= proposed global reference currency (by Bernard Lietaer)
"According to Lietaer in his influential The Future of Money, there is a four-tiered monetary system for the future. People and businesses will routinely and comfortably deal in this multiple currency system, just as we today use all kinds of value cards, air miles, vouchers, credit and debit cards and virtual currencies in the course of our lives.
The first tier of this monetary structure would be a ‘global reference currency’, which is not linked to nation states as such. This currency, which is what the Terra is supposed to evolve into, is there to provide a steady reliable type of money that can be used for international trade. The Terra will be based on internationally traded items like gold, copper, and wheat. It appears that Lietaer believes that this kind of new world currency could morph into being from various corporate scrips used in cashless trade between businesses today.
Apparently, in the US, 400,000 businesses are linked to about 700 barter exchanges, which results in $8.5 billion in cashless trade. It seems that this kind of trade rips along at 15% a year, three times the speed of dollar commercial exchanges.
A second tier in this monetary structure would be, for example, certain multinational currencies utilized by what would be deemed as geopolitically-close countries. This could include say the NAFTA dollar, the Euro, and an ASEAN (the 10-member Association of Southeast Asian Nations) currency.
On the third level, we have some remaining national currencies which run within or outside the multinational currency regions. But this time, individual states no longer have the monopoly in issuance of currency.
At the fourth level, we have CCs/new money as has been discussed. To Lietaer, these CCs could have an expanded role and greater influence, as they may be widely used and exchanged through community internet clearing houses. The Terra, as it is envisaged now, would have evolved from this category. What we need to look at in some detail is what the Terra is and how this may affect its future as a world reference currency.
The Terra is a CC that would be issued by a nation’s central bank. As outlined by Lietaer in his seminal “A ‘Green’ Convertible Currency”, what we will have is a “commodity-based currency, [for ] a…New Currency backed by a basket of from three to a dozen different commodities for which there are existing international commodity markets. For instance, 100 New Currency could be worth 0.05 ounces of gold, plus 3 ounces of silver, plus 15 pounds of copper, plus 1 barrel of oil, plus 5 pounds of wool.”
This CC/new money is therefore backed by the valuation of the commodities in the basket at the value of the national currency of the society it originates from. So in the US, the value of the basket, in terms of USD, will determine the exchange rate between those trading in USD for the Terra in America.
Once again, we need to understand that the Terra works in tandem with the national currency and is not a new money that supplants everything else in its wake. As the Terra TRC (Trade Reference Currency) White Paper by Takashi Kiuchi, Chairman of The Future 500, states:
“The Terra is designed as a complementary currency operating in parallel with national currencies. Therefore, everything that exists today as monetary and financial products or practices continues to exist. The Terra mechanism is only one additional option available for those international economic actors who voluntarily choose to use it.”
Of course, this may advance into the more generic realm of the four tiered monetary structure put forward by Lietaer. So the Terra would be used as a complement in international trade alongside national currencies. The idea being to not only provide an alternative, but wean nations away from relying on conventional currencies which are fiat money subject to the swings of money markets and the designs of central banks and politicians." (http://sanjayperera.blogspot.com/2008/05/money-beginning-of-end-synthesis-part-3_30.html)
Lietaer excerpts from the THE TERRA TRC WHITE PAPER. Bernard Lietaer, 2004.
"The Terra is a complementary, privately issued, demurrage-charged, Trade Reference Currency, that is backed by an inflation-resistant, standardized basket of the dozen most important commodities and services in the global market.
The Terra Characteristics
Complementary Currency. The Terra is designed as a complementary currency operating in parallel with national currencies. Therefore, everything that exists today as monetary and financial products or practices continues to exist. The Terra mechanism is only one additional option available for those international economic actors who voluntarily choose to use it.
Private Issue. The Terra will be issued as an inventory receipt by the Terra Alliance, a private, non-governmental initiative with an organizational structure that is open to all newcomers meeting certain pre-established criteria (organizationally similar to that of the Visa credit card system). Such inventory receipts are issued for the value of the commodities sold to the Terra Alliance by producers of those commodities that are components of the Terra Basket. As a private initiative this does not require governmental negotiations or international agreements. From a legal and taxation viewpoint the Terra is simply a standardization of countertrade. And legislation for countertrade exists already in practically all nations around the world.
Trade Reference Currency. The Terra is backed by a standardized basket of the most important commodities as well as some standardizable services traded in the global market. Though conceptually similar to a fully backed gold standard, the Terra backing would consist not of one single commodity, but a dozen of the main international commodities, including gold. Since it is fully backed by a physical inventory of commodities, it would be a secure, very robust, and stable mechanism for international contractual and payment purposes.
Demurrage-Charged. The Terra is a demurrage-charged currency. A demurrage charge acts like a parking fee, incurring a cost over time to its holder. The cost for holding onto the Terra currency is estimated at 3.5%-4% per annum and corresponds to the costs incurred for storing the physical commodities included in the Terra basket. This demurrage charge insures the currency’s use mainly as a planning, contractual and trading device: it would not be hoarded but always tend to remain in circulation. It would thereby strongly activate commercial exchanges and investments wherever it circulates. In short, the Terra purposely fulfills only two of the three traditional monetary functions. It is designed to serve only as unit of account and medium of exchange, and not as a store of value.
Inflation-Resistant. The Terra is designed as an inflation-resistant currency by its very composition. Inflation is always defined as “the changes in value of a standardized basket of goods and services.” By selecting the appropriate ingredients to be placed in the basket, the Terra can be protected against inflation. For example, the composition of 100 Terras could include 1 barrel of oil, 5 bushels of wheat, 10 pounds of copper, 3 pounds of tin plus…1/10th ounce of gold, 1 Carbon Emissions Right, etc.
Practical Operations of the Terra
The following scenario and accompanying diagram walks through the key elements that are involved in the Terra mechanism--from the creation of Terras to their final cash-in.
(1). The Terra Creation Process.
(1a.) Excess Inventory Sale. The process whereby the Terra Trade Reference Currency is created begins with the sale of some excess commodity inventory to the Terra Alliance by one of its backer/members (e.g., 1 million barrels of crude oil by an oil producer). .
(1b). Commodity Valuation in Terras. The value of this sale of oil to the Terra Alliance (i.e., how many Terras the one million barrels of oil will be worth) is calculated at market prices. This is accomplished by determining the commodity prices at the time of the sale for both the inventory in question (in this case oil) and the sum of each of the commodities in the Terra basket using a pre-agreed-upon procedure.
The formula used to calculate the commodity valuation in Terras is:
(Commodity value per unit X number of units) : Terra Unit Value = Terras
Let us assume that in our example that the commodity price for a barrel of oil at the time of the sale is $20. The commodity prices for each of the items in the Terra Basket at the time of the sale (i.e., copper, grains, lead, one unit of Carbon emissions rights, etc, including oil,) totals $200. Let us further assume that one million barrels of oil are sold. Therefore, 100,000 Terras are created:
($20 per barrel of crude oil X one million barrels) : ($200) = 100,000 Terras
(1c). Inventory Balance. The Terra Alliance rebalances its portfolio to take into account the inclusion of the 1 million barrels of oil. This may be accomplished through future market transactions or through spot transactions.
(1d). Terra Creation. The Terra Alliance credits the oil producers’ account with 100,000 Terras. (note that all Terra currency movements in the diagram are denoted by the thicker continuous arrowed lines).
(2). Terra Circulation among Users. Once the Terra is created, it enters into and may remain in circulation for a period determined entirely by users. For example:
(2a). First User -- The oil producer may decide to pay one of its suppliers (e.g., a German engineering company for the construction of an off-shore rig). It may pay partially or completely in Terras for this project.
(2b). Other User(s) -- The German engineering firm in turn decides, to purchase specialty steels from a Korean steel mill, and may decide to pay partially or completely in Terras. The Korean steel mill in turn uses the Terras to pay a mining company in Australia, etc.
(2c). Last User — Each Terra remains in circulation for as little or as long as its various Users continue to use this currency (from one to an infinite number of transactions and without any particular date of expiration). The process comes to an end only when a particular User determines to cash in the Terra(s), in effect, becoming the Last User.
Throughout the circulation life of each Terra(s), from its creation to its final cash-in, a demurrage fee of 3.5-4% per year is in effect. Demurrage is a time-related charge on money. This demurrage fee acts in a similar manner to a rental fee, the charge increasing the longer the rental is held onto. Anybody holding the Terra would be charged the demurrage fee in proportion to the time it is held. The demurrage is estimated at 3.5% to 4%, so the cost of holding it for a few ays, or even a few months is still low compared to today’s normal international transactions costs. Because the Terra exists only in electronic form, it is easy to know exactly how much time has elapsed between the moment a user receives the Terras and when it is transferred to someone else.
The demurrage charge serves two key functions: it serves as a circulation incentive; and covers Terra operational costs:
• Terra Circulation Incentive. The demurrage charge is designed as an incentive to keep the Terras circulating in a timely fashion from one user to another. As the Terra demurrage charge increases the longer it is held onto as calculated below. Thus, the demurrage charge insures the Terras’ usage as a mechanism of exchange and not as a mechanism of storage
• Terra Operational Cost Coverage - The Terra demurrage charge(s) is calculated to cover the costs of the entire operation of the Terra mechanism (e.g., storage costs of the basket, administrative overhead, transaction costs in the futures markets).
The demurrage fees for a particular Terra transaction may be calculated by the following formula:
(Terra Operation Costs/time unit) X (Terra holding period) X (Terras on account) = Demurrage Charge
Let us assume that the Terra operation costs are evaluated at 3.65% per year, or 0.01% per day. Let us further assume that the German engineering firm (First User in our diagram) received all 100,000 Terras from the oil producer and has kept these on account for a period of 10 days (prior to paying the Korean steel mill in transaction 2b in our diagram).
Thus, the demurrage charge (represented by the dotted blue line) in Transaction 2b would be calculated as follows:
0.01%/per day X 10 days X 100,000 Terras = 100 Terras
4. Terra Cash-In
The circulation (and existence) of a particular Terra comes to an end when one entity (designated the Last User in our diagram) decides to cash in part or all of its Terras (for example, to pay its taxes and/or payroll and requiring national currency to do so.
A transaction fee (proposed at 2% of the amount of Terras cashed in) is charged. This transaction fee serves two purposes:
• Terra Circulation Incentive The transaction fee is designed as an incentive to keep the Terras in circulation and to not cash in its Terras too readily, thus continuing the beneficial effects of the circulating Terras. In effect, the 2% transaction fee requires any entity in possession of Terras to make the following consideration: “Cashing in the Terras now will cost me the same as paying the demurrage fee for more than six months (assuming a demurrage of 3.65% per year). It is likely that I will be able to pay someone at least partially in Terras over the next six months. After all, most suppliers would rather be paid earlier than later….”
• Cash-In Operational Costs. When the Last User decides to cash in its Terras, the Terra Alliance sells the necessary volume of commodities from its basket to the commodity markets in order to obtain the necessary funds in conventional currency. The Terras are thus handed into the Terra Alliance (4a) and converted to either national currency or a volume of Terra commodities (as determined by the Last User) to the amount equal to the value of the Terras cashed in minus the transaction fee (e.g., 2 %).
The cash-in may take place directly with the Terra Alliance itself or by means of an intermediary bank for example as any foreign exchange transaction today. (4b)
5. Reference Currency
Once the Terra mechanism is operational and the advantages of using an inflation-resistant international standard is known, there is nothing to impede two entities (User X and User Z in the diagram) that may have no direct involvement in the Terra mechanism to denominate contracts in Terras, even if the final settlement may happen in the corresponding value in conventional currency. The Terra, in this instance, functions purely as a Trade Reference Currency, a reliable standard of value. This is similar to the gold standard days when two parties agreed on contracts denominated in gold, even if neither party owned gold or had any involvement in gold mining or processing. The only significant difference with the Terra is that, again, it is backed not by one commodity (i.e., gold) but by a dozen or so commodities and services (i.e., the Terra basket) making it more stable a reference than the gold standard."
BENEFITS OF THE TERRA
The Terra Initiative addresses each of the major economic and financial concerns mentioned earlier, and offers both general benefits and specific benefits to particular interest groups. General and specific benefits will be examined next, followed by an analysis differentiating the Terra from all other proposals and initiatives aimed at redressing present monetary concerns.
General Benefits of the Terra
The Terra mechanism, by virtue of its demurrage charge and being inflationary-resistant, endows this trading instrument with three unique economic advantages.
• It provides a robust international standard of value. • It counteracts the boom/bust fluctuations of the business cycle, thereby improving the overall stability and predictability of the world’s economic system. • It realigns financial interests with long-term concerns.
Robust International Standard of Value
The Terra would provide a robust international standard of value, something that has been missing for decades. Since it is fully backed by a physical inventory of not one, but a dozen or so of the world’s most important commodities, including gold, the Terra would be a very robust and credible payment unit that offsets volatility and currency risks.
This robust standard of value benefits commerce as follows:
• Lowers costs by reducing the need for expensive hedging countermeasures; • Enables greater opportunities (including investments in developing countries) by providing stable alternative mechanisms by which to conduct commerce; • Offers a dependable, cost-effective reference mechanism for global trade.
The Terra automatically tends to counteract the fluctuations of the business cycle, thereby improving the overall stability and predictability of the world’s economic system.
When the business cycle is weakening, corporations customarily have an excess of inventory and a need for credit. The excess inventories can now be sold to the TRC Alliance (who would place these inventories into storage). The TRC Alliance would pay for these inventories in Terras, thus providing corporations with a means of payment (typically, less readily available in this part of a business cycle). These corporations would immediately spend the Terra’s, to pay their suppliers, for example, so as to avoid the demurrage charges (whose holding costs accumulate over time). Suppliers, in turn, would have a similar incentive to pass on the demurrage-charged Terras as a medium of payment. The spread of this currency (with its built-in incentive to trade) would automatically activate the economy at this point in the cycle.
On the contrary, when the business cycle is in a boom period, demand for goods and services goes up and both suppliers and corporations have an increased need for inventory. The Terras would now be cashed in with the TRC Alliance for a 2% transaction fee, and the now needed inventories would be taken out of storage and delivered to the respective commodity markets to obtain the conventional currency required. This would also reduce the amount of Terras in circulation when the business cycle is at its maximum, counteracting an inflationary boom phase.
None of this is theory. There is now quantitative proof that the availability of a complementary currency designed for business use spontaneously tends to stabilize the business cycle and the overall economy. Detailed analysis on the WIR system, a complementary currency program in use for more than 50 years in Switzerland, provides the relevant evidence.
In summary, the Terra-denominated exchanges would stabilize the business cycle by providing additional monetary liquidity that counterbalances the pattern observed in the money-creation process of conventional national currencies.
Realignment of Financial Interests with Long-term Concerns
The demurrage feature of the Terra would provide a systematic financial motivation that realigns financial interests with long-term concerns. This is in direct contrast with what happens today with conventional national currencies. The discounted cash flow of conventional national currencies with positive interest rates systematically emphasizes the immediate future at the expense of the long-term. The same discounted cash flow with a demurrage charged currency produces the exact opposite effects. The use of the Terra for planning and contractual purposes will therefore reduce the conflict that currently prevails between the stockholder’s financial priorities and the long-term priorities of humanity as a whole."
Specific 'group benefits' are discussed in the Whitepaper.
Differences with Earlier Proposals
"The Terra is a commodity-basket currency. For more than a century, there have been several proposals for commodity-basket currencies by a series of well-known economists. The main reason why they have not been implemented is not due to a technical fault of the concept, but rather because they were aiming at replacing the conventional money system. Such replacement would have put in jeopardy powerful vested interests. This is not the case with the Terra proposal.
On the contrary, the win-win strategy underlying the Terra mechanism includes the financial sector as well. Anything that exists under the current monetary modus operandi would remain in operation after the introduction of the Terra, as it is a complementary currency designed to operate in parallel with the existing system.
Finally, as stated earlier, the political context for an international monetary treaty has not been available. The Terra avoids this pitfall by relying on private initiative. From a legal or tax standpoint, it would fit within the existing official framework of countertrade, and not require any formal governmental agreements to make it operational.
The other conceptual difference and perhaps the most important one between the Terra proposal and all previous proposals is the introduction of the demurrage concept. The fact that the storage costs of the basket would be covered by the bearer of the Terra, resolves the inherent problem that previous commodity proposals were facing, namely: Who will pay for it all?
The Terra mechanism is a win-win approach for all participants in the global game, and that is why it can succeed where other proposals for monetary innovations have failed in the past."
For those interested in keeping informed on the developments of the Terra Initiative, please consult www.terratrc.org. For more information contact: [email protected]