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Beyond The Limits Of Cash or Credit

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Simple One-to-One Exchanges Will Give Way to Organized, Computerized, Multi-Lateral Barter

The following article was written for World Trade magazine by BarterNews editor Bob Meyer.

In late August the world's economic leaders met for an annual policy conference in Jackson Hole, Wyoming. Alan Greenspan was there, as were the heads of the central banks of Britain, Japan, and 26 other countries.

One of the attendees, Mervyn King, Deputy Governor of the Bank of England, ruminated on the impact of electronic commerce and the future of money. His conclusion, quoted below, will be startling to some, yet obvious to others--particularly those engaged in the commercial barter industry, which I've been covering for 20 years.

"There is no reason products and services could not be swapped directly by consumers and producers through a system of direct exchange--essentially a massive barter economy.

"All it requires is some commonly used unit of account (trade dollars) and adequate computing power to make sure all transactions could be settled immediately.

"People would pay each other electronically, without the payment being routed through anything that we would currently recognize as a bank. Central banks in their present form would no longer exist--nor would money."

International business growth coupled with today's blistering technological change, means it's only a question of time before electronic commerce impacts the role of money, inasmuch as companies of every size look for easier, more efficient ways to facilitate their business efforts.

Mr. King's suggestion of electronic barter payments would make international business considerably easier for many, as it would negate today's struggle to acquire sufficient U.S. currency--which is still the unit of exchange in the majority of international transactions. Barter is used because foreign trading partners don't have, or don't want to use, their limited hard currency to buy products and services from the sellers.

Unfortunately, today's international mode of bilateral one-to-one barter is very tedious and restrictive. The foreign entity uses the U.S. company to, in effect, become their defacto marketing arm. Additionally, growing nationalism often requires an "offset" component be added to the transaction. The buyer's country dictating, "If we give you this (sale) business opportunity, you will be expected (or required) to bring back business to our country--a percentage of the deal's total value." This could be in the form of pushing tourism toward them, building a factory in their country, or agreeing to make selected purchases for other products and services from the country.

Various countertrade mechanism's will evolve as the magnitude of world trade expands. (The World Trade Organization, the U.S. Dept. of Commerce, and The Economist magazine say it accounts for 8% to 10% of the $5 trillion business now done between the countries of the world.) One of the changes will be the introduction of a direct exchange utilizing a unit of account as envisioned by Mr. King. The use of a "trade dollar" as a form of payment offers multi-lateral trading possibilities. Interestingly, it's an alternative already being used by hundreds of thousands of small business owners. And its use is growing, percentage-wise, faster than countertrade.

Computer + Trade Dollars = Multi-Lateral Trading

Whereas countertrade has always been used by Corporate America, this new form of barter evolved from the small business sector. Known as a trade exchange, it's a proven, effective way to conduct business without the use of cash. Now used worldwide by some 600,000 companies aggregately, it has recently taken on an international bent by increasing its availability from three countries ten years ago to a present 23 countries. This method of trading is more sophisticated and versatile than today's countertrade methods, because it's multi-lateral rather than countertrade's bilateralism. In short, why would one take canned hams as a countertrade payment, which entails remarketing, if one can instead acquire a unit of account (a trade dollar) which can be spent in a variety of ways for needed products and services? A trade dollar is easier, faster, and less expensive to use.

How A Trade Exchange Works

In 1960, "Mac" McConnell, then a 38-year-old unsatisfied president and principal stockholder of a Los Angeles thrift and loan, devised and developed a debit and credit system for barter which enabled traders to circumvent the cumbersome one-on-one trading.

McConnell, who studied accounting at Washington University and later earned a master's degree in econometrics--the statistical application of economics--at the University of Chicago, not only developed a professional accounting system for barter, but more importantly created a credit system that gave it liquidity.

The company he started, Business Exchange (known in the industry as BX), is one of the largest exchanges in the U.S. with 20,000 members. Shortly after his successful endeavor others followed, all emulating the McConnell model. There are now over 700 trade exchanges worldwide, with 450 of them located in the United States.

A trade exchange is a privately-owned company that provides its members a conduit to other like-minded members, who sell and buy from each other using a trade dollar as a medium of exchange (equivalent to one cash dollar for use of accounting purposes).

Each time a member makes a trade purchase, the exchange debits the buyer's account and credits the seller's account with trade dollars. Sales are normally made at the seller's normal pricing structure, whether retailer, wholesaler or liquidator. A cash commission of typically 10% is paid to the exchange for its services.

Under the Tax Equity & Fiscal Responsibility Act of 1982 (TEFRA) trade exchanges are classified as third-party record-keepers, having the same fiduciary obligations as bankers and stock (securities) brokers. For tax purposes trade dollars are taxable in the year they are earned, and reported as such on 1099-B forms to the IRS. All members of an exchange get a 1099-B showing their barter sales for the calendar year.

Industry Associations Established

In 1979, the first of two national trade associations was formed. Known as the International Reciprocal Trade Association (IRTA), its goal in those early days was to bring together trade exchanges to foster the common interests of a fledgling commercial barter industry.

Today IRTA members (barter companies) come from as far away as Russia, Iceland, Germany, Chile, Turkey, and Australia. A second association, the Cleveland-based National Association of Trade Exchanges (NATE) came into existence in 1984 and focuses on a domestic agenda for its membership.

Universal Currency Established Promoting Global Barter Business

It wasn't long after the first IRTA organizational meeting in California twenty years ago that trade exchange owners, newly introduced to one another, began trading among themselves so they could expand the goods and services offered to their respective networks--thereby helping their clients.

They did so on a reciprocal basis, owner-to-owner, inasmuch as their trade dollar currencies were inconvertible. However, given the inherent risks in providing extensive credit to one another, the potential for trade between trade exchanges was limited until a way of lessening the liability was created.

That occurred in 1996 when a proposal was made by IRTA's chief executive to establish and operate a Universal Currency Clearinghouse (UC). Instead of trading hard product between each other, a currency just for this purpose would be established. IRTA would administer and control the currency.

The idea was overwhelmingly approved by the Board of Directors, and the opportunity was immediately at hand to develop a worldwide system which would enable trade exchange owners, regardless of their size or location, to easily trade with one another by using this special currency. Transactions are processed by an automated 24-hour authorization center or via e-mail, with UC monthly trading volume currently at $1 million.

Dot.com Companies Enter Barter Arena

Within the last year barter on the internet has appeared and promises to take the industry to the next level, as the bartering opportunitiess for various products and services become increasingly global using this new medium.

Ubarter.com in Seattle and Melbourne-based BarterExpress.com are expanding rapidly. On the horizon are two other venture-capital backed internet barter companies, which are in the pre-launch stage. Their backing reportedly comes from Kleiner Perkins Caufield & Byers, and Sanford Robertson, as well as Vector Capital.

Recently a new market-making service, TradeBanc.com, has been introduced by one of the industry's successful practitioners. Its computerized technology will enable members of trade exchanges to trade directly, online, with members of other trade exchanges--anywhere in the world--as long as their barter company is a TradeBanc affiliate.

Every barter company will continue to have their own front-end, operating as they do now. That's because TradeBanc (being the market-maker) is the facilitator or clearinghouse, rather than a third-party record keeper.

The new technology will be a valuable adjunct to the commercial barter industry. It promises to catapult international trading efforts forward since the aggregation of all goods and services from all the participating TradeBanc affiliates will be housed in a single database. The tranactions will be cleared by the local exchanges, and settlement will be made using IRTA's Universal Currency.

How Your Company Can Benefit

Trade exchanges and corporate barter companies facilitate the movement of $10 billion in goods and services annually. Now done almost entirely in their respective domestic markets, as the Universal Currency is still in its infancy.

That is changing, however, as members of trade exchanges are finding that trips abroad can be handled through their trade exchanges. I personally know scores of business owners who have taken extensive business trips to Europe and Asia, covering the expenses with trade dollars. Additionally, media around the world is increasingly available for companies who have international needs.

For further information on barter companies that are members of IRTA and use the Universal Currency, contact IRTA at (312) 461-0236, or their web site:www.irta.com.

Conclusion Mr. King's vision of the future implementation of direct exchanging--becoming an immense barter economy--is plausible, because all the ingredients necessary for attainment are now at hand with today's enormous and ever-growing computer power. The use of trade dollars, as a viable currency or a medium-of-exchange, is four decades old and utilized in millions of transactions.

The ubiquitousness of the internet and its infrastructure should/could enable the development of a massive online electronic barter economy, to complement and expand the off-line barter offices now dotted around the globe. Which leaves only one final part of the puzzle to be found--capitalization.

Basically, this will require that one or more major corporations grasp in totality the enormous magnitude of creating and ultimately implementing a private, worldwide barter currency.

The move in this direction is, admittedly, very fragmented at this time. But the commercial barter industry's evolution is on-going and will continue. Dot.com companies entering the barter arena will speed the movement forward. The question at this time is: How big will the electronic barter economy ultimately become?

Given the projections for U.S. business-to-business e-commerce (defined as orders placed between businesses via the internet) which is expected to explode over the next few years reaching $1.3 trillion in 2003, it is not that far a reach to assume that with financial might and manpower, the creation of an efficient, effective mechanism for commerce could be constructed which would allow for the payment and acquisition of goods and services by utilizing one's own products and services.

About the author: Bob Meyer, a former major league baseball player, is the founder and publisher of BarterNews magazine, established in 1979. In 1997 he was the third inductee into the IRTA "Barter Hall of Fame." He can be reached at www.barternews.com.

Bob Meyer, BarterNews 1

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