How to manage the Volume of Money in Mutual Credit
The notion that volume is irrelevant in Mutual Credit, as long as it is asset-backed, is quite widespread.
It’s a mistake and a serious one. It is badly damaging the credibility of Interest-Free Mutual Crediters and stalling the development of a platform. Usuronomics is the only winner.
Clearly the issue of Volume needs serious attention. Management of Volume is one of the key arguments Usuronomists of various persuasions use to rationalize their pseudo-science. Rising interest-rates dampen demand for credit and thus stops inflation, they will say. And although we know this to be a half-truth, rising interest rates in fact cause rising prices, albeit not through inflation but through higher cost for capital, it’s far from complete nonsense. The notion that endless credit creation is possible under Interest-Free Mutual Credit, whether we call it LETS, MPE, Bartering, Hours or whatever, is simply wrong and destroying our case vis a vis the open-minded.
The goal is not to insult those Interest-Free Crediters holding this position, men I highly respect and consider colleagues. The goal is to make a viable case for Mutual Credit and ridding ourselves of mistaken notions hindering the fulfillment of its promise. As long as serious doubts remain about the Volume issue, it will never happen. It is better to work these things out amongst friends than to get bludgeoned by Austrians, let alone the simpletons of the Mainstream.
Having said that, I had a bit of a problem getting a good handle on the take Mathematically Perfected Economy has to offer and I’m grateful to Australia4MPE for taking up the gauntlet and arguing MPE’s case on the matter. Our dialogue can be found at the comment section of the article on Money as part of the Commons.
MPE’s take and its problems
You’ll have to read the dialogue in its entirety to see what happened, but I’ll discuss it as fair as I can in my own words here.
MPE doesn’t talk about interest-free credit, as it offers promissory notes. The reason they stress this is because people assume they borrow from the bank, which is obviously nonsense. The bank doesn’t lend anything. The money is created by a promise to pay and the bank does the bookkeeping. Hence ‘debit’ and ‘credit’. But while the promissory note is a more pleasant notion than debt, it’s no different: the promissory note has to be repaid. The key is to understand that a Mutual Credit Facility (MCF) is not the creditor. It represents the creditor, which is really the community. That’s why it’s called Mutual Credit: we allow each other to buy now and pay later. By not charging interest to our neighbor, we obtain interest-free credit ourselves too. The MCF just organizes this, keeps the books and makes sure outstanding credit is good and repaid. It takes a fee to cover its costs.
MPE believes that volume is irrelevant, because the money is in fact circulating credit and this credit is backed by assets. Hence the value of the money, they say, is in reality the value of the underlying asset. In MPE, the ‘debtor’ repays the promissory note at the rate of consumption. So if a house is expected to be end of life after a hundred years, the interest-free mortgage can be repaid over a hundred years too.
But the problem with this is, that MPE only looks at the credit side of MPE. But once the promissory note has been spent into circulation, it starts to behave as money. It will be used in other transactions. And while the value of credit is the underlying asset, the value of money is a function of volume. If the volume increases, when more money will chase the same goods, prices will increase.
And the volume will increase in MPE. Catastrophically. Because people will be issuing more and more promissory notes. And these will fuel asset bubbles. And people will issue more promissory notes, backed by assets at already inflated prices. Ultimately it would be unsustainable and we would have a crash and then there would be many promissory notes in circulation no longer fully backed by assets.
MPE simply overlooks this and vehemently denies it.
The reason is, that MPE has a mistaken, or at any rate incomprehensive theory of inflation. It says that rising prices under usurious credit is not a result of growing volume, but because of escalating cost for capital, interest. And this is true of course. John Turmel calls this ‘shift B inflation’. Because the principle is created but not the interest, someone else must go into debt to finance these interest payments. But for this second debtor the interest is also not created, so a third must go into debt. Etc. This explains eternal growth of volume in all the post war economies. And also the need for ‘economic growth’, as ever higher interest charges require monetization of ever more natural resources and human activity.
However, while this is certainly correct in terms of the longer term development of the money supply, it completely ignores the horrible asset bubbles that have been the norm throughout the post war boom and beyond. The current real estate boom and bust was fueled by low interest rates. This actually is a clear and patent example of exactly what we’re talking about. Only higher interest rates (to stop the easy credit and growing money supply as a result of it) to kill the bubble would have prevented the crash.
Furthermore, early Government debt-free units also saw horrible inflation through overprinting. MPE may say that that was because there was no asset behind the debt-free notes, but that’s not (only) why they lost value. They lost value because the money supply was growing too quickly and more dollars were after an equal amounts of goods.
It matters not, whether the money is debt-free, commodity backed or asset backed credit. What matters is volume. This is what experience shows in all sorts of relevant examples. It is also well known by all economists. They don’t understand the effect of interest on prices, but they do know volume.
So how to manage volume?
The volume must develop in parallel to the value of transactions in the economy.
Next, the money supply must always be as big as possible without raising prices. This is critical, otherwise there will be scarcity of money.
This means that the MCFs can dole out credit in limited amounts. There is a greater demand for credit than there is for money. We will probably need more credit than we can get from the money creation process itself. This can be comfortably solved with JAK Banking and some kind of Brokerages, which could turn out similar to Islamic Banking: sharing both in risk and profit and not on an interest basis.
This leaves the need for some kind of a Monetary Authority (MA) that regularly measures the money growth and decides how much more or less credit can be allowed. There should also be some policing, weeding out rent-seeking in the system, or for instance withdrawing large sums from circulation by rich players.
However, this can be well managed. The MA could be well restricted with a strict charter. It should make education a key target, so that every able bodied citizen understands by what (easy to comprehend) basic parameters the MA operates.
The MCFs should have equitable rules in place sharing the credit that the system can handle, so that each commoner gets his fair share in the Commons. Basically everybody would have a right to a certain amount of credit every so often. Extra credit can be obtained in many ways, as already mentioned.
Money will be abundant and stable. Rents would be decimated, because they are almost all based on cost for capital. The bottleneck in production will swing from capital to labor, meaning that labor will dominate the market place, as it should. Many people will be self employed again. No more wage slavery. They would be doing what they thought either comfortable or worth while, not what they must to survive. Incredible abundance would become the norm.
It’s just like land reform. We cannot just say “ok, go out there and take what you will”. We need reform that gives the commoner good access to his share of land.
The Commons must be free, meaning everybody can take his share, no more and no less. I don’t know how that should be done with land, although I have ideas, but in terms of Interest-Free Mutual Credit it’ll have to look something like the above.
Mutual Credit units are undoubtedly a viable and crucial model. Demurrage money may even be (slightly) better, but Mutual Credit’s great boon is its familiarity. It’s pretty much like what we have now, but completely at the service of the community, instead of the other way around.
Cheap, plentiful and stable.
Helping us to tap into a common abundance that we should probably fantasize more about.