Starr-Bowkett societies remained popular and developed in Australia until the mid-20th century.

In analysing the causes of depression in the 1830s and 1840s, John Stuart Mill was the first economist to explain the credit crunch. He showed that the solution to a business downturn required the freeing up of access to capital at an affordable price to small businesses. Mill became a strong advocate for the growing co-operative movement from 1844.

From 1845 there were a growing range of advocates for a mutual banking system that should be operated on a fee rather than an interest-charging basis. As Owen had called for, the early co-operative movement sought an interest-free banking system. As an alternative to the widespread fraud in the American free-banking system (not requiring a license to trade in some states), Josiah Warren, Edward Kellogg, Lysander Spooner and William Greene in the USA advocated and developed proposals for a mutual banking system.  President Lincoln noted Kellogg’s ideas and used interest-free Greenback dollars to fund the civil war.  To push for monetary reform, the US Greenback Labor Party was formed in the 1870s to seek to end the practice of debt based money creation by banks.

By the late nineteenth century a mutually owned and interest-free banking vision had not been realised and the terminating building societies either remained small or evolved into permanent building societies based on interest charging practices. The Starr-Bowkett societies and their equivalent were being eclipsed in many European countries by credit unions based on the two popular German models or Trustee savings banks as in the UK, or the growing number of municipal savings banks in other countries. Though either mutually or publically owned, all these systems had begun to conform to the traditional private banking model that paid interest on savings and charged interest on loans. However a few leaders in the co-operative movement held out hope for a robust mutual banking model not based on compound interest systems.

Silvio Gesell, a successful German business owner in Argentina, during the depression of was the 1890s, he drew inspiration from the mutual banking pioneers in Europe and sought a solution to the impediments faced. He was a student of history and he worked out a design solution from the local ‘renovation monetae’ practices under the German state of the Holy Roman empire. The local currency in these principalities was known as ‘bracteates’ or black money. In the middle ages, long distance trade was based mainly on silver coins while local trade utilised duller metal coins that quickly turned black.[1] These coins were time-limited and reminted, always when the sovereign died but usually every five to six years – and in some cases, several times a year. The bearer forced to surrender the coins would get back commonly three new coins for every four coins. The medieval bracteates and a similar mereaux coin system in France were common from the 12th century and lasted well into the 15th century. Both are said to be the first demurrage (ie. depreciating) form of metal money. Depreciating money was in any case the historic norm as money based on grain, spices, tea, tobacco and other consumable commodities subject to rot, had been and have been used as common specie forms of currency well into modern times.

To revive and adapt this long-forgotten system, Gesell devised a unique way of overcoming the difficult challenge to secure the financial sustainability of mutual money systems. As a successful businessman oriented to co-operative thinking, he was keenly aware of the social injustice of the interest rate system. His inspiration was economic, not simply moral. He believed interest rates had a negative impact on the economic efficiency of markets, underly the phenomenon of credit rationing by banks and that they were unjust because they misallocated capital by making the rich, richer and the poor, poorer.

His theoretical rationale was compelling. He questioned why when everything in life wears out and dies why money is expected to grow and persist in ‘God-like’ ways forever. Clearly money based on debt and the charging of interest runs counter to the reality of life forms on the planet. To fix this monetary and banking design flaw, which Gesell regarded as a dead weight on local economies, small enterprises and the efficiency of markets, required in his view a money system that mimicked nature.

The first step was to get rid of the idea that money was equivalent to a precious metal.  The second step was to separate the unit of money, say a pound or a dollar, from the paper, or scrip, that represents it. Gesell therefore logically proposed that money should ‘decay’ over time rather than increase, just like everything else does. To achieve this, his proposed ‘natural economic’ device was a negative interest charge. Thus like other experiments by Warren and Owen, Gesell’s co-operative money would depreciate and lose its value over time.

To put this idea into practice, he recommended a negative interest charge of 0.1% per week being 5.2% per year. If money lost this much value annually, Gesell forecast that it would become a pure medium of exchange. Why hoard it when it is no longer a store value. Gesell called his idea Freigeld (free money): free of interest, stable and democratically accountable, if effectively managed locally. He suggested such a currency would be much less risky in terms of either deflation or inflation and would end both credit rationing and the boom-and-bust cycles of market economies as it could be given away.

In 1929, just a few months before he died and the Great Depression, two of Gesell’s supporters supplied a distressed business owner with a Freigeld loan of 50,000 “WÄRA”  (the German name of the Gesellian money) to revive a flooded coal-mine in the small town of Schwanenkirchen, in Bavaria. The owner used the currency to pay 90% of his miners’ wages and, importantly, he persuaded the shopkeepers and local service providers to accept the currency; after all, it was backed by coal from the mine.[2]  The fee charge was stated to be a “storage” cost for the coal into which the money could be redeemed.

The effect was dramatic. While the Great Depression began throwing people out of work across Europe and North America, the coalmine was revived. The workers bought and exchanged goods and the town began a rapid revitalization, all fed by the rapid circulation of a currency that would lose 5.2% of its value within a year. Word spread fast and over two thousand corporations across Germany began to deploy similar methods to revive their operations. But to no avail; the central bank felt threatened and, in 1931, it declared all such “emergency currencies” illegal despite a German Court decision that the money was in fact legal as it represented a presale of goods sold by the issuer.

However “stamp scrip” currency had by then begun to jump borders to Denmark, Austria, America and Britain. Worgl, a small town in Austria introduced a Gesellian currency in 1932. Desperate to rein in an unemployment rate of over 30%, the town mayor issued 40,000 “free schillings”, by using them to pay 50% of the salaries of municipal staff .[3] Fully backed by the Austrian currency, the free schilling was free of interest but not free of charge. Every month, the holder of free schillings had to go to the town hall and get a stamp affixed to the back of each note to revalidate it. The stamp reduced its value by 1% every month, 12% per year, which was more than double the 5.2% Gesell recommended. People in Worgl scrambled to spend their scrip even more quickly than in Schwanenkirchen.

In the first year the Worgl currency changed hands thirteen times more than the Austrian schilling did the year before. Debts declined. Demand for credit fell. To avoid the monthly devaluation, holders of free schillings opted to pay for work in advance, to order goods and supplies, to repay debts, to settle accounts, and to pay off taxes. Everyone was a beneficiary. It was a benefit to householders, businesses and the municipality .[4] Within the first year new homes were built, others repaired; municipal buildings were improved and repainted; streets were repaved; a reservoir, bridge, and ski jump were built and forests were replanted. Public works expanded fast and unemployment ended.

A year later 200 Austrian towns were gearing up to adopt the reform. However, just as in Germany; the central bank declared the free schilling illegal. Tragically in 1934, the unemployment rate of Worgl soared back up to over 30%.

In the early years of the Great Depression in the USA, barter exchanges similar to those in England in the 1830s developed with warehouse receipts used for money. By late 1932 there were over 400 similar projects across the USA and over one million people involved. The success of the Gesellian money experiments in Europe caught the attention of Arthur Morgan in Ohio and Charles Zylstra in Iowa. They both initiated American models of stamp scrip. Morgan’s model followed closely the Worgl system but Zylstra’s money had no specified stamp date to renew the money and it relied on users paying the stamp for each transaction. This slowed down the velocity of the currency completely because it did not discourage hoarding.

20 projects were initiated in 1932 but most followed Zylstra’s model with the poor design and were not successful. The Morgan approach and a similar one in Reading, Pennsylvania replicated the Worgl model, worked well. This Gesellian system was strongly supported by the renowned American economist and developer of the quantity theory of money, RPI and Net Present Value, Irving Fisher. He thought Gesell’s ideas were an esssential emergency currency remedy for tackling in root and branch ways deflationary impact of the Great Depression and the credit crunch that was growing because banks were not lending to small and medium enterprises.

In late 1932, local money using Gesell’s system was already being used in a number of local American towns. Inspired by Fisher proposals, a bill was prepared for Congress to create $1 trillion of ‘stamp scrip’ in 1933 as an emergency currency to ‘stamp away the depression.’ It was proposed that the scrip money be distributed to each US state based upon the population size and that half be used for reducing unemployment and half to finance infrastructure.[5] It is interesting to note that Fisher’s calculated sum of negative interest money to reboot the US economy 80 years ago is indeed the same level of Quantitative Easing (QE) introduced by President Obama. However unlike QE, the Gesellian system targets precisely, in a decentralised way, the liquidity needs of small businesses. In 1844 John Stuart Mill had analysed this bank credit rationing issue in a depression and the critical need for innovative ways to kick start new lending. Fisher indeed references Mill in his ongoing work to reform the US money and banking system throughout the Great Depression.

In Fisher’s ‘stamp scrip’ proposals, each Free-Money note would be good for one year.[6] For a $1.00 note to remain valid the holder had to affix to it a two-cent postage stamp every week. After 52 weeks the sale of stamps would have generated for the Post Office $1.04 for each $1.00 note. It would then redeem the “Stamped Scrip” for ordinary money and retain four cents to cover its costs. Such time-limited currency, Fisher argued, would not cause inflation because it was designed to be self-liquidating each year.

Fisher produced a book to help local communities set up stamp scrip and by early 1933 large cities like St. Paul, Minnesota, the state of Iowa and hundreds of small towns were gearing up to issue their own self-financing, stamp scrip money. President Roosevelt, so willing to try new things, decided not to include Fisher’s reform in his New Deal. Advised by Harvard Professor Russell Sprague that the American monetary system was in danger of being democratised rapidly and the government might lose control, Roosevelt banned the issuance of any new stamp scrip in March 1933.[7]

Stamp scrip revival in the 21st century and new experiments

One key legacy inspired by Gesell and still expanding is an interest-free checking account system that allows businesses and other members to trade goods and services without cash. It began in the Great Depession in Denmark by the JAK co-op banks but was shut down in 1935. However it inspired a group in Switzerland at the time and this interest-free working capital system lives on in Zurich, Switzerland, where the WIR bartering system, adapted from JAK ideas in the 1930s, provides low-cost inter-trading and mutual credit of $2 billion annually for over 75,000 small businesses. This second experiment proved to be more enduring: an interest-free savings-and-loan system aimed at helping its members refinance expensive bank loans and avoid future credit crunch spasms at fee rates of 1.5% to 2.5% for provision of liquidity through a complementary currency system for members of the WiR (the ring). Recent developments in Germany are seeking to develop these local liquidity networks and they are drawing in the support of social and co-operative banks to help expand the service provision and enable the move to be made from the local to the regional.

This effort began in 2003 with an attempt to revive stamp scrip in southern Germany, in the towns of Rosenheim and Traunstein – only 30 miles across the border from Worgl in Austria. The currency called Chiemgauer (named after the local region of 500,000 people) is denominated in 1 to 50 units like the Euro and promoted by four co-operative banks and 40 issuing offices.[8] It has a two-year life and is renewable four times a year for a 2% charge. The development process of the currency was slow but it is now gaining growing support and is accepted by 600 businesses (including eight supermarkets) and used regularly by 3000 people. Annual turnover reached  5.1 million in 2010 and it has now become the world’s most successful local currency with a local turnover annually 2.5 faster than the Euro.

The Chiemgauer currency developer, Christian Gelleri, has followed closely the Worgl design features and the guidance from Irving Fisher. A key difference is that the currency is available both as stamp scrip notes and as electronic debit card money. The pre-loaded debit card facility has been provided by a group of four co-operative banks in the region including Triodos. An additional feature introduced are micro-credit, interest-free loans to local businesses from another supporter, the GLS co-operative bank.

The success of Chiemgauer is now spreading to other areas of Germany and there are 36 similar projects under development through the national Regiogeld network. In the USA, the use of debit cards to support local currency reduce transaction costs and to help small business traders is growing. There are several projects like this in northern California including the Sonoma Go Local card and the Oakland Acorn backed by the city government.

Fisher’s backing for stamp scrip was to tackle the rising levels of unemployment in the USA and the disappearance of liquidity in growing numbers of American towns and cities. A similar circumstance arose over a decade ago in South America.

In the wake of the national debt crisis of Argentina in 1999 when the banks froze the funds of depositors, a grassroots social currency system, Red de Trueque, developed. Following the collapse of the national currency the social currency operated as an emergency currency, providing a third of the country with a means of exchange.[9]

Inspired by this success, more than 50 community banks in Brazil have developed their own local social currency based on the original Banco Palmas system established in 1998.[10] The Palmas money is issued into circulation to fund community infrastructure. The community development banks make loans to small business and to households with a mixture of social currency and co-operative microloans. The aim of the currency is to alleviate unemployment and poverty in different local areas and these currencies have now secured support from the national government and the central bank of Brazil.

Emergency currencies like this are springing up in southern Europe. In the midst of its debt crisis, a LETS network in Greece is developing called TEM. In the USA, a small business trader in California fed up with the new bank charges announced by Bank of America in September 2011 has supported the movement under development over the past year by Community Development Finance Coalition organisations to offer an alternative banking option to local people and local small businesses. The call for action in California has begun to snowball. During October 2011, over 650,000 Americans have opened up new credit union accounts in just one month. The Move Your Money campaign to support the mutual banking sector in the USA is growing in momentum and has attracted over two million people to shift their money to credit unions or community development banks over the past two years. A Move Your Money Campaign has just started up in the UK.

So what about the prospect in the UK? The need is obvious. Since November 2011 the Coalition Government has signalled the beginning of the second credit crunch. New bank lending in 2011 to small businesses was less than loans repaid. The cost of working and investment capital is high with a large margin between base rates and commercial loan rates. The latest Quantitative Easing by the Bank of England injects a further £50 billion into the economy but the previous two bouts of QE have not filtered down to meet the needs of small businesses in the direct way that a modern electronic version of Gesellian money could.

In the past it has been local co-operative banks in Britain, Germany, Austria and Denmark that have driven these reforms. There are hundreds of credit unions and over 70 community development finance institutions that could drive this change. With support from social banks like the Co-op, Unity Trust, Triodos and Charity Bank, a national system could be obviously co-designed and co-developed. So what is stopping us?




[1] Boyle, D. (2009) ‘Economic Thought in the Middle Ages’ in The Idler, No.42, Idler Books.

[2] Lietaer, B. (2001) The Future of Money, Century.

[3] Ibid.

[4] Only national businesses (the post office and the railway) refused to accept the free schilling.

[5] Turnbull, S. (2009) ‘Remaking the economy’, On Line Opinion, 18 March 2009.

[6]Turnbull, S. (2009) “Options for Rebuilding the Economy and the Financial System” available at

[7] Douthwaite, R. (1996) Short Circuit, The Lilliput Press.

[8] Palmer, J. and Collinson, P. ‘Goodbye euro, hello chiemgauer’ The Guardian Money, 24 September 2011.

[9] Luna, M. 11 January 2011 ‘Local money creates wealth outside the bubble’,