Mutual Credit

Definition

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.

Description

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." (http://realcurrencies.wordpress.com/2012/08/09/a-primer-for-recovering-austrians-the-many-systems-behind-violent-statist-fiat-currencies/)

Characteristics

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." (http://regional-economic-communities.info/downloads/hidden/Money_So-where-do-we-go-from-here_2011-09-03.pdf)

Discussion

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)." (http://en.wikipedia.org/wiki/Mutual_credit)

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." (http://realcurrencies.wordpress.com/2012/01/03/mutual-credit-the-astonishingly-simple-truth-about-money-creation/)

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."

Example

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. " (http://www.transaction.net/money/glossary.html#mutualcredit)

Ournexchange

= 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." (http://webspiritcommunity.com/webbooth/ournexchange/learn-about-ournexchange/comprehensive-details/)

More Information

1. Wikipedia article at http://en.wikipedia.org/wiki/Mutual_credit
2. Community Empowerment through Mutual Credit Systems: http://www.ratical.org/many_worlds/cc/NMfHC/chp12.html