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Mutual Credit for the 21st century: Convertibility

by on January 10, 2012

I’m reposting this because at this point concrete solutions are crucial to the debate. When I published it first it was probably a little abstract for most, but perhaps now it is a better time to discuss these fundamental issues of Complementary Currencies.

At the related links below, the other important articles on Mutual Credit are made available.

Modern complementary currencies either allow for interest free credit, or for convertibility to euro or dollar. This explains to a large extent why interest free credit is not the norm and why Banks still exist. To compete with banking currencies in the marketplace, interest free credit (Mutual Credit) must be available in convertible form. Fortunately, the technology for this has become available.
This is the key to a new era.

At this point there are two major methods in operation for the creation of interest free ‘complementary currencies’. That is, units created by private parties instead of the State.

There are Mutual Credit based units, as used in barters worldwide, but also LETS. And there are the euro (or dollar) backed units. The US Berkshares and the German Regional Currencies are designed this way.

Each have their particular strengths: Mutual Credit allows interest free credit. Euro/dollar backed units allow convertibility which is equally important.

However, and this is the main challenge for interest free currency at this point, there are no Mutual Credit based units which are also convertible. And the euro/dollar backed units don’t allow for interest free credit.

So each has a major trump, but neither has both.

This is one of the key reasons why private interest free currency has never been able to really compete with banking units.

We have already discussed Mutual Credit, so let’s also get a basic grasp of how euro/dollar backed units are designed.

It is equally simple.

Designing Regional Currencies
1. 1 RC = 1 euro/dollar.
I.e., they use the accounting function of the dominant currency. This comes in handy for two reasons.
First, it allows price transparency. If the RC is allowed to ‘float’ it means small transactions in shops involve calculations which may change per day. Your bread will cost $2/3RC one day and $2/2,5RC the next.
It is also minimizes complications for the firm’s bookkeeping: they don’t need a second ledger and can just add up their income in RC with their dollar/euro income and pay taxes in dollar/euro over the total.

2. People can buy them with a discount, usually for around 95 cents.
It can vary from RC to RC: some will offer them for 90 cents, others for 97. But let’s stick with 95 cents here. This means buyers of the RC pay 95 cents for 1 dollar/euro of purchasing power. This gives a useful incentive to people to pay with the RC.
Businesses can sell their RCs back to its supplier for the same price: they get 95 cents back for 1 RC. This amounts to a small loss. They accepted the RC at face value (1 RC = 1 dollar/euro). But of course this invites them to try and spend the RC themselves, instead of converting back to dollar/euro and in effect taking the RC out of circulation.

3. Euro/dollar backing allows convertibility……
Because the RC is sold for dollar/euro, with a discount, there is always 95 cents for every RC in circulation. This is how convertibility is created.

4. …but it destroys interest free credit.
There can never be more RCs in circulation than the issuing organization has dollar/euro in the bank as backing. No RCs therefore can be lent out, not interest free, anyway.
This is the key limitation of this system. The Chiemgauer, which is the largest RC in Germany, circulating in and around Rosenheim, near Munchen, is a good example. They are successful, see turnover grow with 100% per annum. They cooperate with an Anthroposophical bank (GLS Bank), allowing them to offer bankaccounts in Chiemgauer. But they can’t offer interest free credit in Chiemgauer. In fact, they are one of the very few offering credit at all, but at a fairly steep price of 7%.

5. Demurrage
Still, RCs can be successful in dampening the interest drain to the plutocracy, because they do bring down capital costs. Not by interest free credit, but by making better use of available money by letting it circulate quicker.
A dollar/euro may go round 8 to 10 times a year, facilitating a total of 8 to 10 dollar/euro worth of trade.
Demurrage is a penalty on holding cash: typically about 12% per year. A demurrage will facilitate a massive increase in velocity of circulation. The famous Wörgl experiment saw its units circulate up to 130 times during the 13 months it was in operation.
This means that with the same amount of cash op to 13 times more trade can be financed, in effect slashing capital costs by more than 90%.

Now that we understand the classic method for creating euro/dollar convertibility, we can see why Mutual Credit units are not convertible: they are not backed by euro/dollar so the issuing organization does not have the cash to convert their units.

That’s why, at this point, we can have either convertibility or interest free credit but not both.

Convertibility for Mutual Credit
The problem of convertibility has haunted Mutual Credit (MC) ever since it was invented. But is it a problem? Some within the interest free community argue it isn’t. Even the sages of WIR claim lack of convertibility is not a problem and even a strength: they claim convertibility would lessen the incentive to keep business within the network.

There is some truth in that, but the medicine is worse than the disease. Because lack of convertibility forces firms to closely monitor how much of the MC units they can accept. They can accept no more than it can spend usefully in the network. More successful players in the network will at some point be forced to stop accepting the currency, until it has spent its cash reserves.

This is the basic bottleneck that all MC facilities face: the more successful players in the network have more MC income than they can plausibly spend, forcing them to limit their acceptance. Particularly prospective participants can be difficult to convince that partaking in the MC will give them business that is lucrative to them, exactly for this reason.

So making the MC unit convertible will solve that: it greatly increases the ‘liquidity’ (what it will buy) of the unit and its acceptance by the business world.

But with the advent of the internet, this problem can be easily solved, and the way forward has been shown by Bitcoin: an on-line marketplace, where participants can buy and sell MC units. Just like a FOREX exchange.

To be honest: Bitcoin beat me to it, because this is also how the Gelre will allow convertibility. But of course, Bitcoin is not credit based and although a very powerful experiment, it will prove not to be very important in the marketplace.

So what does such an on-line marketplace look like? Point for point:

1. The Mutual Credit Facility (MCF) offers the on-line trading facility.

2. It always offers 1 MC for 95 cents. In this way, businesses offering their excess MC can’t ask for more. The incentive for the public to buy them is maintained. This effectively tops the free market price for the MC at 95 cents and stops speculation or other destabilizing and unwarranted activities. Convertibility exists for one reason only: improving the scope and power of the MC, to service the public and free trade, not all sorts of silly ‘capitalist’ games.

3. The MC uses the income it obtains from selling MCs on the market place to create a ‘stabilization fund’.
MCs coming into circulation by selling them at the marketplace are not credit based. So in effect MC is morphing into a hybrid: some units are euro/dollar backed, although most still will be simply credit based.
The income from selling MCs should not be seen as income for the MCF. But as backing for outstanding MCs. And used to buy back MCs. The ‘stabilization fund’ can be used to buy back MCs especially when there is excess supply on the on-line marketplace, alleviating downward price pressures.

4. The MCs rate will be always very close to 95 cents
For several reasons. First, the agreement is that 1 MC = 1 dollar/euro. Firms must accept them one on one. Because the MCs purchasing power is always 1 dollar/euro for the consumer, the lower the rate for them at the marketplace, the higher the demand will become, with a strongly stabilizing effect.
Secondly, MCs in circulation are mostly backed by the promise to pay by debtors. These debtors are continuously paying off their debt and they need to obtain MC units for that. Either by selling their own goods and services, or buying MCs at the on-line marketplace.
Thirdly, the stabilization fund can intervene, if sudden supply shocks occur.
Finally, if the MCF goes bust (which can happen in the case of mismanagement), all outstanding MCs will be taken out of circulation by paying off outstanding debts. This can only be done by buying up all outstanding MCs via the marketplace. So everybody is more or less guaranteed to get their money back.

5. In this way a real free market price for the MC can be established
And this has many advantages. It allows for transparency and real balance between supply and demand. It can stabilize supply and demand by rising or declining prices. It also provides real information about the volume in circulation: if there is too much in circulation, chances are there will be too many MCs being offered for sale, with downward pressures on its rate. This would suggest there is too much outstanding credit, which can be easily corrected. It gives the public and the users of the money reliable information about the all over effectiveness and health of the MC.
With enough liquidity in the market it will also show what rate is really necessary. As said earlier, MCs (and Regional Currencies) are sold with a discount, varying from 3% to up to 10%. There is no real free market information available on what is the optimal percentage. And this will also vary from system to system, depending on local circumstances. The fact is: nobody knows how high this discount should be and the free market can answer this question.

6. In this way, convertibility to other free market units is also established
And this will be important, when more and more MCF’s and RCs become available.

So this is how convertibility can be obtained. Mutual Credit buying euro or other free market units. Just imagine: we’ll have printing presses, just like Ben Bernanke, and we will print money able to buy dollars, euros and Gold.

Babylon demystified. That’s why we are in this business to begin with.

Convertible Mutual Credit will finance our dreams and liberate us from usurious usurpation.

We will use it to buy back the world.

Don’t withhold your questions from us! I will answer them in the comments and we will all learn from them!

Mutual Credit, the Astonishingly Simple Truth about Money Creation
Concepts of the Gelre, or: What is ‘High Powered Working Capital’?
Mutual Credit and Inflation
The Goal of Monetary Reform

  1. Satoshi permalink

    Here’s a very relevant article on p2p credit. Ripple, Stellar, to name a couple.

  2. Spartacus permalink

    I am looking into the legality of offering a free market for MCC in the US. Since AFAIK there are not any such currencies in existence, there may be difficulties.

    The first obstacle I have seen is that it may be the case that in the US, such a currency would deem the issuing organization to be considered a money services business (MSB).

    One type of MSB is a money transmitter which, among other requirements, requires around $5000 for an application fee, annual renewal fees and a minimum net worth of $250,000. The issue arises from a recent (2013) banking secrecy agreement (BSA) designed to regulate bitcoin.

    This is from the LinkedIn discussion
    “A regular run-of-the-mill barter exchange does NOT fall under the guidance of FinCEN or the BSA. Because the currency is internal, and as Annette pointed out, it cannot be converted to cash, they don’t have any issue with it.
    – If the exchange has any sort of “cash-out” option, they DO fall under the guidance and are required to register and report as required by the BSA. That would include a metal-backed exchange such as Sovereign (if it were located in the U.S.), and I seem to recall at least one barter exchange here in the U.S. that has a cash-out option.”

    The exact details of the BSA requirements which convertible currencies a subject to are not clear yet but it seems like being categorized as an MSB would be a major issue. There must be other similar areas of the legal code relevant to convertible MCC.

  3. Reblogged this on Things I grab, motley collection and commented:
    Though posted in January 2012, this post remains valid.

  4. Dugan King permalink

    Great article Anthony.

  5. iwuvjhdva permalink

    Very impressing!

    The main question is: how to protect such a system against fraud?

    For instance, if one participant has two accounts (or two participants has accounts and are in collusion), a transfer of MCs can be performed from one account to another in form of direct transfer (if the system allows that) or in form of fictional purchase.

    After that the gained MCs could be easily exchanged to a national currency through the Mutual Credit Facility.

    Could you please share your thoughts on this problem?


    • It doesn’t matter: all companies have the right to sell MC. Consumers don’t, but they will never have much of it: they don’t have credit.

      Even if one company goes into debt, and, in collusion, gives his credit to his partner who then sells, there is still the obligation of the debtor. No major credit will be given without collateral, so the debtor better make sure what he’s doing.

      Also: management should not be to preoccupied with the ‘rights’ of individual participants and manage the greater good. I suggest few and very simple rules in the system, one of them being:
      ‘Both parties (MFC and participants) can end participation immediately, without offering a reason. Outstanding liabilities will be settled reasonably (giving a dumped debtor time to repay).
      This means the MFC can kick all fraudsters out. The on-line banking system always gives full access to the MFC to all accounts, so it’s easy to see what’s going on. Furthermore, because it’s a regional currency, its scope is easy to manage, that’s one of the key reasons we want regional money in the first place: it doesn’t grow over the head of the managers of the system.

      • iwuvjhdva permalink

        First of all, thanks for the very quick reply.

        So, unlike LETS, individual participants don’t have credit at all? Does that mean that they are allowed to spend only amounts in national currency or national currency-backed MCs (purchasing them on the MCF market first)?

        > No major credit will be given without collateral

        How this will be implemented technically? The MCs are not money at all from the point of view of the law. Is it possible to demand collateral for them?


        • In theory it’s of course possible to give individuals credit too, but in a professional environment (and this must be done professionally to unlock its potential) it will be an administrative nightmare to get the credit back from individuals who mess up. It’s much easier with businesses. Businesses also have a much better grasp of what credit and working capital is.

          Consumers just buy the units (95 cents for a 1 euro/dollar worth RU(nit), meaning a 5% discount for whatever they buy with it), or accept small amounts of wages, helping to greatly increase the liquidity of the unit in the process.

          It matters not whether the law accepts RC as ‘money’ in a theoretical sense of the word. There is a contract, that’s all that matters.

          • iwuvjhdva permalink

            Thanks for the replies, it’s much clearer now.

            In that case, if all the liabilities are peer-to-peer and all the credits has a contract, what are the advantages of the scheme compare to ordinary barter? Except the common directory of services and commodities and that individual participants can buy MCs and pay by them?

            • the convertibility to euro/dollar! That’s the whole point!

              This is the way forward, Mutual Credit suffers from lacking liquidity, because the most successful players make more MC than they can plausibly spend, forcing them to limit acceptance. This is now solved.

              • iwuvjhdva permalink

                Anthony, I’ve wrote you an E-Mail to info at Please take a look.

              • iwuvjhdva permalink

                Hm, it’s still not clear to me how does the crediting work in the system.

                For example, we have business A and business B, both has 0 MC balance initially.

                Business A wants to buy 100 waterpumps from business B, 10 MC for each.

                What exactly happens between the parties, who gives the credit and what parties become indentured?

                Is it possible to find the step-by-step description somewhere?

                • It’s just bookkeeping. Business A goes 100×10 into debt, Business B gets 1000 credits which he can use to pay others with. By going into debt, the money is created.

                  Look a little bit into LETS, for instance. It’s just as basic.

                  • iwuvjhdva permalink

                    Yep, business A goes -1000 MC into debt.

                    What is the guaranty that it will pay back the debt?

                    You said that it will have obligation of the debtor stated in the contract, but with respect to whom will be this obligation? To MCF?

                    • Yes, to MCF. MCF manages the whole thing in the name of the participants, with the interests of the network as its primary objective.

                      Small loans is just a matter of contract, but serious credit requires collateral.

                    • iwuvjhdva permalink

                      The number of levels of comments hierarchy is limited in this WordPress theme 🙂

                      Yes, this is actually the answer. Thanks for the explanations!

                      I’m aware of LETS, just was a little bit confused by the words that all the relationships in the system are peer-to-peer.

                    • hit reply to read squashed text It’s a nasty bug 🙂

                      Great, good luck K.

      • Facio Libre permalink

        I like your take on Interest Free Credit and Debt Free Money, BUT

        Virtual Money (Digital Money) = Slavery

        • Lee Redinger permalink

          Can you explain that thinking? How do you see virtual money as slavery?

        • No, it’s not very important. Modern economies cannot be run on cash alone.

          Of course, what IS important is who controls the database.

          I’m in favor of paper money though. For networks in a local/regional level I definitely recommend using paper besides the electronic modes of payment. On a national/international level it’s difficult to manage.

  6. Interesting thoughts.
    What about having both cash and mutual credit currencies and convert between them using the Ripple protocol?

    Is designed as mutual credit, but you can represent cash with it.

    I think an hybrid is not a good idea. Mutual credit is free-money because it has zero interest, but is also abundant, so it can’t be convertible into cash, which is scarce. Cash monies need demurrage to be free-monies (to allow 0% capital yields), but they’re more liquid too.
    If there’s a market people can trade cash for credit according to their needs at that moment.

    You may also be interested in freicoin: bitcoin with demurrage:

    • nice comment! Thanks for ripple, had not seen it yet.

      And you’re right about demmurage/cash/free money.

      However: mutual credit convertible to cash (through an open on-line ‘market’ or ‘bourse’ or ‘exchange’ where people can trade credit units for euro/dollar combines best of both worlds: zero interest and optimal liquidity.

  7. OOPs. What do we call the “discount” at the time of purchase? Usury!! Just an observation. Thanks Rduanewilling

    • huh??

      Up till now I agreed with just about everything you brought forward here Rduanewilling.
      But how can lower costs be considered usury?

    • Lee Redinger permalink

      I know this is coming in late, but …

      @ rduanewilling, calling it usery does not make it usery. Your comment is actually pretty common. It comes up because the meaning (not just the definition) of the word “usery” is not clear, or not the same, to everyone. The people who really understand this money problem well only apply the word “usery” to compound interest charged on “new money loans” like most bank loans. Some others apply the word to any interest charge. Those who are still hurting, and still getting a good run at understanding the creature, will zealously apply the word to anything that hints of a profit to the “bank” entity. And, of course, there are some bankers who just can’t think this way. They might say anything at all.

      What you are calling usery, that 5% discount, is only a simple service charge. It does not recur periodically until repaid! It does not consume of your production every day until you die! It does not make you pay 2.5 times the price of your house. It is no different in function than a margin, or markup, that a retailer charges over his cost of goods.

      If you must think of it as usury, please consider it alongside the horrible levels of usery it crowds out. It is so, so mild in that perspective!

      • Very good explanation. I see by the other response that some cannot allow a business (bank, MDF, store selling currency) to make any money for their service. That is not a problem with the system, that is not usury, it is merely an irrational mental block against being paid for one’s labor.

  8. My opinion on any of this is that once you allow usury or interest in on any part of your economic or financial system, then you have destroyed anything good about what you are doing. Interest is the arsenic in the punch bowl. If you leave it completely out, then your system would probably work, at least better than what we have now.

    To make an economic system work properly, interest and usury has to go completely.


  9. haig permalink

    1.) With the MC pegged to national currencies (USD/EUR/..), what happens when those currencies are debased?

    2.) I agree with the idea of ~zero interest when initially creating money/credit, but sometimes there are valid reasons to charge interest on loans, such as when they are granted for risky ventures. A MC system should still allow for people to loan MC to others and charge them interest for it.

    • 1) The main aim of the peg is to make it easier for the users of the unit. It provides price transparency, otherwise with changing prices people would be calculating all the time.
      But if the national unit starts to devalue at an inappropriate rate, or implodes altogether, other pegs are thinkable. A basket of commodities, or metal of course.
      The key is not to hoard the unit. Pay with mc, hoard the national unit or gold. in that way you are certain you will not lose value and it is beneficial for the unit and the other users, because the same unit can finance more transactions.

      2) I understand. I’m not in favor of it, but nobody can stop it. However, there are many other ways that people can invest in projects of others, without interest. A brokerage would allow individuals to invest ‘savings’ in real projects, sharing in the risk.
      If you want to simply store wealth, consider buying some Gold.

  10. I agree with this article. Usury has to go. In the scriptures, it is considered stealing. I wrote an article on this about a year ago, but it deals with the spiritual fallout that comes from usury. It is considered stealing.

    • Yes, Usury is a real sin.

      The horrible thing is: you can’t avoid paying. 45% of what you pay for you daily needs are ‘cost for capital’ (interest) included in prices.
      If you have no debts and no usurious income on capital, this means you lose net 45% of your income to interest.

      • Anthony,

        Yes, usury is a part of the cost of doing business for most businesses and that’s why it wastes the resources of everyone involved. If the usury on any debt service was eliminated, then there would be more disposable income.

        I’ll admit, I haven’t looked into your solutions as I just ran across your blog. I will take the time to read what I can as it looks like you’ve spent a lot of time on this subject. But usury
        is the economical Kool Aid that has consistently started wars, cause unbelievable inflation, and ultimately ruined every economy that uses it. If usury was so good, then why are all the western banking organizations doing well? Usury is an economic slave system.

        More importantly, it violates God’s laws; natural law. It takes from the disadvantaged and it keep them economically downtrodden with no future. Any economy that uses it will eventually fail and self-destruct.

  11. Markoff Chaney. permalink

    Very well explained I commend you.

    What matters about the rising cost of imported bread cost if local bread is cheap as usual?. Import prices are international trade and determined by how national economies relate to one another.

    Local LETS can easily convert to national markets using national currency conversion agreements. A straight 1-1 ratio makes it simple and seamlessly workable. National/Local – PXU exchange is free market (non-force) determined at national level. This allows the national/local economy which is not international to carry on regardless.

    International trade can also be seamlessly intergrated upon an agreement of some kind of (PEX) Planetary Exchange Units. China and Japan is the latest and biggest mutual trade agreement bypassing USD. They have a convertibility agreement for their local currencies (probably denominated in commodities?). It is not difficult – economies only have to agree.

    This can be very quickly done when the force-backed money monopoly is ended. Many local LET systems are already up and doing well ( Argentina, Greece, Portugal are some). This is the way international trade use to be. Marco Polo, for example bartered Venetian saffron for Chinese silks – Gold was used as a common PEX index reference only.

    The key is the ending of force-backed currency monopolization.

    My personal suggestion for the Financial Reboot:

    Return of ALL interest payments to everyone on the basis of fraud, ie void contract. This is easy as all transactions are recorded under SINs worldwide via IRS-IMF.

    Return of ALL fees, fines, penalties, restitution of wrongs.

    This will come from the stolen fortunes of the slave masters and result in a flowering of the world as people get back ALL their treasure and start to spend it on stuff that is NOT war – Bucky called it livingry as opposed to weaponry.

    This is enough to get us to planetary civilization which is a prerequisite for Galactic membership.


    • Thanks!
      I can certainly live with your solutions!

      • Yes, indeed, I believe that everyone on earth could live with this solution, that is unless your a bankster. This is a step in the right direction. We must take back control of our own lives and futures. The time for this idea has come, if not longly overdue. The Human Race is unshackling the chains of economic slavery.

        Thank you, everyone on this blog for being so aware and conscious. I believe working through these ideas could and will lead to a new age of enlightenment, a second Renaissance if you will, in which we are our own masters. But I have a feeling that the banksters will not go quietly or peacefully because they are addicted to the false power they currently believe they have, and this worries me. To them, this is the highest form of game and there is a real rush or high involved. All one has to do for an example of this “high” from money is go to a casino and watch the winner of a jackpot.

        I’m afraid that in freeing ourselves we will also pay a hefty price. How do we kill the beast (usury banks) swiftly and without collateral damage, which Im afraid will get worse the longer it takes.

        • Where Satan gives the false power you mention, the Christ gives the Real Power.

          The book that did more than anything else is called God at Eventide. It’s part two of a series, the fist part is wonderful also. It contains 365 little gems to meditate on. It shows you the way to the One, which is through the Christ.

          It will give you what you need to transcend the fear of the enemy and to learn what your task is.

          • Which is why your blog comes off as anti-Semitic and irreputable. Anyone who cannot make a coherent argument about economics without bringing in religion has proven that they cannot separate the two– that their agenda in business is motivated by their religious agenda. You are pretending that you are presenting a secular argument for global change. In reality, your comments are those of an evangelical Christian. You have every bit as much of an agenda with this as you claim factions of the Jewish population does in other areas of this blog.

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