The mutual credit society

Sometimes it seems like we've tried everything to create a better politics and a fairer society and that our failure means the rot must lie in the very essence of humanity. But unless all societies are afflicted as ours (and they are not), we need not give up hope on our species. Alternative configurations exist!

One extremely pervasive variable which has been constant in our culture for hundreds of years if not longer, is money, and in particular, money as a commodity, most of which is owned by a few who hold back more than they spend. This scarcity of commodity money exacerbates inequality by putting the have-nots in service of the haves; it creates harmful competition where cooperation would be more efficient, its lending at interest has given rise to a growth imperative which makes it almost impossible to reduce greenhouse gas emissions and to a complacent ruling elite which feels entitled to money free of both effort and risk.

Bitcoin and its spawn brought a new narrative that the real problem comes from the overreach of government and other 'centralised' institutions who abuse the monetary privilege by issuing by fiat. Advocates believed that algorithmic governance would be more efficient and transparent than our large 'centralised' institutions. This thinking though, seems to have resonated most with one particular demographic: young white male science graduates whose confidence and self-entitlement was only amplified by their speculative gains. Bitcoin endures but those high modernist fantasies of algorithmic governance are fading fast.

Some work has been done making connections between our current money system and the society it reflects and forms (example). This article is about how a different money, mutual credit, could shape and reflect a better society.

Mutual credit is when members of a group exchange things which are priced in a unit of account; payment is not made with money but by delivering goods and services to the rest of the group. It means trading without money. In between supplying and consuming, or consuming and supplying the temporary debts are measured with the unit of account. Thus, instead of money they are effectively using credit they grant to each other, trusting each other that those who consume will later supply, and vice versa. Money is directly replaced by trust.

Since mutual credit implies a manageable number of entities per group, in imagining a whole mutual credit society, I'm drawing on the idea of that mutual credit can be multi-tiered from the local to the global scale, each group at each level being a manageable size, in a structure we call Credit Commons.

This mechanism is key because at a time when governments are increasingly seen to be serving interests other than voters, interventions are needed that can scale with little or no engagement from government. Mutual credit allows any group of people to create a 'money' between themselves - because money is a relationship, not a commodity - and the Credit Commons protocol is a standard that so that all groups can be interoperable.

I want to highlight 3 characteristics of mutual credit associations and then show the social, economic, ecological and psychological and implications of taking them seriously.

The 3 characteristics of mutual credit associations.

1. They allow exchange which is not restricted by the lack of a medium or the cost of a medium of exchange. Money, considered as a medium of exchange, is a proxy commodity held by people who have given goods to the market and are yet to receive. When there is not enough money or when money is held out of circulation, exchange is constrained, usually for some people more than others. In a mutual credit association exchange is limited, not by the quantity of a given commodity, but by the degree to which peers, who typically know something of each others' affairs, trust one another to complete the exchange. So instead of taking credit from a bank on the bank's terms, mutual credit peers grant each other interest free credit on their own terms, sharing the risk amongst themselves. The limitation is therefore not of money, but of how much members will supply each other before demanding something back.

2. They convert mutual trust into economic efficiency. It is well understood that high levels of trust in communities such as ethnic minorities, or criminal networks, corresponds to their prosperity; trust itself is an economic asset. The cost of chasing money, escrow, protecting cash, insurance, drawing up contracts, enforcing contracts all adds up; knowing that matters can be resolved informally makes trade much more efficient.

A mutual credit network is a container for such trust. Bank credit is designed for use between strangers. The bank guarantees the credit of its borrowers so it can be used as an asset at face value by people who neither know nor trust the borrowers. For the service of 'hardening' their credit, banks take the first (pre-profit) fruits from producers. But within the network, our promise to repay is enough to make our credit fungible. Trusting each other saves money.

3. They happen in human-scale institutions. You might trust one or two people with your life, trust several more people with your car, but the larger the group, the weaker the bond. Mutual credit associations then, in contrast to the machinery of the state, work best when they are fairly small.

With these characteristics in mind, lets explore how they might shape an economy, a polity, an ecology, and a psyche.

Economic implications of mutual credit.

Most economists believe that money derives its value, at least in part, from its very scarcity. That scarcity is felt disproportionately by the poor, and across the economy through the business cycle, in which the sentiment of the banking cartel makes commerce uncertain.

In a mutual credit society there would always be enough money for everyone to do valuable work, and without involuntary unemployment the society would be more efficient. As long as there was demand in the marketplace, there would be 'money' to finance production. In addition, prices of goods would be much lower if they were financed without interest. Margrit Kennedy estimated the interest proportion of prices of consumer goods to be around 50%.

When the medium of exchange is created externally to an economy, the quantity of it available is in no way calibrated to the needs of the community to produce and consume. This is partly because the monetary policy is foreign, and partly because policy makers struggle to control the hoarding of money. While money is being hoarded it is not lubricating the economy and it is not available for debtors to earn back. Because mutual credit money does not pay interest, the wealthy are encouraged to store their wealth in more concrete form bearing the risk and maintenance costs of doing so. It is still possible to store wealth as credit, but only as much as other people want to borrow.

Furthermore exogenously created media of exchange are liable to change in value, just as any asset on a market. That makes it a vehicle for speculation which amplifies instability. A mutual credit unit of account is defined, rather than discovered, which removes opportunities for speculation and making money out of money.

In today's economy, creditors and debtors are at loggerheads with creditors wanting interest rates ever higher and debtors wanting them ever lower. When money is not property which is lent by creditors to debtors, but merely deferred spending, then the relationship is much more cooperative. Debtors who consume now and repay later are merely half of an equation in which creditors are enabled to consume later by lending now. Creditors and debts are not separate social classes, but the same people at different moments in their lives or careers. They all have the same objective which is to return their balances to zero. To that end, creditors are obliged to spend and debtors are obliged to earn. If either party has problems, then both parties have problems because one cannot earn if the other does not spend, and vice versa. From competition to cooperation!

This negotiation between creditor and debtors also helps to ensure that production and consumption remain constant and balanced. In commodity money economics, it is very difficult to ensure that the supply of goods matches the demand, that enough goods are produced but not so many that they are wasted. In fact billions and trillions unspent in tax havens is reflected in a wasted wealth of unsold surplus. When money doesn't get stuck like this, it should result in a balance of production and consumption and a balance of supply and demand.

Finally within these small groups there is a much stronger incentive towards cooperation than to competition, because when everyone has a stake in the same co-created credit asset, the success of one effectively increases its purchasing power. Enterprises are much more closely connected, the success or failure of one is felt by all in the form of increased trade, or debt default, respectively. Thus members are incentivised not only to trade with each other but to go the extra mile in supporting each other. In Japan and Korea, businesses shield from capitalism by clustering together into 'families' where they support each other over the long term with credit and other resources along with a mutual commitment to buy from one another, even when it is not the cheapest. This is what I understand when I hear the phrase popularised in Latin America, 'solidarity economy'.

Here I can just scratch the surfaces of the profound differences of the economics of mutual credit, but I want to point out one more. When the haves lend their property to the have-nots, and the latter pay for the use of it, there is a tendency when business isn't sufficiently profitable, them to fall into a debt trap.

Mutual credit economics starts with a commitment to balancing trade, meaning to produce and consume in equal quantity. Most of the debt problems in the world, at least those between countries are the direct result of trade imbalances. Developed countries export more goods to less developed countries than they buy back, so the less developed countries first run out of money, then fall into debt, and then into servitude. That cannot happen with a primary commitment to balance trade, since both the surplus and deficit partners need to work together to balance trade rather than accumulating money or debt. That is why Keynes wanted to found a mutual credit system instead of the IMF after World War II.

Political implications of mutual credit.

A hundred years ago, civil society was composed of myriad small organisations from local political groups, friendly societies, trades unions, scouts, bridge clubs. De Toqueville, visiting USA in the 1930s observed

"not only commercial and manufacturing companies, in which all take part, but associations of a thousand of the kinds, religious, moral, serious, futile, general or restricted, enormous or diminutive."
De Toquevile, Alexis (1945) Democracy in America. Book 2 Chapter 5

His warnings about the rise of 'individualism' eroding these institutions came to pass, and today most of us are very small cogs in a very large machine, feeling disengaged and disempowered.

A mutual credit society would mean rebuilding some of those 'human-sized' institutions and participating in governing them, at least with respect to credit creation. Once this kind of trust was operationalised those social structures would likely extend to other functions like insurance, investment, and social functions too, as the savings pools network in New Zealand experienced. (Their experience has not yet been written down as far as I know.) These smaller structures give their members a greater sense of controlling their own lives which De Toqueville would have characterised as more democratic.

It's not only the small institutions though, but medium sized ones as well. The principle of subsidiarity, nominally supported by many political parties, states that decisions should be taken at the appropriate level of government, but what if that level of government doesn't exist? A mutual credit society would have many more layers through which citizens could participate in decisions that affected them, most especially risk management.

Currently banks and insurance companies assess risk, choosing which ones to take, and reap all the rewards. These disinterested outsiders fund only profitable projects and starve socially necessary ones. A mutual credit society would take such decisions much closer to home, by people who know the situation rather than the megatrends, by people who would win or lose from the outcome, by people who want the long term success of the project, not just a claim on the first fruit.

Another key feature of mutual credit, at least as it happens today is that they are voluntary.. Unlike with nation states, there is neither the obligation to participate nor the force to compel us. If we wish to live in a voluntary way, without force, we would be wise to nurture such systems. The voluntary nature of these groups means there is no compulsion to invest in or work with people who are not liked or trusted, and if feelings escalate, it is always possible to create new groups. These groups are also private in principle: as long as member's own credit is changing hands rather than money, nobody else needs to know. Those concerned about mass surveillance will know that one cannot communicate privately when all one's correspondents are surveilled. From that point of view, privacy is much easier within the membrane of a group.

Ecological implications of mutual credit.

Ecologically speaking what's needed is a devastating reduction in consumption of everything, and increasingly a huge investment in rebuilding almost all our infrastructure not only to run sustainably, but to be resilient against weather-related and political and financial shocks. Governments and corporations who have the power to act are doing so little that this paradox remains irrelevant. A mutual credit society could not evade this paradox, but it could reduce the pain in three ways.

Firstly through localisation. A mutual credit economy is a localised economy because we are much more likely to have relations with those nearest to us, who we meet in the street. This is more true since COVID made much work obsolete and travel difficult. It is not necessarily true that localised lifestyles are more resource efficient, because although less energy is expended on transport, the benefits of scale production are also lost. Localisation is important precisely because it is less efficient; the redundancy built into the system makes it more resilient to economic and political shocks.

Secondly a mutual credit society would be one in which projects that mattered could be funded. The availability of finance for climate adaptation does not currently reflect the level of public concern, but reflects the low cost of fossil fuels and the strength of their lobbies. If a mutual credit group wants to do something, and it can find the materials and labour, then money cannot be an obstacle. Thus a mutual credit society would be much more empowered to act on climate.

Finally, mutual credit money lacks the growth imperative which is intrinsic to modern fiat money. There are many growth imperatives built into our western societies, but the monetary growth imperative is perhaps the most pernicious. Money, issued as debt, is then used as a store of value, which means that the original borrower cannot earn it back. Ever more money has to be borrowed to compensate for money saved, and every more production and consumption is needed to justify and repay that borrowing. In a mutual credit economy, as explained above, with no monopoly on credit creation, it is not possible to stash other people's debt and lend it back to them time and again, putting them in servitude for ever; the level of production/ consumption is the result of choices rather than chains.

Psychological implications of mutual credit.

The benefits of mutual credit are not just collective, but personal. Many participants in LETS have reported that they started with the same anxiety they had with money, a sense that it was scarce and needed to be accumulated, but later realised that LETS flows much more easily, and that they had a nice feeling when using it.

Benefits would also be expected from the reduced size of many institutions and businesses. Members would have a much larger say in how things were run, which means they could design work to better suit themselves. That means not only better work, but also a better feeling about work. Smaller institutions would lead to greater conviviality and wellbeing.

Of course not much of this is science, but it is supported not only the negative evidence against the current money system but there are also scraps of it in all the above disciplines, with more clues in monetary theory itself as well as in the testimonies of participants of LETS and timebanks.

Thanks to Jem Bendell, Dil Green & Tim Jenkin for contributing edits.