Aside from self-control, credit is Edelhart's primary monetary policy tool. Nearly 40% of his customers have credit lines in BarterTrust currency with interest set at the prime rate. By raising and lowering the rate it charges, BarterTrust can influence borrowing and spending, much like the Fed. In the past most exchanges based such decisions on rules of thumb, but Edelhart plans to consult with a high-powered advisory board, a kind of quasi Fed, that includes two past chairs of the Council of Economic Advisers.
Edelhart expects his investment in customer confidence to pay off in several ways. A strong economic track record, he believes, will draw large corporations away from corporate barter and into his exchange. Unlike retail exchanges like BarterTrust, which primarily serve the small-business market, corporate barter companies typically take title to customers' excess inventory as well as broker large-scale company-to-company deals. But barriers between corporate and retail barter are starting to fall as corporate barter companies like Icon International open online exchanges and as giants like Maytag Corp. sign up with BarterTrust.
Then there's the international opportunity. "While it is utterly natural for an American to wake up in the morning and see the government-backed money as a wonderful thing, that's not the case in many parts of the world," Edelhart observes.
Ultimately, Edelhart believes, trade dollars will become as natural a form of business-to-business settlement as letters of credit, credit cards, or cash. And one day soon, he hopes to hear people ask, "Are you going to settle this in cash or by wire transfer, in U.S. dollars or in BarterTrust dollars?"
Mary Kwak is a freelance writer based in Cambridge, Mass.
The Vast Swap of History
Barter is often called the world's oldest profession -- or the second-oldest, with a nudge and a wink. The barter-exchange industry, however, has been with us just 40 years. Bob Meyer, publisher and editor of BarterNews, traces its origins to "Mac" McConnell, president of a Los Angeles savings and loan. McConnell devised the system of debits and credits that allows exchange members to "trade." Business Exchange, the company he founded in 1960, floundered for nearly a decade. But in the 1970s, as proliferating computer power simplified matchmaking and record keeping, barter began to grow. By 1980, 280 exchanges across North America were handling an estimated $200 million in transactions.
Alan Zimmelman, executive director of the National Association of Trade Exchanges, describes the industry's youth as a free-for-all. "There were shysters, con men, everybody who would find this business attractive because you print your own money," he recalls. And fly-by-night exchange operators weren't the only ones with a casual approach to the law. Tax evasion was an important motive for at least a significant minority of customers. Some businesses failed to report trade dollars as income; others misstated the value of trades.
The turning point was the passage of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, which required exchanges to report all transactions to the IRS. Some exchanges lost large numbers of members in the wake of TEFRA. But the industry as a whole won the legitimacy it needed to grow. By 1998, North American retail barter, the type used by most small companies, had become a $1.6-billion business.
A Fistful of Hours
Start-up barter exchanges hope to make the world their oyster. Organizations that issue local currencies target the community as a pearl of greater price. During the past 20 years many nonprofits have created local currencies -- a spin on barter -- to help support small businesses in their communities. Those currencies promote economic diversity and direct local resources to local pockets rather than to global companies' vaults.
Most local currencies in the United States are modeled after Ithaca Hours Inc., a program launched in upstate New York during the 1991 recession. Ithaca Hours issues notes in several denominations, with one Hour equal to $10. A governing board meets monthly to assess the state of the system and make policy decisions. At the beginning of this year there were $40,000 to $50,000 worth of Ithaca Hours in circulation, and more than 1,000 individuals and businesses regularly accepted payment in Hours, either alone or in combination with cash.
Similar organizations -- some short-lived -- have sprouted up in 60 cities across North America and Europe, sponsoring currencies such as SEED (Mendocino, Calif.) and BREAD (Berkeley, Calif.). Outside the United States, LETS (Local Exchange Trading System) predominates. Unlike Ithaca Hours, LETS has no paper currency and no central-bank equivalent. Any member can create credit simply by agreeing to a sale, and all transactions are reported to a registry, which debits and credits members' accounts.
The LETS model is especially popular in the United Kingdom, where 450 groups claim more than 40,000 members. Currencies' names are colorfully localized: members in Canterbury reckon in tales; in Carmarthen, they tot up merlins; and in Edinburgh, reekies are the virtual coin of the realm.
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