“It only requires that we each take control of our own credit and give it to those individuals and businesses that merit it and withhold it from those that do not.” – Thomas Greco
What is mutual credit?
It’s a means of trading, of exchange, that doesn’t require conventional money, doesn’t incur interest and doesn’t involve banks. It’s based on networks of businesses, traders and individuals who get to know and trust each other in a geographical area or business sector. Each member gets an account. They go into a directory so that suppliers and customers can find each other. When a purchase is made, the buyer’s account goes into debit, and the seller’s account goes into the same amount of credit. But these are just numbers in an account – information, not money that can be hoarded. There’s a limit to how far you can go into credit or debit – and that’s basically it.
Mutual credit is not barter. You don’t have to find someone who has what you want and wants what you have – you just get credit or debit in your account. It’s not a swap. You can then use your credits to trade with anyone else in the network.
- Mutual credit involves a trusted network of traders; local currencies don’t.
- Local currencies are bought and redeemed for conventional, bank-issued money; mutual credit isn’t.
- Local currencies can still be hoarded and made scarce; mutual credit can’t – it’s just a means of exchange.
This medieval tale shows how self-issued credit works in a local community. Each trader’s credit has the traders’ name on it, and the risk is theirs alone. In mutual credit, the risks are mutually held, which means that mutual credit schemes require governance. Unlike medieval market traders, we now have the advantage of the internet to organise it.
Mutual credit has a fine pedigree. Pre-money, villagers everywhere traded with each other in credit – you help fix my roof, I give you meat when I kill an animal; you help me harvest my crop, I help you bring in firewood – and so on. The accounting was done informally, in people’s heads, and no money changed hands.
In the 19th century, William Greene, Lysander Spooner and Pierre-Joseph Proudhon championed mutual credit and mutual banking in the US.
After the Second World War, at the Bretton Woods conference, John Maynard Keynes proposed a mutual credit scheme between nations – the International Clearing Union – but it was rejected.
The large-scale, for-profit barter industry (actually mutual credit) has developed since the War, overseen by the International Reciprocal Trade Association (IRTA), comprising 400,000 businesses and trades valued at $14 billion in 2019.
LETS (and time banks) are community-based, non-commercial exchanges in which local people exchange favours and hours of work. However, LETS schemes were usually comprised of individuals rather than businesses, and it’s hard for individuals to obtain credits unless the company they work for is in a scheme and pays some wages via credits. Mutual credit networks can involve individuals, but for real economic impact, they have to be based on networks of businesses.
Interview with Thomas Greco: the future of money is mutual credit (not Bitcoin).
On the island of Sardinia in the Mediterranean, a group of arts graduates launched a mutual credit scheme called Sardex in 2009 – after the financial crash when money was very scarce. However, skills, tools and infrastructure were the same as before the crash, and so Sardex allowed businesses to trade without money. There are now 4000 businesses involved, with trades approaching 50 million euros per year. Here’s an FT article with more information about Sardex.
Grassroots Economics are building mutual credit networks in poor areas of cities in Kenya. They currently have over 50,000 participating small businesses, with thousands joining each week. We interview their director here.
What are the benefits of mutual credit?
- Mutual credit provides a parallel purchasing / accounting system that means businesses don’t have to rely entirely on pounds, dollars etc. This insures them against cashflow problems and wider economic downturns.
- Networks of businesses give each other interest-free credit (credit is difficult for small businesses to obtain from banks, and expensive via credit cards).
- The network provides new leads / customers for members.
- Businesses can pay suppliers without money, and customers can buy from them even if they have no money.
- Allows businesses to sell surplus stock / spare capacity.
- Unlike conventional money, mutual credit is not an exchange medium that can be sucked out of communities and accumulated in tax havens.
- Builds trusted networks of businesses, which can improve and increase community connections, interactions and trust.
- A community with a strong mutual credit network will have more protection against wider economic crashes. Trade can continue even when money is scarce.
- A local mutual credit network of committed traders can help start new small businesses, as gaps in the local economy are identified.
Grassroots Economics have introduced voucher schemes into poor areas of Kenya. The vouchers don’t have to be bought with official currency – they are just to facilitate trade locally in a membership scheme, and in fact represent a mutual credit system.
- Conventional money is scarce; mutual credit is not – it’s available to any network members who want to trade with each other. To paraphrase Alan Watts: to say that it’s not possible to trade because of a lack of money is like saying that it’s not possible to build a house because of a lack of centimetres.
- This means that mutual credit enables trade in areas of extreme poverty.
- Mutual credit is a means of exchange, but not a store of value – it can’t be accumulated and hoarded by billionaires.
- Because there’s no interest to be paid, and no impetus to hoard, there is no ‘growth imperative’ that causes overconsumption and damages nature.
- Provides a refreshing alternative to debt-issued, bank-controlled money.
- In a well-run mutual credit system, inflation can’t happen.
- Mutual credit has no divisive ideology attached. It’s just a practical tool that has multiple benefits, whatever your political position.
- It doesn’t require any mining – of precious metals or of digital coins.
What can I do?
The Covid pandemic provided the stimulus to bring together a group of specialists who have formed Mutual Credit Services (MCS) with the aim of setting up mutual credit groups (or ‘clubs’). They realised that lockdowns will mean that many small businesses may close because of lack of money in their communities, and so the ability to trade without money may be exactly the safety net that can help keep them alive. They’re approaching existing business networks, social enterprise networks and local authorities.
Clubs can be in a geographical area – so there could be a club in your town – or they can be clubs of interest, for example in a particular industry, with members in different parts of the country, or even in different countries. The most important thing is that these clubs contain businesses that already trade with each other, or that could switch suppliers and get new customers so that could happen. Active trading loops or circles need to exist, so that popular businesses don’t get stuck at their credit limit with no-one to buy from, or that other businesses end up at their debit limit with no-one to sell to. Trade needs to flow in loops around the community.
Interview with Mercedes Bidart of Quipu Markets, who are building mutual credit network in poor neighbourhoods of cities in Colombia, and eventually further afield in Latin America.
MCS can help business networks set up and run a club quickly and cheaply, but with something new – federatability – i.e. the ability for businesses in a particular club to trade seamlessly with businesses in any other club. As this network of clubs grows, existing mutual credit schemes will be able to join, and it can develop towards a global Credit Commons.
Two other developments:
- ‘Trade credit clubs’, in which short-term credit between participating businesses is ‘cleared’, and everyone makes (or receives) just one monthly payment to (or from) the network to bring their account back to zero. Then, if, instead of getting back to zero, businesses are given credit and debit limits, it becomes a de facto mutual credit network. More on trade credit clubs here. Research has shown that a basic trade credit club can reduce small businesses’ need for hard cash by 25%, and when mutual credit is included, by a whopping 50%.
- Savings and investments: instead of equity or debt, businesses can raise finance by offering vouchers for future production, at a discount. So, say for example a community energy company wanted to build a wind turbine, they would sell future energy vouchers at, say, 10-20% discount. The same can be done for a restaurant, office block, haulage company or any kind of business. Local businesses can obtain funding without going into debt with banks, without having to pay interest, and without giving part of their company away. Local people can save surplus cash and feel secure, knowing that they can obtain energy, housing, food or any of the essentials of life in future, without worrying about inflation (because a kilowatt-hour is always a kilowatt-hour etc.) or bank failures. The vouchers can be either redeemed or sold. More here.
MCS are talking with business networks in Lancashire, Yorkshire, London, Devon and in other parts of the world, from India to Scandinavia. You can get involved:
- First, it might be an idea to learn more about mutual credit: we recommend Thomas Greco’s book, the End of Money and the Future of Civilisation; or you can watch some of our interviews with people working in / interested in mutual credit.
- Contact us if you’re part of a business network – you can talk with MCS with a view to setting up a local trade / mutual credit club. This also applies if you’re part of / associated with a local authority, social enterprise or any other group that might want to host a network.
- A small transaction fee could provide an income for a club convener – obviously this income will rise, the bigger and more active the club becomes.
- Contact us too if you think you might like to volunteer for MCS, or the soon-to-be launched Credit Commons Society, whose aim will be to raise awareness of and to ensure good governance of mutual credit networks worldwide.
- If you know someone who might be interested, or if you want to help spread the word, please share this information. We’ll keep this page updated as things develop.
The specialist(s) below will respond to queries on this topic. Please comment in the box at the bottom of the page.
Matthew Slater develops software for complementary currencies. He co-founded Community Forge, which free hosts software for collaborative credit schemes; he co-authored the Money & Society MOOC, a free masters level multidisciplinary online course. He co-drafted the Credit Commons white paper, a proposal for a global solidarity economy money system, based on mutual credit principles.
The views expressed here are those of the author and not necessarily lowimpact.org's
1Jeremy Smith February 26th, 2018
There is much that is attractive about collaborative credit systems, and as you say, they may be our only alternative once the present model of capitalism finally implodes. But I worry about the old and the vulnerable in such a situation. They are not going to be able to offer much to barter, and they may not be well enough to contribute collaboratively in a way that would allow them to build up credits. Our present economic and social model, which is based on two incomes per family, does not allow for the traditional family-based care (which was usually carried out by a woman rather than a man) to be brought back. There are also many old people who do not have family members or anyone else to care for them. So how should post-capitalist society deal with this issue, please?
2matslats February 27th, 2018
This question isn’t about the type of money or accounting, but about the willingness of the productive people to support the others. In a developed national economy the government and the law confiscate wealth from producers and redistribute it to the vulnerable. A locally run system could do exactly the same, though it might aspire to work with more consent, more participation, and less force.
3Daylen March 17th, 2018
What are the tax implications of such a system? Both personally and commercially?
I’ve read that things like LETS transactions for business services do need reporting to HMRC. This seems like a real difficulty to me as every transaction would need converting into a cash value which would add significant complexity to the accounts. I’m not sure my accountant would appreciate it!
4Matthew Slater March 17th, 2018
@Daylen You’re right about paying tax on activities which you normally do professionally. Governments do not allow you to work without sharing the wealth. Business barter networks exist to separate the personal and professional exchange, and do make it easier to handle tax, and not only because the B2B unit of value is the national currency. In USA those barter providers report your tax obligations for you!
5Eloise Sentito October 25th, 2018
I love this page and frequently share/link to it, thanks Dave and all. I see it’s been updated and I look forward to re-reading.
As regards taxpaying: I’m a sole-trading handweaver – http://www.theseisles.co – and I enter my barters into both the income and outgoings (if they’re both business-related) part of my tax return as if a currency had been used for two separate transactions, and thus will pay tax on it according to the tax bracket I fall within. I don’t think it makes any difference whatsoever to my accountant’s work – she always remarks that my return is unbelievably simple. Clearly if I traded entirely without money as we know it I’d never have any with which to pay tax. I aim for one of the following three scenarios:
1. I trade entirely without money – because our current monetary system is congenitally flawed – and pay tax in some other form (community service?);
2. I trade partially in money;
3. I (eventually) trade entirely in reformed money: an international currency not blighted by its debt-based operating system.
6SteveUK October 28th, 2018
This is very interesting and I’d like to learn more.
Please could you clarify the tax situation a bit more please (in the UK)? If, as part of a trade, I provide services for which I receive, say 100 credits and I purchase other services at a cost of, say, 50 credits, how am I taxed on this? Eloise, it would be interesting to hear how you would enter this in your tax return – can you give an example please?
If, on the other hand, I gain 100 credits for some voluntary work (as a private citizen (rather than in the course of a trade) and spend 50 credits on a haircut is this all exempt from tax?
I’ve read that complementary currencies may not be taxable (eg having the same status as a supermarket voucher). is the situation different with a mutual credit system? Are the credit ‘points’ (or whatever they are called) not similar to voucher points?
7Dave Darby October 29th, 2018
As Matthew says in the comment above, and as I understand it (and as I think it works with Sardex or commercial barter sites), credits are given an equivalent value in legal tender by tax authorities, and tax is payable (in legal tender) in exactly the same way as usual. It’s about your income, and they will see credits (rightly) as adding to your income. For example, in Sardex, credits are given euro values – just for simplicity (you can’t exchange credits for euros – it’s just a handy way of putting a value on something easily). So one credit is seen to be worth one euro – e.g. if a haircut locally is 5 euros, then a haircut in the system will be 5 credits.
If you receive 100 credits for something, the tax authorities won’t see it as voluntary, they’ll see the 100 credits as payments, and it will add to your income for tax purposes.
8Mark Kuramoto-Headey July 10th, 2019
Sorry, back to the tax issue. Many years ago, I was offered a tax-free loan by my employer to enable me to buy a house. However, when HMRC discovered this, I was liable for tax, on the grounds that I WOULD have paid interest so the lack of it could be likened to a flow of money TO me. Therefore, I had to pay tax on that PRESUMED income. Surely, an interest free loan would come under the same tax rules. Obviously, it is possible that the tax rules have changed, but I feel it unlikely the HMRC would have relinquished any means to gather tax.
9matslats July 10th, 2019
@Mark The difference is that in mutual credit, no money changes hands. It is credit in the sense that something is owed, but it is not a loan in the sense that somebody had some money and lent it to somebody else for a time.
Also for the foreseeable future, the amounts of trade credit we are talking about are peanuts compared to buying a house.
Also these are interest free loans so there are no taxable gains or losses.
Besides if a government wanted to tax interest free credit it should by rights be equal and opposite tax relief to the creditor.
The tax laws for the reciprocal trade sector are fairly clear (for now) – sales tax (VAT) applies but members balances don’t count.
10Francois February 8th, 2021
Congratulations for all your work ?
Have you considered the use of a blockchain and a defi (decentralized finance) approach to mutuel credit projects. If so, please share your thoughts. Thank you.
11matslats February 13th, 2021
Yes there is implicit pressure from donors to use blockchains for everything. I regard blockchain as ‘trustless’ architecture, not ideal for an economy based on trust. Furthermore there is an additional cost to building and maintaining the cutting edge technologies which makes them highly centralised around specific donors or engineers.
12Organicweirdybeardy March 1st, 2021
I’m still a little bit confused as to how this would look for a consumer or if it would be able to compete with a capitalist system. If one is a steady stream of trust and the other is perpetual growth than the latter is going to get bigger/stronger. I understand that a capitalist system would eventually exhaust itself but while the two systems co-exist capitalism would still cause ecological ruin. Unless we had a complete shift to mutual credit (which let’s be honest isn’t happening anytime soon) than we would still be doomed. Couldn’t we have a system based on growth (not overall growth) and sustainability/trust instead of one or the other?
13Dave Darby March 2nd, 2021
I think the way to look at mutual credit (rather than as an -ism) is as a tool for allowing trade to happen when people and communities don’t have very much money (coming to a town near you very soon!). There are existing schemes all over the world (involving $billions worth of trade – but with no money changing hands – so it’s already happening), and we’re working with a group of people to allow key people in communities (business network conveners, social enterprises, accountants, local authorities, keen individuals, even local newspapers) to set up mutual credit ‘clubs’ of local businesses. Then the software exists (and is improving) to network all clubs together (including existing schemes).
If we look at it this way, it’s a tool, a technique, in the same way that organic growing, or renewable energy installations, or natural building or craft skills are tools / techniques. Rather than thinking in grand terms, let’s just do them, because they’re good things to do.
I think there could be a big shift towards mutual credit and similar ideas (of which there are many) when the economic effects of the covid lockdowns really kick in globally.
We just have to try things, to see what works – otherwise, as you hinted, we’re probably ‘doomed’.
PS what do you mean by ‘a system based on growth (not overall growth)’?
14Organicweirdybeardy March 2nd, 2021
First of all it’s cool to have you reply to my comment. I loved reading all of your arguments on is it ethical to eat meat at all? topics (looking forwards to low impact money, butchery and low impact kids to be released). I like the interpretation of the system and I do think that mutual credit (or small scale trust which is from how I understand it is having closed systems where you know/trust everyone your “money” might go to or come from) is part of the solution. I didn’t really now that it was possible to link different small systems (but it make sense.) I would love to hear more about what the government’s role would be in mutual credit and what would infotech’s role be. I meant not very extractive but more so knowledge, moral growth/understanding and growth in the economy by developing technologies.
156degrees October 1st, 2021
How to enforce credit limits? won’t a network eventually stop using them?
How to make sure individual networks stay in a geographically or market-based fixed location?
16Dave Darby October 4th, 2021
Credit limits are part of the membership agreement of each club. It’s something that members agree amongst themselves. So it’s more of a question of sticking to agreements, rather than ‘enforcement’ – although if a member consistently refuses to stick to the agreements, then they can be ejected from the group. That might cause a bit of local animosity, and loss of business, so it’s in a member’s best interests to stick to the agreements.
There’s no need to make sure that networks are tied to a geographical location, or to a particular market sector. People can do what they like. It will probably make sense to have a ‘town’ network though. Small businesses we’ve talked with say that most of their customers and suppliers are local.
I’ll see if Matthew has anything to add. Thanks
17matslats October 4th, 2021
> the government’s role in mutual credit and infotech’s role
A mutual credit group can of course run itself, but a supporting regulatory and technical environment can greatly increase its viability in 3 ways that I can think of.
1. Tech and government encouraging standards like the Credit Commons, a standard for accounting that would enable groups to be interoperable.
2. Otherwise Tech doesn’t influence much but rather serves various needs. It could help in the same way it helps global payments now, by providing user-friendly interfaces and integration with other applications.
3. Government could harden small, local currencies by wielding its ‘legitimate’ use of force or indeed its ability to buy bad debt, as happened in the bailouts.
4 Government could also make taxes fairer. Currently taxes must be paid in legal tender based on a legal tender evaluation of the goods or services traded. This severely limits the amount of trade a company do in softer currencies. However this is unlikely because it constrains the power of government to spending taxes where they are collected and the deregulation of money would increase centralised administration costs.
5. Government could provide infrastructure and legitimacy to local exchanges as a form of public service, in the same way it licenses and regulates many activities.
186degrees October 12th, 2021
What if members decide not to have credit limits? I would think that limiting the amount you could spend would considerably limit the growth/competition between small businesses.
Is mutual credit kept on a ledger like crypto?
point 4 – than how do you suggest taxes work on mutual credit exchanges?
19Dave Darby October 12th, 2021
6degrees – if I were in a trading network with you, would you give me unlimited credit?
(ps, answering for Matthew – although he might respond too: mutual credit is just numbers in a ledger, yes. Taxes would be payable in sterling unless and until governments start to accept them in other currencies, including mutual credit. This is much more likely with local authorities than it is with national governments.)
20matslats October 13th, 2021
@6degrees A credit limit is actually a limitation of the risk that one’s fellow members are willing to share. Not having a limit means that members are free to take as much from the group as they like without giving anything back. Many of the benefits of mutual credit are precisely because the group’s trust is not intermediated by a bank, but most people would still like to put limits on that trust.
Also mutual credit accounting can happen on any kind of ledger. Think of mutual credit as a style of accounting.
216degrees October 13th, 2021
thank you, that makes total sense. Could a bigger business have a larger credit limit? What if you are getting lots of credit from other businesses/customers that love your innovative product than would a credit limit cap your profit?
22matslats October 13th, 2021
Do you think a bigger business deserves a larger credit limit? It’s up to the members, but normally yes.
A credit limit shouldn’t really cap profit, think of it as help with cashflow, at least in the context of a trading network.
236degrees October 14th, 2021
this is genius!!
24Dave Darby October 15th, 2021
6degrees – ha! I agree. Once the penny drops and you can see the potential, it’s hard to see what could stop it. It’s beginning to get traction in various parts of the world, and we’re interested in contributing to that traction in the UK. The ability to federate groups together all over the world is the exciting thing, I think.