Barons of barter

OBMTradia-576No cash? No problem. Trade it! For businesses that join trade clubs, it’s not all about the Benjamins.

Share this article!

OBMTradia-576Tradia president and CEO Matt Humphreys and friends. Tradia is one of two major barter exchanges in Oregon.

No cash? No problem. Trade it! For businesses that join trade clubs, it’s not all about the Benjamins.

By Adrianne Jeffries/ Photo by Anthony Pidgeon

In 1962, a salesman came to Bob Galas’s jewelry store in Medford with a strange proposal. The salesman belonged to a private trade club founded in Oregon, but with members all over the world. Remarkably, all business within the trade club was done without cash. Would Galas like to join?

The salesman was from Barter Exchange International (BXI), a group of businesses and people buying and selling from each other using “trade dollars” that had no value outside of the system. Networks like BXI are called “barter” exchanges, which is misleading, since they invent their own money to avoid the headache of arranging direct trades.

Galas signed up, figuring that barter would be a way to boost business at his store. Forty-seven years later, he says barter is much the same — just bigger. Much bigger.

BXI was eaten by another company four years ago, but the barter exchange industry has grown steadily for decades. And as the economy cratered, bartering in Oregon and the rest of the country exploded.

Today there are two major barter exchanges and an unknown number of private brokers operating in Oregon. The barter exchange industry is underground here, as it is nationally; even though the trades are regulated by the IRS, there are no authoritative statistics on the barter economy. Modern barter is an obscure concept and a tough sell, even for the uninitiated who don’t know its downsides. As a result, the barter economy remains in the shadows of the cash economy until a recession puts the spotlight on it.

More than 2,000 businesses and individuals do $12 million worth of barter a year in Oregon, according to the two major exchanges, Tradia and ITEX. Tradia says it has 1,500 members in the state and 4,000 nationwide. ITEX, founded in Oregon and headquartered in Washington, is the exchange that merged with BXI. ITEX reported that its membership increased 38% from April 2008 to April 2009 and the exchange now has about 490 members in Oregon and 24,000 worldwide.

Tradia, founded in Portland in 1995, has flourished as the economy has fizzled. Over the past 10 months, Tradia has signed up four times as many new members as usual. Even more striking is the spike in the number of entrepreneurs who want to open barter exchange franchises. In the past six months, Tradia went from 14 franchises to 22, and in June it was on the verge of closing the deal on another nine.

Barter exchanges are always up in a recession, and they’re in a better position to capitalize now than ever before. Electronic banking and websites that allow members to trade independently have made barter easier and more efficient. And this recession’s most famous symptom – the liquidity crisis – means there’s a need for barter. There’s no cash, but lots of unbooked appointments; no income, but lots of inventory.

Business owners used to hang up quickly when Erik Peterson called to make his Tradia pitch. Suddenly, he says, they’re listening.

Peterson makes his pitches from a cubicle inside Tradia’s small office in Clackamas. In addition to prospecting, he brokers trades between existing Tradia members.

“Printing? Just the one we spoke about? OK, I think we do have something like that,” he tells a member through his headset. “I’ll call around and find someone.”

Across from Peterson, Elysia Avery is reviewing the books. Tradia offers credit lines in its currency, Tradia dollars, and one member has worked herself into $1,400 of debt. The member wants to barter her way back into the black and then quit.

What Peterson pitches — that barter exchanges can help businesses conserve cash and attract new customers — doesn’t always hold true. (Peterson is no longer with the company.) There are members like Bob Galas the jeweler, who has bartered happily for almost half a century, but there is no shortage of dissatisfied ex-barterers.

Julie Parrish, who calls herself a “serial entrepreneur,” quit BXI in 1998 after she crunched the numbers and realized she was losing money by bartering meals at her restaurant in Medford. Her profit margin on meals was so low that she had to hustle in order to make enough barter dollars to afford somebody else’s services.

Parrish was able to make enough to buy her sister an engagement ring from Bob Galas’s jewelry store, but she suspected he inflated the price for barter customers. (Galas has the same suspicion about other barter members — but he swears his price is consistent.)

Parrish knew people who had the opposite problem — accumulating too many credits. As big as some of the barter exchanges are getting, the selection of goods and services for purchase is still very limited compared to the economy at large. Some members have trouble finding something they want from the exchange’s directory.

“I’m not down on bartering across the board,” she says. “If you can self-initiate barter you’re in a better spot. There’s no cash management fee associated with it, and it’s a one time thing — no credits sitting in an account.”

Ex-members also complain about other members giving trades low priority or pulling out of a barter deal at the last minute. And bartering also carries risk. Barter dollars are stored at the barter exchange like a bank, except they are not insured by the FDIC. So if the exchange goes under, so does your money.

James Stodder is one of many economists writing about the counter-cyclical nature of the barter exchange industry. An economics professor in the business school at Rensselaer Polytechnic Institute in Connecticut, Stodder found that barter exchanges show less-than-average growth when the economy is booming, but greater-than-average growth in recessions, especially if prices are falling due to deflation.

“When you have a really serious depression-type downturn, you tend to find that not only does the rate of inflation slow down but the prices actually drop, and that indicates pretty directly that people are not able to get their hands on enough money to get the number of things they were able to get before,” he says. “People find themselves to be inventory rich and cash poor.”

Barter can be useful for the inventory rich and cash poor. The exchanges promote their members through trade conventions, auctions and email advertisements, and the most successful barterers are able to keep cash in their pockets while attracting new customers through the network. They can use barter dollars to pay for business costs like printing. And sometimes barter customers refer cash customers.

It works well enough that big businesses and governments barter, albeit on a larger scale and usually with a corporate barter exchange or without the help of an intermediary.

Some economists say barter that works well is bad for the economy. Barter exchanges hinder the free market by limiting the pool of trading partners, says Tim Duy, an economics professor at the University of Oregon and director of the Oregon Economic Forum. If people miss out on other opportunities by focusing on barter trading partners, he says they could make themselves and the community worse off.

But Stodder’s research shows that if a barter exchange is large enough, it acts as an economic stabilizer because it means goods and services move around even as unemployment rises. The U.S. barter exchange industry would have to grow by about tenfold to get to the point where it would have a stabilizing effect on the national economy, but some well-established exchanges have already helped their local communities, Stodder says.

The key is concentration. Even though trade within barter exchanges is mostly local, Tradia and ITEX both have more members outside the state than inside it. Their ambitions are international, so it’s unlikely that barter activity at either of those two exchanges will become concentrated enough in any community to be a stabilizer for anybody other than their members.

A barter model that emphasizes the local economy is the Local Exchange Trading System, or LETS. LETS exchanges operate in a limited area and don’t charge membership fees or extend credit the way the barter exchanges do. One example is the Community Exchange Network, which includes 141 local exchanges in 19 countries. A CEN chapter is set to open in Portland in late summer, and it already has partnerships with the city and the Saturday Market.

CEN|PDX has a new twist on LETS that founder Collin Ferguson hopes will stimulate nonprofits as well as the local economy: Members make donations to local nonprofits in Kurrents!, the CEN currency, which they buy with tax-deductible U.S. dollars.

Recession or not, barter is a no-brainer for Portland chiropractor Dr. Richard Crokin. He hasn’t saved himself any money in the five years he’s bartered with Tradia, but he says he’s increased his buying power.

Crokin’s barter clients pay $660 in Tradia dollars for a therapy package, which he estimates costs him $60. Tradia dollars are pegged to American dollars, so when Crokin had his car repaired recently for $600 Tradia, he was only out $60 when he would have been out $600 if he’d paid with cash.

Even with the transaction and monthly fees Tradia charges, Crokin says he still comes out ahead. He uses his barter dollars to pay for perks like travel, goodies for his staff, organic beef and weekly delivery of fresh flowers, as well as essentials like carpet cleaning and auto repair. Barter makes up less than 3% of his business.

“It’s like Monopoly money,” Crokin says. “And you can spend your Monopoly money with anybody who is playing the game.”