Convertibility for Mutual Credit
"Modern complementary currencies either allow for interest free credit, or for convertibility to euro or dollar. This explains to a large extent why interest free credit is not the norm and why Banks still exist. To compete with banking currencies in the marketplace, interest free credit (Mutual Credit) must be available in convertible form. Fortunately, the technology for this has become available. This is the key to a new era.
At this point there are two major methods in operation for the creation of interest free ‘complementary currencies’. That is, units created by private parties instead of the State.
There are Mutual Credit based units, as used in barters worldwide, but also LETS. And there are the euro (or dollar) backed units. The US Berkshares and the German Regional Currencies are designed this way.
Each have their particular strengths: Mutual Credit allows interest free credit. Euro/dollar backed units allow convertibility which is equally important.
However, and this is the main challenge for interest free currency at this point, there are no Mutual Credit based units which are also convertible. And the euro/dollar backed units don’t allow for interest free credit.
So each has a major trump, but neither has both.
This is one of the key reasons why private interest free currency has never been able to really compete with banking units."
The problem of convertibility has haunted Mutual Credit (MC) ever since it was invented. But is it a problem? Some within the interest free community argue it isn’t. Even the sages of WIR claim lack of convertibility is not a problem and even a strength: they claim convertibility would lessen the incentive to keep business within the network.
There is some truth in that, but the medicine is worse than the disease. Because lack of convertibility forces firms to closely monitor how much of the MC units they can accept. They can accept no more than it can spend usefully in the network. More successful players in the network will at some point be forced to stop accepting the currency, until it has spent its cash reserves.
This is the basic bottleneck that all MC facilities face: the more successful players in the network have more MC income than they can plausibly spend, forcing them to limit their acceptance. Particularly prospective participants can be difficult to convince that partaking in the MC will give them business that is lucrative to them, exactly for this reason.
So making the MC unit convertible will solve that: it greatly increases the ‘liquidity’ (what it will buy) of the unit and its acceptance by the business world.
But with the advent of the internet, this problem can be easily solved, and the way forward has been shown by Bitcoin: an on-line marketplace, where participants can buy and sell MC units. Just like a FOREX exchange.
To be honest: Bitcoin beat me to it, because this is also how the Gelre will allow convertibility. But of course, Bitcoin is not credit based and although a very powerful experiment, it will prove not to be very important in the marketplace.
So what does such an on-line marketplace look like?
Point for point:
1. The Mutual Credit Facility (MCF) offers the on-line trading facility.
2. It always offers 1 MC for 95 cents. In this way, businesses offering their excess MC can’t ask for more. The incentive for the public to buy them is maintained. This effectively tops the free market price for the MC at 95 cents and stops speculation or other destabilizing and unwarranted activities. Convertibility exists for one reason only: improving the scope and power of the MC, to service the public and free trade, not all sorts of silly ‘capitalist’ games.
3. The MC uses the income it obtains from selling MCs on the market place to create a ‘stabilization fund’.
MCs coming into circulation by selling them at the marketplace are not credit based. So in effect MC is morphing into a hybrid: some units are euro/dollar backed, although most still will be simply credit based.
The income from selling MCs should not be seen as income for the MCF. But as backing for outstanding MCs. And used to buy back MCs. The ‘stabilization fund’ can be used to buy back MCs especially when there is excess supply on the on-line marketplace, alleviating downward price pressures.
4. The MCs rate will be always very close to 95 cents.
For several reasons. First, the agreement is that 1 MC = 1 dollar/euro. Firms must accept them one on one. Because the MCs purchasing power is always 1 dollar/euro for the consumer, the lower the rate for them at the marketplace, the higher the demand will become, with a strongly stabilizing effect.
Secondly, MCs in circulation are mostly backed by the promise to pay by debtors. These debtors are continuously paying off their debt and they need to obtain MC units for that. Either by selling their own goods and services, or buying MCs at the on-line marketplace.
Thirdly, the stabilization fund can intervene, if sudden supply shocks occur. Finally, if the MCF goes bust (which can happen in the case of mismanagement), all outstanding MCs will be taken out of circulation by paying off outstanding debts. This can only be done by buying up all outstanding MCs via the marketplace. So everybody is more or less guaranteed to get their money back.
5. In this way a real free market price for the MC can be established.
And this has many advantages. It allows for transparency and real balance between supply and demand. It can stabilize supply and demand by rising or declining prices. It also provides real information about the volume in circulation: if there is too much in circulation, chances are there will be too many MCs being offered for sale, with downward pressures on its rate. This would suggest there is too much outstanding credit, which can be easily corrected. It gives the public and the users of the money reliable information about the all over effectiveness and health of the MC.
With enough liquidity in the market it will also show what rate is really necessary. As said earlier, MCs (and Regional Currencies) are sold with a discount, varying from 3% to up to 10%. There is no real free market information available on what is the optimal percentage. And this will also vary from system to system, depending on local circumstances. The fact is: nobody knows how high this discount should be and the free market can answer this question.
6. In this way, convertibility to other free market units is also established.
And this will be important, when more and more MCF’s and RCs become available.
So this is how convertibility can be obtained. Mutual Credit buying euro or other free market units. Just imagine: we’ll have printing presses, just like Ben Bernanke, and we will print money able to buy dollars, euros and Gold." (http://realcurrencies.wordpress.com/2012/01/10/mutual-credit-for-the-21st-century-convertibility/)