Mutual credit
Encyclopedia
Mutual credit is a type of alternative currency
in which the currency used in a transaction can be created at the time of the transaction. LETS are mutual credit systems.
Typically this involves keeping track of each individual's credit or debit balance. Although the effect is like a loan, no interest is charged, and since mutual credit allows for trading and cancelling balances with others, debts can be paid off indirectly.
One 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).
and the Cincinnati Time Store
are examples of mutual credit systems. A number of different mutual credit systems have been proposed. Mutual credit can be combined with a number of features of alternative currency
systems. For example, it is usually (but does not need to be) a local currency
, and it can have a demurrage
fee for the holding of balances.
Alternative currency
Alternative currency is a term that refers to any currency used as an alternative to the dominant national or multinational currency systems...
in which the currency used in a transaction can be created at the time of the transaction. LETS are mutual credit systems.
Typically this involves keeping track of each individual's credit or debit balance. Although the effect is like a loan, no interest is charged, and since mutual credit allows for trading and cancelling balances with others, debts can be paid off indirectly.
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 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).
Examples and types of systems
LETS, the Community Exchange SystemCommunity Exchange System
The Community Exchange System is an Internet-based trading network which allows participants to buy and sell goods and services without using a national currency...
and the Cincinnati Time Store
Cincinnati Time Store
The Cincinnati Time Store was a successful retail store that was created by American individualist anarchist Josiah Warren to test his theories that were based on his strict interpretation of the labor theory of value. The experimental store operated from May 18, 1827 until May 1830...
are examples of mutual credit systems. A number of different mutual credit systems have been proposed. Mutual credit can be combined with a number of features of alternative currency
Alternative currency
Alternative currency is a term that refers to any currency used as an alternative to the dominant national or multinational currency systems...
systems. For example, it is usually (but does not need to be) a local currency
Local currency
In economics, a local currency, in its common usage, is a currency not backed by a national government , and intended to trade only in a small area. As a tool of fiscal localism, local moneys can raise awareness of the state of the local economy, especially among those who may be unfamiliar or...
, and it can have a demurrage
Demurrage (currency)
Demurrage is a cost associated with owning or holding currency over a given period of time. It is sometimes referred to as a carrying cost of money. For commodity money such as gold, demurrage is in practice nothing more than the cost of storing and securing the gold...
fee for the holding of balances.