Mutual Credit

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A system in which the currency necessary to mediate a transaction is created at the time of the transaction as a corresponding credit and debit in the balances of the two parties. These systems (LETS and Time Dollars, and the proposed ROCS), unlike fiat currencies, do not require any centralized money supply management.

2. From the Wikipedia:

“Mutual credit is a type of alternative currency in which the currency used in a transaction can be created at the time of the transaction. Local exchange trading systems (LETS) are mutual credit systems. Typically this involves keeping track of each individual's credit or debit balance. Although the effect is like a loan, no interest is charged, and since mutual credit allows for trading and cancelling balances with others, debts can be paid off indirectly.” (Wikipedia -

3. John Rogers:

" I think it is important that we all clarify our meaning of the term mutual Credit. My understanding of the 'mutual' part of mutual credit is that it means that *any* trader has the power to issue or allow credit to any other trader, so long as they meet the requirements of the central trading rules set by the 'bank' (credit limits for instance). This is how 'currency' or medium of exchange is made available to any participant. But in the WIR case, it now appears that only the bank has the power to issue credit to new traders. How is that still 'mutual'? The bank can issue me credit but I can't issue the bank credit. It seems like a different animal to me.

And a strategic question then follows. If WIR is NOT the world's largest mutual credit system, which is? " (Facebook posting, Sept. 2013)


1. Anthony Migchels:

"Mutual Credit is just simple bookkeeping. When opening an account one gets a credit line and can start spending by going into debt. When doing so, the unit is created. It is so mindblowingly simple it boggles the mind how the banks have gotten away with their silly antics for so long.

Mutual Credit is undoubtedly the unit of the not so distant future, although Social Credit may be a good alternative for Government units." (

2. Matthew Slater

The simplest expression of mutual credit is an IOU network. A group of people can trade amongst each other without exchanging a dime, but just by keeping track of what is owed. It works as long as the participants return to zero (on average) before leaving the system. The hallmark of a mutual credit system is that the balances of all the users should add up to zero – which is to say that when all the debts are paid off, nobody owes anybody." (

with Katalin Hausel:

"Ledgers in banks and other corporations are used to store promises to pay real money, because promises are easier to track and transport than physical cash. Users of the ledger agree to settle the balance at a later date with a single net payment of cash; if at the end of the accounting period the net balance is close to zero, settlement is not even necessary and the balance can be carried forward.

While conventional bank credit is created on a balance sheet as an asset/property, on a ledger the credit between accounts can be created more as a dynamic relationship between several accounts. This credit is not minted or printed, it has no physical form and no fixed quantity. Starting from zero, Alice can pay Bob 10 units. Then Alice’s account is -10 and Bob’s +10. The total is zero. Bob can pay Carol, and Carol, Alice. When Alice’s balance is back to zero she can walk away, having paid and been paid without the hassle of shipping accounting tokens back and forth in armoured vehicles. The stigma of debt does not apply to short term liquidity loans between trusted traders. It costs nothing to extend and is not scarce and thus interest does not apply. More than that, the credit and debit cannot exist without each other, so how can my credit be your shame?

Using a ledger in this way, as a closed system with accounts extending credit to each other, is sometimes called mutual credit. This term focuses not so much on the clearing aspect, but on the fact that credit can be made available to anyone at any time, and the risk entailed by that credit is spread out across the whole system. In the event of an account being abandoned rather than being closed at zero, the whole system deviates from the perfect zero. Similarly, all members are affected equally when the total supply and total demand leave perfect equilibrium. This notion of economic equilibrium is a guiding principle of a mutual credit economy.

A local currency can build solidarity within the local economy insofar as it actually diverts spending towards the local economy. But there is a deeper solidarity within a mutual credit system because the value of the system depends on the engagement of the members and the quality of their experiences. The wealth gains that come from good governance, a glut of production and the wellbeing of the precarious members are distributed much more in a mutual credit system than in a commodity money system, where all the wealth gains are sent to the top of the pyramid.

This system of mutual credit is ideal for becoming the money of the solidarity economy." (

3. "Drew Little excellently summarizes Tom Greco‘s definition of mutual credit in another Shareable article:

According to Thomas Greco (author & thought leader in alternative currencies), in a mutual credit system, the members empower themselves to do the same thing that banks have done for years. Members create their own money in the form of credit but save the cost of interest, while distributing the money themselves according to their own needs. In this type of system, having a positive balance proves that value has been delivered to the community while a negative balance indicates that a member has received that much more from the community than she or he has delivered. A negative balance thus represents a person’s commitment to deliver that much value to the community sometime in the near future." (

4. Arthur Brock and Eric Harris-Braun:

"There’s a name for this completely peer-to-peer approach to issuing managing a currency supply: mutual credit. In a mutual credit system, units of currency are issued when a participant extends credit to another user in a standard spending transaction. Picture a new mutual credit currency with all accounts having a zero balance. The first transaction could look like this: Alice pays Bob 20 credits for a haircut. Alice’s account now has -20, and Bob’s has +20.

Notice the net number units in the system remains zero, just like the balance sheet in standard accounting must always balance to zero. That accounting practice places no limits on the amount of cash or assets a business can have; it simply means they are offset by an equal amount of liabilities or equity. Every negative balance in a mutual credit system is offset by positive balances so there is always a systemwide ZERO balance. You could think of the total number of units in circulation at any time as the sum of all the negative balances (or, if you prefer, the sum of positive balances since they are the same number).

But wait — Alice spent credits she didn’t have! True. That’s exactly how issuance in mutual credit works. Managing the currency supply in a mutual credit system is about managing credit limits — how far people can spend into a negative balance. Different systems set different rules about this, ranging from everyone having the same limit (e.g. 100 credits), to having NO limits and leaving the choice up to each person as to whether they want to extend more credit to someone deep in debt. It really depends on the community, the relationships, and the use case.

One elegant approach to managing mutual credit limits is to set them based on actual demand. You can calculate credit limits to be an equivalent of what you can pay back in 3 months (or another arbitrary period) based on the transaction history of each account (with a couple of anti-gaming modifications). This allows the currency supply to expand and contract based on the actual usage patterns of the community which demonstrate the market demand for the value people are providing." (




"Globally, many people connect with the idea of mutual credit as LETS systems, which stands for Local Exchange Trading Systems. These are community trading systems and come in many different varieties. They tend to be filled with individuals trading handmade goods and services rather than businesses.

In the US, due to IRS rulings and regulations, mutual credit splits into two unique forms rather than the general purpose LETS systems seen around the world.

  1. Barter Exchanges. These are mutual credit systems designed specifically for businesses to participate in and all sales in Trade Dollars are taxable. As part of the Tax Equity and Fiscal Responsibility Act of 1982 declared barter exchanges function as “third-party record keepers” of financial transactions. The medium of exchange created by barter exchanges, Trade Dollars, are not technically an alternative currency but an accounting hack which creates liquidity out of maintaining community record-keeping of accounts payable and accounts receivable.
  2. Time Banks. These are a volunteer or charitable form of mutual credit. The IRS has passed rulings on the tax exempt nature of Time Banks. This means that people on fixed incomes, such as seniors, can participate without jeopardizing their benefits.

Because of the stark tax reporting differentiation between these two types of mutual credit, they are similar in form and function but do not exist in the same transaction. There is no exchange between them. It is possible to maintain memberships in both types of networks (I do!) but the services offered must be appropriate to the nature of each network, as defined by the IRS. For example, I offer open space facilitation as a taxable activity in a business network and I coach people on how to run their own open space meetings in my local Time Bank.

(One of the best resources on this is Money Soup: A Legal Guide to Bartering, Giving, and Getting Stuff Without Dollars, by Janelle Orsi of the Sustainable Economies Law Center."


Mutual credit systems are normally completely decoupled from national currency and thus have a much greater theoretical potential; they have however remained more or less in the province of swapping home-made jam for lawn-mowing, because they are not, or not adequately, secured against misuse – so people in general are not willing to offer expensive professional services if they see no guarantee that they will be able to get as much out as they put in. Such problems of misuse and lack of trust are more prevalent the larger and more anonymous the community, which effectively limits the scope of such systems.

Design criteria for a successful multipurpose local currency

  1. The currency must be trustworthy and misuse of the barter community precluded. The barter system as a whole must not be able to be cheated of value by individuals.
  2. The currencys purchasing power per unit should remain more or less constant over time.
  3. It is a means of payment, and must therefore flow rather than be hoarded – it cannot be used to store value.
  4. Since the requirement for well-founded trust automatically leads to a cautious approach to credit, a diversity of possibilities must ensure that sufficient liquidity is available.
  5. The currency construction must be legal according to national law and, if possible, not subject to scrutiny by the authorities which supervise banking activities and other financial services.
  6. The currency is designed to keep operating costs of the barter community as low as possible."


Aspects of Mutual Credit

Anthony Migchels:

  1. " Zero reserves are required. Therefore, the Mutual Credit Facility (MCF) does not need savers. It does not need to attract outside capital. It does not incur capital costs in creating credit. It can therefore operate interest free.
  2. Mutual Credit Facilities typically finance themselves with monthly fees. These can be very low, about 10 dollars a month. Of course the outlet does need a minimum numbers of participants to be effective and acquire sufficient income to operate. But with only a thousand firms participating, already a viable business is possible.
  3. Governments can easily create National Currencies using Mutual Credit. Commonwealths on other levels can do so too.
  4. Debts that are not repaid lead to unbacked units in circulation. The cost for taking these out of circulation can be covered by taking a small one off fee when the credit is assigned. Defaults typically amount to 2% of total outstanding credit.
  5. Serious sums of credit are backed by collateral.
  6. The creditworthiness of participants is much higher than with banking, because debtors are not burdened with interest.
  7. In the case of payment problems, Mutual Credit Facilities will typically not act in the same barbaric ways that banks do. The debt does not grow if repayment is lagging, because there is no interest. If a debtor defaults, underlying assets will be liquidated, but in the way least harmful to the debtor.
  8. The MCF is intrinsically stable: it cannot provide more credit than it has assets, because it has no assets. Even if the MCF goes bust because it cannot finance its own operation, all the outstanding debts will be repaid and settled in other currencies. People holding the defunct units can expect to be (almost) fully reimbursed, even though this may take some time.
  9. MCFs should preferably be Not for Profit entities. But commercial MCFs certainly are possible too.
  10. There are no laws to stop Mutual Credit in the marketplace. But of course regulators are inimical to them.
  11. MCF units can have their own unit of account (like with LETS), or they can use the National Unit as such.
  12. MCF units are a means of exchange and should never be hoarded. They should be converted to other currencies, precious metals, durable goods, invested or used in other ways when people want to store wealth.
  13. Mutual Credit is peer to peer. The MCFs exists only to see to the administration it brings. It is fundamentally democratic.

It is in this incredibly simple way that humanity can finance itself interest free. We can get rid of interest, not by outlawing it, but by creating all the cash we will ever need at zero cost." (

Chris Cook on what constitutes a Peer to Peer Credit Architecture

"This is an interesting architectural discussion. The relationship between the collective and the individual is key.

In the current 'Market 2.0' intermediated architecture, we see collective intermediaries - central banks for credit risk, and clearing houses for future market price risk - stepping between lenders and borrowers and between sellers and buyers, respectively to assume and aggregate (aka dangerously concentrate) risk in single points of failure.

In the WIR, as John says, there is essentially a central counter-party, but it is a very interesting (unique in my experience) hybrid in that commitment is asymmetric. That is to say the members cannot issue credit to the bank, which if they did would actually be 'deposits' and as we are sad enough to know, there are no deposits in a credit creation and clearing system.

In fact, the ultimate basis of the credit given by the WIR bank is - as it is for the banking system generally in respect of all secured credit - the use value of the asset which is given as security,typically land.

I was pointing out to Richard Logie that we must also be careful as to what we mean by 'Peer to Peer'.

To me, this means transactions which are made bilaterally - A to B and B to A (we call them in Planet Finance 'over the counter' or 'off exchange') transactions.

These give rise to bilateral contracts and interactive obligations, A to B and B to A.

The question then is how these are settled, and the mutual credit clearing systems which he operates and for which GETS accounts creates a complementary currency (ie obligations by members) - as a 'look-alike' of fiat currency and records these obligations by creating matching (symmetric) debits and credits in respect of this quasi-fiat currency.

The difference between Richard's architecture and the WIR is that Richard is not taking performance risk, whereas the WIR bank is, but backs it with productive assets.

In a true Peer to Peer system the record keeping is not centralised but decentralised and linked,and transactions may be kept open indefinitely until settled either by chains - A>B>C>D>E>A or with currency (fiat or otherwise).

This is precisely how the North Sea crude oil forward contracts settlement upon expiry through the generation of chains and the 'netting' of obligations down the chain without actually taking delivery.

The point is that in a TRUE P2P credit clearing architecture, there is technically no need for currency at all. However such a system would soon silt up as productive capacity becomes committed because settlement paths/chains do not exist or cannot be found and chain-settled.

So settlement will be made through the creation of 'peer to asset' credit/currency, eg rental credits; energy credits and IP credits.

This gives rise to questions of equitable access to the commons of land/location, energy, and knowledge (IP) which underpin such currencies.

It also raises the question as to how to guarantee bilateral performance without a central counter-party, and that is where the 'guarantee society' approach - which has existed in the City in the form of 'Protection and Indemnity' mutual risk assurance clubs for 140 years, comprises a solution." (Facebook comment, September 2013)


1. Advantages and disadvantages:

"One economic advantage of mutual credit is that the currency supply is self-regulating--the money supply expands and contracts as needed, without any managing authority. The availability of interest-free loans is a great advantage to members of the system. One major downside of mutual credit, as with any form of credit, is the possibility of exploiting the system by running up a negative balance and then leaving. This problem is often addressed by caps on negative balance which can be raised as balances are paid off, or by limiting the system to a small, close-knit community based on trust, where the community holds people accountable. For this reason, most mutual credit systems are small (under 2000 members)."

2. Mutual credit, convertibility, and barter.

By Anthony Migchels:

"Mutual Credit is the way money is created in barters worldwide. Barters don’t barter. They don’t use national currencies to finance their trade and that’s why they are called that way. But they use their own means of exchange to pay each other, so ‘barter’ is a misnomer.

It is an extremely cheap and simple way of creating money. Every participant is given an account and credit. Let’s say 1 Unit = 1 Dollar. This is actually how many of these systems work: it creates transparent pricing by using the national currency as the unit of account, but not as a means of exchange.

Let’s say every participant gets a 1000 Unit credit. In the beginning there is no money at all. It only comes into circulation when one of the participants uses his credit to pay another participant. If he uses his 1000 Units his balance is – 1000 U. His supplier’s balance is now +1000U. The total amount in circulation is now also 1000 U. This means there is always exactly as much in circulation as there is outstanding credit: a zero sum game."

If you understand the very primitive LETS, you basically understand how money should work. It really is that simple. Galbraith was not kidding when he said “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent”. But there is no deeper mystery. This is it.

One of the key reasons why privately operated barter units are not dominating in the real economy, is because until recently there was no known mechanism to create convertibility to other units, most importantly the national units. Amazingly, many of these barters actively resist convertibility and believe non-convertibility is a strength. It is not, of course, as it hinders the liquidity of the unit. Lately, however, the right way to convertibility has been shown by Bitcoin and the Gelre: on-line markets where the units can be traded in a free market environment is the solid way forward." (

Minimum Viable Mutual Credit Cryptocurrency

Arthur Brock and Eric Harris-Braun:

"Most modern community currency systems have been implemented as mutual credit, but we don’t know of anyone who has built a tokenless crypto-mutual-credit-currency yet, so let’s outline an approach to creating a basic one with minimal supporting infrastructure.

Instead of sending a check or wiring money through a bank or Western Union, hundreds of millions people transfer money through the hawala system. Hawala is a network of merchants and businessmen, which has been operating since the middle ages, performing money transfers on an honor system and typically settling balances through merchandise instead of transferring money. It works like this: a laborer building a skyscraper in Dubai wants to send some of his earnings home to his family in Egypt. He goes into a store in Dubai, gives the owner, who is a hawaladar, 1,200 UAE Dirham in cash, and provides a passphrase for collecting the cash. The hawaladar calls a hawaladar he knows in Egypt and arranges for an equivalent sum in Egyptian Pounds to be picked up using that password. The laborer calls his wife and tells her the password and at which store to collect the money. Each hawaladar makes a record on their own books of the debt, which is eventually settled by applying it as a discount to merchandise going from Dubai to Egypt.

Let’s look at building a minimum viable cryptocurrency with the hawala network as our use case. We’ll focus on the processing and data integrity of the transactions, not on user interface, because if the data is stable, and locally accessible, any kind or reporting and widgets could be made available via phone app, web interface, or whatever.

We’re making a few design decisions in the spirit of keeping this example simplified. To minimize key management infrastructure, each hawaladar’s public key is their address or identity on the network. To join the network you get a copy of the software from another hawaladar, generate your public and private keys, and complete your personal profile (name, location, contact info, etc.). You call, fax, or email at least 10 hawaladars who know you, and give them your IP address and ask them to vouch for you. (Yes, IP addresses are inconvenient but in a minimal example we want to show you don’t even need a domain name under the control of any group or individual.)

Once 10 other hawaladars have vouched for you, you can start doing other transactions because the protocol encoded in every node will reject a transaction chain that doesn’t start with at least 10 vouches. Having this requirement accomplishes a few things. It makes manufacturing fake accounts impractical (Sybil Attacks) and it begins building your peer routing table (which stores public keys, last-known IP addresses, names, locations, and contact info for other hawaladars that you interact with) while seeding your information with those other peers so you can be found by the rest of the network.

As described in the Mutual Credit section, at the time of transaction each party audits the counterparty’s transaction chain. This is when they confirm the initial 10 vouches and also validate that their counterparty’s balance(s) are in good standing — that they make good on their debts and are not too far indebted to want to transact with.

Hawala transactions often cross national boundaries and currencies. We don’t specify here a “best” way to approach conversion and accounting of many national currencies. One could store balances using a currency-neutral value-reference like the Terra Trade Reference Currency (TerraTRC) or Rogers International Commodities Index (RICI). For simplicity, we’ll stick with the current frequent practice of just recording the exchange rate of the national currencies at the time of transaction.

Our hawala crypto-clearinghouse protocol has two categories of transactions: some used for accounting and others for routing. Accounting transactions change balances. Routing transactions maintain network integrity by recording information about hawaladar. These two categories of transactions could be stored in a single chain, but it probably optimizes accounting operations and routing operations to store them in two separate chains for each node."


Sarafu: Digitally Empowered Mutual Credit Systems in Kenya and elsewhere in Africa

Will Ruddick:

"The ability for people to create tokens on public ledgers has been around for many years.

Likewise the ability for people to make printed IOUs has also been around for a while. See printed Ithaca hours. is data from 60 such community issued mutual credit systems using Blockchain in Kenya."

(email, January 2024)

Application in LETSystem

"... I--who with others 'coined' the LETSystem word to express the ideas of consent, collaboration, invitation, possibility--regret the extent to which others restrict their understanding to the local. Certainly, local is good, local is essential, and local will happen--but let's not lose sight of the bigger pictures....

I don't just care about local people - I also care about my childrens' childrens' children (none yet born), and about trees, who don't seem to give a damn about me, and about international and inter-community harmony. I care about the weather.

The essence of a LETSystem is that it tends to generate positive social behaviours amongst its users. It makes it possible for us to deal equitably with all sorts of people. In my own little world and system, there are plenty of people that I don't 'care' about, nor want to care about. I wouldn't trust them for a second in a situation where they might rip me off--and I don't have to.

You don't have to care -- it is only necessary that we act as though we do, and that's the behaviour that a mutual credit system develops in its users. So act now, then you will be able to care as much as you choose, later, if you like. "


= Community Currency Trading for the Rogue Valley [1]

"Our local currency system is distinct from the national system, in that Trade Dollars is not “created” by a central bank.

Instead, currency is activated by members at the time of the transaction, and the resulting balances are tracked by the system. All the currency will be backed by trust, and the service we promise to owe each other. This form of economy is called a mutual credit system, and can be thought of as mutual credit and debit trading.

In this system, trading possibilities are not limited by scarce currency. Instead, our trust and willingness to trade, create a wealth of community value in countless transactions.

Individuals, businesses, and organizations, can trade between themselves without relying on an outside source of funds. Even if both trading accounts are at zero, a mutually valuable transaction can still be initiated. When an exchange agreement is reached, the payee drops into the negative while the receiving account becomes positive, activating currency for future trading. At any time, the sum of all the user accounts, both negative and positive, will always balance at zero.

When any account dips below zero, currency is “activated”, or brought into circulation, via the recipient’s account. Currency units that are activated in this way are backed by the trustworthiness and stability of each community member.

Negative account balances are not charged interest and are not seen in a disparaging light. Instead, they represent an agreement to repay the community through some later service. Negative balances will be capped at a preset lower limit based on your membership type and level of participation. The OurNexChange system is carefully monitored and managed, and those users whose accounts remain at the lower limit will be automatically prompted to return to balance by offering something back to the community.

No matter how much our community trades, the system-wide account balances will always total to zero, proving that no currency has actually been created from a single source. The currency supply expands and contracts as needed to supply our unmet needs and make the most of our underutilized resources."

Open Credit Network

"In the Open Credit Network, members trade with each other without using standard money. Each trade is valued in Open Credit Units – (OCU), and each exchange results in some OCU moving from the account of the buying member to the account of the selling member. The buying member’s account balance goes down (into the negative if necessary), and the selling member’s account balance goes up. In return, the selling member transfers whatever was agreed to the buyer in goods and/or services.

And that’s it. The buyer has something they needed, and the accounts reflect the agreed transfer of OCUs, just as you would expect from a bank account. Except that you have the money when you need it (as do your customers), and there’s no interest to pay. So OCUs work just like money for trading within the Open Credit Network, but they work for you, and for the network, not for the banks.

If that seems as if it ought to be impossible – as if there is some trick, remember that money isn’t a fact of nature; what makes money work is one crucial thing – trust. We all agree to trust that having some numbers in our account gives us a claim on our network to buy things we need (usually that network is the big network that accepts GBP). We don’t need to trust any particular member – it is the network as a whole that we rely on.

The Open Credit Network is designed to maximise trust, so that we can trade together in confidence. All businesses have to manage risk – risk of late payment, risk of poor service, and in the end, interest rates are justified by the risk of unpaid loans. So increasing trust reduces risk, which reduces costs, and makes trading within our network a little more rewarding."
(About the Open Credit Network)

More Information

  1. Wikipedia article at
  2. Community Empowerment through Mutual Credit Systems: