More on Mutual Credit
(Left: Thumbs up for Mutual Credit!)
We need credit and that’s
why a credit based money supply is so attractive. It catches two birds
with one stone. It’s probably its simplicity that makes it so hard to
digest. It solves money scarcity, the boom/bust cycle, Usury and
decentralizes credit allocation as much as is humanly possible. In
short: it meets all requirements of comprehensive monetary reform.
Mutual Credit in its purest form is peer to peer credit by double
entry bookkeeping. I think the phrase was first coined to describe LETS,
Local Exchange Trading Systems, which were proposed by Michael Linton.
LETS was designed to facilitate exchange between normal people. It is
Hour based, which is not something I’m overly fond of. Not because
Hours are not a good unit of account, but because nobody at this point
knows what an Hour is worth. This hinders price transparency. It creates
complications for businesses, because they don’t know how to price
their services in Hours, and because they need a second ledger to keep
The problem of money is not its unit of account function. Yes, we
need just weights and measures, in money too, but just weights and
measures are stable and predictable. It does not matter what it is, as
long as people know what they can expect.
At this point the Dollar (or Euro) provide a reasonably stable unit
of account and everybody knows what they are worth. Therefore I suggest
not complicating the issue and just settle for the ’1 unit = 1 dollar’
agreement. This is how most regional currencies and professional barters
work. On a national level this would also facilitate an as simple as
possible transition. We can simply replace the current usurious dollar
with an interest-free one.
In its simplest form, everybody gets the same credit limit and the
money supply is always equal to total outstanding debt. No credit
facility is necessary.
For this reason, some resist the idea that for instance a major unit
like the WIR is Mutual Credit: there a strong central credit facility,
the WIR bank, decides who can borrow what and charge service and
handling costs and nowadays, sorrily, even some interest.
But to me WIR is still Mutual Credit, because while the fundamental
peer to peer nature of it is slightly obscured by central management,
it’s more about the process of credit creation than anything else. It is
low cost because of mutual acceptance.
As we have been discussing
extensively, credit can be interest-free if it’s mutual. Nature unfolds
as a process between to only seemingly opposing forces: the binary
opposition of Yin and Yang. Debit and Credit are its equivalent in
money. The one is not better than the other. By accepting the credit of
the other today, we are allowing ourselves to finance our home and
business ventures tomorrow.
Society is served by our well-being and we have a direct interest in the well-being of our brethren.
The Difference between Fractional Reserve Banking and Mutual Credit
While both create money by double entry bookkeeping, Mutual Credit is
vastly superior, simply because it’s so much more simple. It does away
with the need for reserves.
Fractional reserve banking was designed to hide the fact that the
banks don’t lend deposits. It began as a scam, where goldsmiths lent out
up to ten times more Gold than they actually had. Later the process was
redesigned: every bank could lend 90 cents on every dollar in deposits,
this seems to have been the situation when the Federal Reserve Bank
opened up shop. Nowadays it’s very hard to get to the bottom of it all.
It does seem that the banks just lend whatever they want.
They are officially ‘restrained’ by ‘capital reserve requirements’.
This is then used by the Bank of International Settlements, which is the
apex of the global banking cartel, to manage the global volume of
money: if they raise the capital reserve requirements from 3% to 4%, the
banks can ‘only lend 25 times more than they can ‘back’, instead of 33
times more. This chilling effect on their capacity to lend leads to a
contraction of money, which in turn will lead to depression. This is the
game they play, late 2012 BIS ‘expected’ (made clear that they were
going to create) the next round of bank busts and a deepening of the
depression. “But hey, we need stable banks, no?” The wide eyed
banker/magician tells us.
It’s all complete baloney. We don’t need reserves. Management of the
volume of money should not be based on the stability of the credit
facility! Nothing could be more absurd, volume must be managed to
safeguard stable prices while maintaining stable access to credit.
So this is the great beauty: we don’t need a cent to create all the
money we will ever need. We don’t need ‘savings’ for investments. We can
restart from scratch at any given moment.
The credit facility can never go bust. If a loan goes sour and
collateral cannot be liquidated (an extraordinary situation) the debt
just circulates as unbacked money and the credit facility can take it
out of circulation at its leisure by passing on the cost for this in the
service and handling charges it passes on the users in the system. Just
like we have Mutual Credit, we have mutual insurance against default.
Only one question remains: how do we allocate credit? In the current
system, the banks lend as much as they can and demand is limited by
interest rates. Low rates encourage demand and facilitate booms. Higher
rates dampen demand and thus the volume of money and thus growth. High
rates will precipitate depression. As for instance happened in the late
seventies, when Volcker ended chronic inflation by driving rates up to
13%, plummeting the West into years of stagnation and decline. The
economy never really fully recovered, although that was also to a large
extent due to the neo-liberal (libertarian) policies that became the
norm. This resulted in chronic lack of demand in the economy because of
ongoing austerity and decline in real wages.
As we have discussed extensively
in regard to Mathematically Perfected Economy, a highly advanced Mutual
Credit system, 0% interest rates will lead to a demand for credit that
is greater than the economy can handle: it would create so much
structural demand in the econonmy that there would simply not be enough
productive capacity in society to meet it and prices would start to
rise. Asset bubbles are to be expected, both in commodities and real
estate. A vicious circle of growing asset prices and growing demand
would seem to guarantee this.
The interest-free crediters have not been able to explain why 0%
rates would not see the same bubbles as the banks have been blowing for
centuries through easy credit.
Credit allocation should be based on rights. We participate in the
system and thus have basic rights to credit. I propose a truly radical
solution to the question how to allocate the available credit: let’s
share it equitably.
Equitably is not equally. Some people have a greater need for credit:
not all of us are going to be businessmen, for instance. If we have
greater income, than we probably will have a greater need for credit
too: more affluent people will probably want to live in bigger houses,
We can create basic algorithms to facilitate fair sharing. A couple
of parameters are important. The money supply must remain stable. It
grows when new credit is allocated and shrinks when debts are repaid.
It’s a dynamic process. Because the demand for credit is greater than
what we can supply (given the need for stable money), it is in
everybody’s interest that loans are repaid as quickly as possible.
Borrowing 300k and repaying it in five years has a similar impact on the
money supply as borrowing 150k and repaying it over ten years.
Hence, people who can repay more quickly, have access to more credit.
Another rule should be that young people who are starting out in
life, coming together to create a family, should have preference over
people who already have had an interest-free mortgage.
It’s all not completely clear cut and it will have to be worked out
in more detail, but the direction is clear: there is a certain amount of
interest-free credit available, and we all have a claim to a part of
it. Our individual rights must be balanced with the common need for
The Credit Facility
We all love peer to peer and personal sovereignty. We are sovereigns
without subjects. This is the truth and our money must harmonize with
that. Perfectly ideal would be private issuance. For instance the
promissory notes of MPE. Wayne Walton is also strong on issuance by the
But because of the need to allocate credit to manage volume (and to
insure repayment), I think we cannot do without a credit facility to
manage the whole thing. The books must be kept. Volume managed. Defaults
handled. While there are many responsible individuals in society, we
must also allow for the fact that we not all are completely capable of
meeting our commitments without some gentle guidance.
But the understanding must be that the credit is ours. It is not the
facility that creates credit, it’s our mutual agreement and the facility
only exists to manage its day to day implementation. We are not going
to face stern technocrats who are weighing us up to see how much they
can get out of us. They are only going to check whether we can meet our
Credit facilities should have clear charters along these lines.
The credit facility covers its costs with real service and handling
fees. A mortgage should cost no more than 10% of the principle and
perhaps even less. A useful rule of thumb is that the financial sector
should not account for more than 1% of total economic activity.
The Monetary Authority
In a major national economy, there will be plenty of credit facilities
scattered around the country. The total volume of money must be managed
centrally and this is then the Monetary Authority.
This central body indexes economic activity and makes sure the money
supply develops accordingly. If the economy grows, the money supply
grows equally and if the economy is facing a downturn for real,
structural reasons, than the money supply must shrink accordingly.
The Monetary Authority oversees total credit allocation and makes sure individual credit facilities don’t overextend.
It should be independent from taxation and spending in Government.
Otherwise a dangerous powerglut emerges and Government would have a
strong incentive to subvert its operations for its own ends.
Considering the crucial issue of volume, there is well warranted
distrust of any central control, but on the other hand it is very hard
to see how all central coordination can be avoided.
As the wise men throughout the ages have told us, ‘the price of
ignorance of public affairs is being ruled by evil men’. The
dimwittedness of the masses and their blind trust in Government has been
humanity’s bane for as long as there has been recorded history.
Therefore the Monetary Authority should also have the duty to make sure the populace is well educated in monetary matters.
As we can see all this is not brain surgery. Far from it. It is not
the complexity of money that has made it such an elusive subject. It has
been the Money Power’s subversion of public thought and its subtle
manipulation of our greed and sense of insecurity, its exploitation of
Stockholm Syndrome, that has made monetary reform so incredibly
difficult to implement.
But now that the banking cartel has been exposed, now that a rational
discussion of money is ongoing and a real chance at getting it right is
slowly materializing, all the nonsensical ‘complexities’ are swept
Education is fundamental to achieve reform and it’s even more vital
to secure it permanently. Every able bodied man should know the Monetary
Authority’s charter and understand its basic operations.
All decision making by the Monetary Authority should be completely
transparent. No oracles with bizarre language obscuring reality. No
‘need’ for ‘discretion’ to ‘placate markets’ and sundry nonsense.
We’re all grown ups, this our society.
Where we can talk endlessly about Usury because it’s so pervasive and
this innocent looking 5% per year has such profound and unexpected
implications, Mutual Credit is simplicity personified.
The reason that Mutual Credit is so incredibly attractive is that it
is so close to our current experience. The only thing that changes is
our perception: we don’t ‘borrow’ from the bank, we exercise our right
to our fair share in the available credit. Therefore it is
This familiarity also greatly helps the transition to a usury free economy.
This does not mean that Mutual Credit is the only way forward. The
goal is the end of usury, not the implementation of Mutual Credit. But
it’s hard to think of a more simple and understandable approach. It is
Sure, the change will be profound and it’s difficult to fathom all
the implications. But considering the stark choice we face, ongoing
servitude and Plutocracy vs. freedom and justice, this is the most
simple and straightforward approach available at this point.
It is the transition itself that is most risky and we will further
discuss the implications of ending usury on credit in a future post.
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