Mutual Credit for the 21st century: Convertibility
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%.
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!