This Text Can Be Found in the Book,
The Evolution of Consent: Collected Essays (Vol. I)
If you are unfamiliar with mutual credit, please see my article,
“Mutual Credit: Its Function and Purpose,” for an introduction.
Credit money is commonly misconstrued, and the misconception is oftentimes applied unfavorably toward mutualist systems of currency. When people generally think about credit, they think about a loan, generally without any backing other than debt, and often paid back with interest. Indeed, this is certainly a form of credit. This is fiat credit. When a mutualist speaks of mutual credit, however, this specific form of credit should not be applied exclusively to the definition. Instead, mutualism works with a much larger definition of credit-money.
To understand what is meant by this, one must understand that money developed firstly from commodity exchanges. Those commodities which were commonly desired and had high exchange-values tended to be used as a means of exchange, and these items became what is today called commodity money. Commodity money is any money which carries an intrinsic exchange-value. Examples include shells, gold, bullets, and various other objects, depending on the time and place. Commodity money was an early, now outdated, form of money. Credit money, on the other hand, carries only redemptive value. Examples of credit money include bills of exchange and personal or business checks. These are credit monies because the paper itself has no use-value, only redemptive value. When a mutualist (at least one who knows what they are talking about) proposes mutual credit, they are not necessarily proposing that we all start using fiat-credit full time, but that instead of the state and the state’s banks regulating credit money, we should cooperatively print our own by way of free mutual banks.
Credit money can be fiat, based solely on decree of the bank, or it can be based on a physical commodity, or even land. Indeed, just as the state prints fiat currency, a mutual bank may do the same. This concerns many, because of the track record of fiat currency, but this track record is due to the federal banking monopoly, which can lend fiat currency over and above the expected return on labor. Labor is not a physical item, it is a potential, but so long as fiat money is based on this potential, and not above, the fiat currency can maintain stability. If left up to the market, a simple equilibrium would keep this in check.
Governments, and federal banks, not being subject to the laws of supply and demand, can do as they please, and may lend (or spend) fiat credit into the economy over and above the return on labor, in effect stealing the larger population’s money-value, through inflation, and destabilizing the value of money for everyone else. This is incentivized through hierarchical decision-making, whereby a certain class may benefit at expense of the others, by carrying out such actions.
A mutual bank, being non-hierarchical and democratic, as well as being subject to supply and demand, will lack both the incentive and the capacity to print fiat money above the potential of labor. The membership will not desire to inflate their own currency. The bank will not be able to provide a stable currency if they do, and, since there is no monopoly on force, people can freely leave if they become dissatisfied. The bank is incentivized, inside and out, from printing an unstable currency.
Clearly, fiat credit is not good enough to provide a means for all of the exchanges in the economy. The problem with the gold-basis, for example, was its inability to provide enough value to coordinate all exchanges on its own. Thomas H. Greco, Jr. says,
The main problem is that when gold is used to back redeemable paper notes, the supply of money cannot grow larger than the supply of gold unless the system uses “fractional reserves,” which creates still more problems. [i]
The same would be true of a purely labor-based currency. Certainly, a form of commodity-based credit is also essential to a stable currency and plentiful exchanges. Individuals should certainly have the liberty to print their own IOUs, perhaps being fiat (purely on labor-debt), or based on a number of commodities.
It would be disadvantageous to the consumer to have a great number of currencies on the market to keep track of, but by confederating into mutual banks producers maintain the capacity to print a mutually agreed upon currency. They are then enabled for printing a form of mutual credit I like to refer to as pan-commodity scrip. This scrip, as that which Clarence Lee Swartz discusses, “can be realized through the Mutual Bank. It will be a credit currency pure and simple, not redeemable in coin of the realm, but secured by tangible values nevertheless.”[ii]
Naturally, a pan-commodity scrip of this nature would be subject to concerns regarding the marginal utility value of various commodities, and issuing their affiliated money. In a bank such as this, producer-members would use their products as collateral, in order to gain an interest-free means of exchange. The bank would be unable to offer a flat-rate for most items, as proper prices are a reflection of supply and demand, not bank dictate. Since the bank would not be acting as investor, as in privately-owned capitalist banks, but instead as trustee, as in a mutual or trust organization, the bank should not involve itself in earning profits or dictating the prices of goods, but rather in reflecting the value ascribed in the market by its members.
When a bank takes a profit from loans— interest—, all prices reflect this profit, and scarcity ensues for everyone but the bank, who gains surplus. When a bank is run without a profit, just paying the bankers a salary or wage, money finds an equilibrium at its clearance price, and supply meets demand. In order to prevent a profit, a bank may use tools such as demurrage, whereby money expires alongside the goods it represents, and dividends, whereby profits become redistributed. Dividends and demurrage are not to be praised, however, but are rather safety-nets. It’s best if they are unnecessary. In order to do away with their necessity, it would be essential to issue money perfectly in accord with supply and demand. This is impossible, of course, but it can be approached and approximated, making demurrage and dividends less necessary as time passes. Traditional banks lack the incentive to do so, but a mutual bank has much incentive.
The bank would adjust its prices with supply and demand. This is called spot-pricing. Spot-pricing is used all of the time. Take, for instance, the business of pawnbroking, which is ages-old. Pawn shops offer customers loans based on collateral. They are constantly having to spot-price and appraise items. A pawnbroker has to know about the products they are appraising, but their knowledge is not intrinsic, it is extrinsic, and the knowledge can be gained by just about anyone. A pawnbroker will contrast the items to be used as collateral with similar items, looking for wear and tear, scratches, and various other kinds of faults. They also have to keep in mind the supply and demand in the local market at the time. If a pawn shop is flooded with a specific item, they will stop accepting it as collateral, or they will lower their rates. At times, pawn shops may also purchase items for resale. The point is, pawn shops make their income, and some of them a very lucrative one, by knowing the market of the goods they are selling.
A mutual bank can be thought of, in a way, as a community-owned pawn shop. Instead of a single owner, partnership, etc. the people who use the bank/shop are the ones who own it, collectively. It may be operated by a few individuals at a time, such as employees or volunteers, but, if they are paid at all, they will not be individuals who make any profit or interest from their capital. Instead, they will be employed by the banking community, and paid a salary or wage equal to the market rate of like services. Their duties will be to appraise items and offer interest-free loans to the community of members, as well as tending to more standard affairs of bank management.
If carpenters, organized into a cooperative or as independent artisans, bring forward their collateral to the bank, the bankers should be obligated by contract (through the bank’s constitution, which is governed by the members rather than exclusively by the bankers) to offer loans based on the policies of the bank. The bankers will, indeed, need to be informed individuals, capable of handling the duties asked of them, but their duties should be defined by the collectivity. This is not impossible; the affairs of pawn-broking can be learned, and even further developed, by the general populace, and members can make motions to one another to change policy accordingly, demanding officials to follow certain measures, or otherwise face conviction of contract infringement and termination of employment, and, perhaps, worse. Banks should, of course, also allow some leeway, as is necessary in any spot-transaction. Pawn brokers today use things such as appraisal manuals, “blue books,” the internet, and current supply and demand in their own area when they appraise items. A member assembly may demand that a collective employee, such as a broker, follow certain procedures, such as making use of these items, and may also specify a range considered reasonable within which a pawnbroker may define more specific and immediate value concerns. This could be as simple as saying, for instance, a pawnbroker may deviate from the blue book price by up to 15% in a given term. Such policy would be defined, yet flexible. As always, being a democratic organization, a mutual bank is always able to change policy that is deemed destructive or undesirable. If a broker, immersed in the task, feels it necessary to break such a rule, and go outside of the allocated 15%, he or she must first persuade the voting collectivity to change policy. Only under this condition is the broker allowed to stray from current policy, as they, unlike the bankers of today, are restricted by a constitution, which is governed by the membership as a whole. Thus, they need permission from the members, who, collectively, are their employer.
Of course, just as when a system only monetizes certain products, or if it only monetized services, scarcity would be faced, the same is true also of an economy that only monetized products, and not labor. Labor, too, must be appraised. This can be done by starting individuals out with a basic or initial credit on their labor, which, if repaid in a timely fashion, becomes graduated, and allows even larger debits.
All members should be treated similarly. If good for their loans, they should be loaned more. If they are not good for their loans, they should not be loaned to any further, and their credit score should be shared; banks should federate with one another for the purpose of sharing credit scores, generally ridding themselves of the problem of free-riders.
Of course, any loan has the capacity for collateral failure. Money backed by labor can become inflated with the death or injury of the individual upon whose labor-debt it is based, and a currency based on product may become inflated with the destruction of the items which it represents. In such a case, the collectivity, being the bank, must face the losses collectively, just as a private creditor today must face the loss of a default personally. This loss is applied through demurrage. Still, even with this loss, the benefits of a means of exchange make any such loss due to default worth it, and the natural human drive to acquire more, or at least be accepted by one’s community, is its own incentive for individuals to pay back their loans. If they don’t, they will face a negative credit score, and all of its implications (such as wagedom), forfeiting their otherwise easily acquired interest-free loans, which could be put toward mental or physical capital. Because mutual credit would offer so much accessibility, I doubt that anyone would accept wagedom over paying back an interest-free loan. Because of this, as argued in “Mutual Credit: Its Function and Purpose,” a society with such a system of banking would be a society free of spurious returns on money, including interest, profit, and rent.
In conclusion, mutual credit does not suppose pure fiat money, but, instead, secured fiat money based on the general return rate of the economy, coupled with a pan-commodity scrip, whereby members may contribute their own products as collateral toward an interest-free loan, determined by the constitution of the bank, likely according to cultural norms of value-measurement (blue books, merchant prices online, etc.), as well as the educated assessment of the broker, who is not the owner, but the elected trustee of the bank. Any returns to the bank above the costs of management will be paid to the members as a dividend, and any losses will be socialized through demurrage. Ideally, these costs will not occur at all, but in the real world they should be used as safety-nets against the limits of human knowledge. A mutual bank may be understood, in many ways, as a community-owned pawn shop; legislating is done together, and a trustee is elected to act as executive. The purpose is not to accrue interest for the broker, but, instead, to create a means of exchange that is interest-free and, thus, beneficial for the community as a whole.
 To see what I mean by these terms and their implications, see my other articles, “Interest and Premium: A Geo-Mutualist Synthesis,” and “On Mutualism & Interest on Capital”
[i] Thomas H. Greco, Jr., 129.