Back in June of 2009, Uruguay embarked on a nationwide experiment with complementary currencies — a plan that evolved from a number of local trials of the alternative currency system in that country. The name of the currency is officially the ‘liquidity network”, but is known locally as the “charrua“.

It is painfully difficult to find any information about the system, but from what I can tell the new system resembles the Swiss WIR system. The WIR bank is an electronic exchange of debits and credits between businesses in Switzerland. There are currently over 70,000 small businesses that participate in the WIR Bank exchange, and it has proven to be quite countercyclical. The system allows small- and mid-sized businesses to lend to each other, with debts being backed by the production value and assets of the lender. Until recently, these loans were interest free. The effect of having a dual currency system is the outward macroeconomic stability of Switzerland’s economy. Indeed, the Swiss unemployment rate is only 4.5% (2010 est), which compared to the rest of the Eurozone is somewhat of a miracle.

The key difference between the WIR and the charrua is that the charrua will be accepted for all debts, public and private. This means that taxes will be payable in both pesos and charrua (and I believe in US dollars, as well).

All over the world similar systems already exist. In this case, the different element is that the administrator will be the State. It works as a network of payments through electronic debits and credits. To join the system the companies must request approval of the State Bank. From there on, the company will be assigned an account in the system. This company will be able to order the payment from its account to be credited in favour of a state organism or a private member of the network. Accounts will be balanced periodically and participants advised of their trading position.

This amount will be redeemable into national currency or used to pay for petrol or taxes. Bonomi said that this idea was presented to the National Association of Micro and Small business and to the Uruguayan Confederation of Cooperative Entities and other cooperatives, arousing great interest among them.

As far as I know, this is the very first complementary currency system with state backing on the level of duties to the state being denominated in the alternative currency, which is very exciting (if you’re a fan of complementary currencies). Also, this new financing mechanism will not add to Uruguay’s public debt:

The development of the network doesn’t create any costs for the country, since it was originated in cooperation with the STRO Foundation from Holland, which supplies the network model, known as C3 (Consume and commerce circuit). The name for the virtual money circulating through this payment scheme is called “internal liquidity”, although the technicians working on its development adopted a more native denomination: “charrua” (name of the Indians, that inhibited Uruguay before the colonisation, and who were completely exterminated, therefore it is ironic that the Uruguayans are called like that even nowadays, and more that this name it’s used as a icon of local identity)*.
However, in Uruguay STRO chose a new approach, which might also work out well for other C3s. Small businesses cannot obtain the same payment guarantees that large businesses receive. C3 Uruguay is going to work with a guarantee fund that will assure small businesses of payment on delivery in internal C3 money. In such case these small businesses do not have to wait for months until they receive payment and are therefore able to maintain their stock level. In the capital Montevideo, where over a half of the Uruguayan population lives, the same method of payment on delivery in internal C3 units to small businesses will be followed.

Also, the currency liabilities will be 100% guaranteed by the assets of the debtor. The level of debt will, of course be monitored and as stated above, be relayed to each member of the currency system periodically. Since transactions denominated in charrua will be literally zero-sum, the currency will work much like Say’s law. When businesses goes into debt, each business will be able to either produce more, save more, or consume less to balance its position — avoiding the fallacy of composition.

Operations would be 100% guaranteed and the system will allow access to low cost credit -around 10 to 12% to small business that aren’t currently covered by the traditional banking system. This will also improve competitiveness of this economic unit and its formalization will be stimulated, reducing administrative and transactions costs at the same time. This network won’t create inflation dilemmas, since the financing will be channelled towards production, which will broaden the supply of goods and services.

It will be interesting to see how this currency system evolves.

[H/T Tao of Money, Complementary Currency Magazine]

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To tie this in with the US a bit, I’m often very disappointed that the idea of complementary currencies are almost universally not taken seriously by my fellow right-wing, free marketers. They seem to view it as some sort of ultra-leftist conspiracy. On some level this is warranted. The ultra-left (but not State socialists) take to the idea of complementary currencies very quickly; and when they talk about the idea, it’s never about the economics. It’s alway in the context of some pseudo-philosophy that ties in with a larger lifestyle choice (which is really annoying for me, personally) . The right seems to like the idea of currency “competition” (although that’s a stupid concept), but doesn’t ever think that in a free market, currencies that do not have positive interest/are not defined by scarcity could (would?) arise. There seems to be a dichotomy between the limitless imagination that the right-wingers say “the market” has, and what they can imagine…and anything they can’t personally imagine, of course…well, you get the idea.

P.S. I’m going to try and find out some more information about this from some friends, I’ll keep you all posted!