Mutual Credit: It’s Workings and Implications

Some were expecting there to be an article titled “In Defense of Lifestyle Anarchism” today. While that was the original plan, my computer has decided to delete that document entirely, and I am unsure why. In the meantime, while I am rewriting these pages, please enjoy this lengthened version of an earlier article written for “freedmarkets” on Instagram.


Capital has been chained by the capitalist, unable to be utilized in a manner that promotes competition, decentralization, and egalitarianism as it normally would (and should). Banks align with the government for their own interests, centralizing the supply of money in a manner that bears no resemblance to a freed market at all. There have been several suggestions on what to do after the cage on capital is removed. Some suggest privatizing banks and removing all inhibitions on what can and cannot be considered currency. Others suggest community currencies, owned by all in a community and usable only inside that community. But there is another option, one that has historical precedence in free societies and is near guaranteed to keep the society free if allowed to persist.

That option is credit, specifically mutual credit.

The premise is fairly simple. Instead of a hard currency, mutual credit works to track how much each person is owed. Instead of hoarding currency, mutual credit only exists for those transactions, and exists with the intention of paying back what is owed later with an actual product, rather than using the credit as a something worth keeping. Eventually, the intention is to have nobody owing anyone anything.

Sounds confusing?

Imagine, for a moment, two individuals – Sarah and Jon – who each have something to sell and something to buy. Each has a current balance of zero credits. After joining, Sarah would like a toaster from Jon, and Sarah wants to get rid of their own microwave, but Jon does not want the microwave Sarah is selling. So instead of a direct barter, Sarah gives Jon 10 credits. This may seem to be a problem, since both have zero credits, but as stated before, mutual credit works differently from regular currency. Instead of being unable to pay, Sarah now has -10 credits, and Jon has +10 credits. At some point in the future, if Sarah has a product that Jon deems worth 10 credits, such as a bookshelf, they can trade again, and both will once again be at zero credits, with no one owing anyone anything.

Now this can be more complicated than a simple two person, peer-to-peer trade. Let’s add Max and Jill to this exchange. Imagine that Sarah still has that microwave, and still has -10 credits. Max has a product that Jon wants, and sells it for 10 credits. Now Max has +10 credits, Jon has 0 credits again, and Sarah still has -10 credits. Max, having 10 credits now, decides they would like a service from Jill, a quick bit of car repair, which both agree to price at 10 credits. Now Max has spent 0 credits, and Jill has +10 credits. Jill discovers her microwave has broken, and decides to buy a microwave from Sarah for 10 credits. Now all four are back at a balance of zero credits. This can continue rearranging itself as large or as small as necessary – either three people or entire cities and countries.

When seeing how much less complicated mutual credit is in comparison to our current system, it makes one wonder why we’ve used currency for as long as we have.

This is what separates mutual credit from the regular banking system.

In the regular banking system, the bank acts as a private intermediary. This is not necessarily an issue in and of itself, as there are even some mutual credit banks which work to keep track of all the ledgers and such, with little to no interest to help pay for their side of the transactions. But when the private banking system becomes interwoven with the government, as it is and must be when dealing with a government-backed currency, it forces citizens to use banks with that currency in order to exist. When someone needs to use a bank’s services just to exist, and they have control of the money supply, it allows that bank room to bloat. And bloat it does! And when it bloats, the supposed intermediary becomes fully capable of doing many things without any accountability at all.

It becomes capable of becoming, itself, a for-profit system. When the intermediary between for-profit transactions becomes a for-profit system itself, it needs interest to do so. And when the banks centralize and monopolize, as they do, who is to tell them what they can and cannot do? Who is to say that, as happens with the Federal Reserve on a regular basis, they may not simply make up new money in order to pay themselves? An easy transaction for them, simply adding numbers where they were not, becomes inflation for the rest of us. For those in the lower rungs of society, this becomes especially problematic, as our section of the wealth becomes dwarfed by the supply of it. But this is not as big of a problem for those with more wealth, who still may have a good amount in comparison to the rest of the supply. When this happens, the bankers may simply deal with those with the ability to pay for their interest, continually devouring those profits, inflating even more, and having to deal less and less with the effects of their utter lack of accountability to those on the lower rungs of society.

This seems to be something that can simply be fixed by removing their connection to the government and the major government supply. But can it, or does this show a problem inherent in the very concept of a for-profit banking system, no matter how localized?

Because even a private bank is ultimately there to assure the shareholders that they are worth continuing to have a share in, they are simply far more likely to make a decision that benefits the shareholders rather than the members. They are more likely to run in a way that maximizes their profit instead of a way that directly benefits the bank’s user. This can certainly go a few different ways: perhaps they can utilize large interest fees, or maybe they can go with a lower fee that attracts more customers.  Perhaps they won’t even have shareholders, but simply do all the planning themselves. But one thing is for sure: central planning, regardless of whether it exists in the private or public sector, is simply a poor decision. And because those banks are comprised of a small group of people trying to represent the interests of what may be an even smaller group of people, without full accountability from those using their services, they run the risk of making some bad decisions. Depending on the extent of those bad decisions, the person using the bank as intermediary runs the risk of losing their money forever. This is not at all a problem with mutual credit. Why?

Mutual credit does not necessarily need any hard cash as representing it, possibly even existing entirely in a personal ledger. Because it does not need any hard cash, and does not exist as a bank or association giving out money, it cannot have one person or group lording over a large supply of it or able to claim it. Because it does not have one person lording over it, and because it exists simply as a tracking of who owes what, and does not exist as actual money so much as an IOU tracker, it does not suffer from fear of an individual owner or group of owners adding in more credit to cause inflation. In mutual credit, each person can act as their own personal bank, lending and taking credit at a whim, and so each person can go wherever they please and continue lending using the mutual credit system. As such, it also has the grand advantage of not needing any interest rates, fees, or even profit to operate. When a price for something inside the mutual credit system changes, you can be assured that it is due to the production cost changing, not because of any sleazy dealings of the banks and money systems. And as consumers tend to prefer options that are both cheaper and more effective, the banks as they currently exist don’t seem to have much to stand on.

With cryptocurrencies like Ripple and Holo already running the mutual credit path, along with many local exchange trading systems popping up all around the world, the question no longer seems to be “Will the banking system collapse?” but rather, “When?”

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