Credit commons accounting

There are many different ways of accounting and things to be accounted for; Despite its simplicity, I've had some difficulty in the past explaining mutual credit accounting, even to educated people, so this blog is an attempt to express it clearly, for the record.

The Credit Commons is a way of recursing mutual credit accounting. A mutual credit ledger contains a list of accounts and transactions between them, denominated in a common unit of account. There a no assets 'on' the ledger, nothing ever enters or leaves the ledger. It is purely a record of credits and debts between the accounts. For that reason I sometimes think of it as 'closed' accounting.

When a debt is incurred between two account holders, say for 10 units, the debtor's account is decremented by 10 and the creditor's account is incremented by 10. Thus the sum of all accounts on the ledger never departs from zero. When an account's balance = zero that means it neither owes nor is owed by anyone else on the ledger. If the system is being used as a medium of exchange, zero means that that the user's exchange is complete, that their debts cancel out their liabilities, that their production and consumption are balanced with respect to the other accounts.

As a medium of exchange system there is usually a minimum and maximum balance for each account to prevent them straying too far from equilibrium and reduce their risk of their not being able to return to zero.

If accounts are not returned to zero, or stray to far from zero then the system can become distorted, with members struggling to earn or spend the units, or perhaps trading them at a discount or a premium.

That is why, in the event of an account holder departing with a positive or negative balance, the account must be returned to zero before it can be closed, which means the surplus or deficit must be shared out between other account holder according to some pre-arranged system. Typically there might be an account for that purpose which could collect transaction taxes, membership fees, or even redistribute prizes in case of a surplus.

Another way to think about mutual credit is as a rolling contract. All signatories agree to return their accounts to zero, and the ledger simply records their obligations to earn or spend before they can withdraw from the contract.

Credit Commons accounting means joining existing accounting systems together using the Credit Commons mutual credit protocol. In order to participate in a mutual credit system a would-be member needs only

• to price goods and services in the ledger's unit of account
• to be allowed a balance greater then, and/or less than, zero.

In the language of networks, a ledger is a 'node'. Any node can have many accounts, but can only control an account on one other node. This implies a tree structure, with each node having zero or one rootwards node and many branchwards nodes or accounts.

When a node connects as a branch of another node, it can engage in multilateral clearing with all the other branche; instead of entering into bilateral relations within which trade must be balanced within every trading pair, mutual credit is a multilateral system, which means each group maintains a single balance of trade account with respect to all the other members.

The new node prices its goods by declaring a conversation rate between its own unit in which its members' goods are priced and the coalition's unit. The coalition then grants the new project a credit limit.

All inter-node transactions go across the shared ledger, which both enforces balance limits and acts as a third party record. The shared ledger therefore reflects the balances of the balance-of-trade accounts (BoT) of all its members, the sum of which is zero.

So let us track a payment of #10 from Alice in Aylesbury to Bob in Brixton, where Aylesbury and brixton are both members of London.

Note that Brixton's unit is not worth #1, but 1KWh so the debt is converted in the same way that kilometers are converted to miles, by multiplying. Each system must have a chance to validate the transaction to sure that its internal balance limits are respected. For example Bob or the Brixton account in London may already be near their maximum balances. Note that even though Brixton in London and the BoT account in Brixton are effectively mirror images of each other, nonetheless they could have different balance limits, and either could block the transaction. If the account balances ever didn't match, for any reason, Brixton would not be allowed to trade until the discrepancy was ironed out.

This was just a quick technical description, but a much more interesting subject I shall cover soon is the economics implied by this way of accounting as opposed to fiat money and free market exchange.