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 their books.
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 they are, 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 how much and charges service and handling fees 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 two 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, for instance.
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 stable money.
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 sovereign.
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 commitments.
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 away.
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 interest-free.
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 immediately implementable.
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.
Mutual Credit, the Astonishingly Simple Truth about Money Creation
How to Manage the Volume of Money in Mutual Credit
The Goal of Monetary Reform
The Difference Between Debt-Free Money and Interest-Free Credit