Mutual Credit: Its Function and Purpose


This Text Can Be Found in the Book,
The Evolution of Consent: Collected Essays (Vol. I)

This was composed for a speech given to the People’s Arcane School
on May 4, 2013 in Fort Worth, Texas.

The Necessity of Money

Money is both the most important and most destructive means of human interaction. With the use of money we have constructed vast cities for people to thrive in, as well as the bombs with which our lives are made to seem so trivial. It’s impossible to have an advanced economy, teaming with its many wealths for enjoyment, without money. But money is such a crushing force in our lives, for when the landlord calls for their rent, the state for its taxes, money is what is actually being demanded. In the end, money is so useful people are willing to kill in order to get it. But what is money? What is its purpose, and why does it cause so many problems? How do we fix it? These are the questions I am aiming to answer.

The History of Money

To start, I’d like for you to imagine life without money for a moment. I mean, really imagine it. How would you go about getting the things you need?

One cannot simply do everything by themselves while having a standard of living as high as we enjoy today. Milton Friedman points out that you can’t even make your own pencil,[i] let alone all of the comforts of a modern home, such as mattresses, refrigerators, computers, razor blades, etc. All of these things exist only by the fact that human beings have cooperated, by using a means of exchange, called money, to manufacture them.

Early people, such as hunter-gatherers, being free from government, had exchange systems based on various forms of gift and credit. It was once thought that early economies existed by way of barter, but barter is too clumsy, and relies on the double-coincidence of wants; that is, on each party wanting something the other party has at the same time, and to an equal degree, feeling it to be of equal value, use, or, as best used in terms of economy, utility. Instead, hunter-gatherers would give each other things, and loosely keep track of credits and debits. Barter, when it existed, was usually symbolic within groups, or occurred between them.

Hunter-gathering people lived in small bands, usually smaller than 100 people, related as family or clan. [1]Though there was no physical means of exchange (that is, currency, money) at this time, as shown by the work of Robin Dunbar, primitive people would regulate their credit exchanges by way of gossip. If someone didn’t contribute to the group, they were ridiculed, and the group would not contribute to them either.[ii] In this way, the free-rider problem was resolved without the need for money.

The benefits of primitive credit led to the production of more wealth and, thus, more population, and better storage of knowledge, as well as technologies that allowed food to be grown. Credit exchanges, now between strangers, needed a form of regulation, and so people organized into politico-religious organizations would create organized systems of credit, which were often kept track of by way of some form of tally. They would also use commonly-valued and long-lasting commodities, such as shells, well-crafted tools, precious metals, etc. for their exchanges.

Eventually governments developed, and demanded involuntary tribute by way of taxes. Tribute had often been taken in the form of corvée, which is slave-labor, or an involuntary tithe of a percentage of all grains, cattle, and other goods produced. Taxation by way of tithe became troublesome for rulers, as serfs would often try to pay tribute in their least-valuable goods, their spoilage; and so coinage began. First ingots were used, but then the king had his head stamped on the coins in order that they would have his seal of approval—that is, approval of the proper weight of the metals—, so that a regular measure of value could be imposed on the rate of taxes. In order to acquire the metal coins to begin with, the serfs would have to accept them as payment for labor from the lords, but did so only in order to pay them right back as tribute, which is little more than payment to be left alone.

In due course, populations spread, and the need for exchanges grew immensely. This led to paper money, as metal is hard to carry around. Unlike commodity money—that is, money like gold bullion, wheat, shells, tools, and more, which hold intrinsic value by themselves (being able to be used)—, paper (or now digital) money has no intrinsic value at all, but only redemptive value. Paper money is a form of credit money. Credit money can take the form of tallying, paper scrip, or cheques. Credit money only holds value so far as it can be redeemed for something with intrinsic value. Money that has no redeemability has no value at all. Let’s take a closer look at the redemptive value of money.

Basis and Standard

The thing money is redeemed for is called the basis of its value. The basis is very important, as it ensures the dependability of the currency. Thomas H. Greco, Jr. tells us,

The most important factor in the creation of an exchange medium is the basis of issue. Historically, money has been issued on the basis of various financial instruments such as bonds, promissory notes, mortgage deeds of trust, and other claims to real value. Ideally the creation and issuance into circulation of a unit of currency or credit should be coincident with the actual transfer of value (goods and services) from a seller to a buyer.[*] That transfer should also give rise to a “commitment” on the part of the original issuer (the buyer) to redeem the currency, in the market, by providing equivalent value in exchange for the currency, that is, the issuer should be obligated to accept his currency at par or face value from anyone wishing to buy his other goods or services. The form of the redemption need not necessarily be limited to a particular commodity, but may be in the form of any desired goods or services that the original issuer offers for sale. This is the way LETS and other mutual credit systems operate. The “credits” that the seller receives are, in effect, money, created by the buyer who is “committed” to redeem credits later by providing goods or services to someone in the system.[iii] [* bold removed]

The basis of money is not to be confused with its standard, which is the thing value is measured against. For instance, the basis of money was gold and silver for a long time, because money could be taken to the bank and redeemed in these precious metals. However, gold and silver were also used as the standard of value, because all other prices were measured against them. It is completely possible, though not reliable, to share a common standard, while having a different basis, so any item used as a standard of value need not limit the supply of money. But to enforce a standard separate from its basis can cause problems as the supply of the standard fluctuates relative to other items.

To better understand what I mean by “standard of value,” “what value is measured against,” and “fluctuating relative to other items,” think about it in terms of human height or weight. In order to create a system of measure that is not arbitrary, we must define where the lines are drawn, and, in order to do so, many have chosen to pick a specimen, and call it the standard. After a specimen is chosen, values are measured against it. In the case of height, we can choose an individual, and measure the height of others against them, calling them either short or tall, depending on how they compare. Likewise, individuals may be compared one against another for relative measures of weight, such as heavy or light. Such values are made only in reference to others. These others are the standard. For a long time, gold and silver were the price standards, against which everything else in the economy was measured. A “fixed” standard, of this sort, turned out to be ultimately troublesome.

The least arbitrary of standards, and the method by which most economies have moved past the problems of fixed standards, is to use the average, which, at times, is not represented by a physical thing, but an abstract idea. For instance, in the case of weight, if three teenagers weigh 93, 102, and 120 lbs. we can choose the middle one, John, at 102 lbs., as a standard, but the best appeal to intersubjectivity is to use the average, which is 105, a non-existent person. If we name this imaginary friend Sally, we can say that anyone can be measured as short and tall compared to Sally. The average changes as new people are brought in. Using a standard such as this— an imaginary friend, who magically changes in size, rather than one that is fixed, such as John— is called a floating standard, or floating exchange rate, specifically because, like a buoy on the water, as new participants are added, the value, or level, changes. The effects of a floating standard on money are not to reduce the value of money, but, quite oppositely, to keep money at a constant match with the value of its basis. The dollar used to be fixed to gold, but it has since become a floating currency.

A healthy float can be understood as being “fixed” at equilibrium, resulting in market clearance. This means that (so long as there are no state privileges, like subsidies, zoning, etc.) everything in the economy reaches its equilibrium price, which is at cost. When money is allowed to float freely, is loaned fairly, and does not face deflation or inflation, its clearing price is zero. When money is at its clearance price, it carries no exchange-value of its own, but only use-value, which is equal to the exchange-value of its basis. This results in perfect economic circulation.

Clearance prices and floating currencies are discussed further at the end this essay, as well as in “Credit, Collateral, and Spot-Pricing” and in “The Proper Rate of Money.” For now, we must move on to exchange- and use-value.

Exchange- and Use-Value

The distinction between use- and exchange-value is important to understand when it comes to the price of money. The mutualist, Francis Dashwood Tandy, helps clarify a bit:

It is not unusual to consider that value is derived from the power of wealth to gratify desires. This is only partially true. Certainly, a value does attach to everything on account of its utility, but this is a very different kind of value from that which attaches to commodities which are kept for sale. The latter are valuable, not because they are of use to their owner, but because he can exchange them for something else. This value is known as price, or exchange-value; that is, the value which attaches to goods from their characteristic of exchangeability, as contradistinguished from the value which attaches to them from the use to which they may be out. This latter is known as utility, or use-value. It will be readily seen that many things may possess great use-value, while possessing no exchange-value whatsoever. Air is absolutely essential to our existence, and consequently has a very great use-value, but as no one would ever buy or sell it, it has no exchange-value.[iv]

To understand exchange- and use-value further, let’s talk about product. Say you have grown 50 carrots. After the 30th carrot, your marginal utility, or use-value, for more, diminishes considerably. Someone comes along and offers you a pineapple (hypothetical-you loves both carrots and pineapples) for three carrots. Because you don’t need so many carrots, they carry little use-value to you, and, because you don’t currently have a pineapple, it holds a high use-value. At this point, the carrots, which have little use-value, and will eventually spoil, can be exchanged for something with high use-value that will be quickly consumed, the pineapple. The exchange-value of the carrots then exceed their use-value. When exchange-value exceeds use-value, exchange occurs.

This brings us to an important fact about money: Money is not capital or a commodity, and has no intrinsic value, but only value of representation. Thus, money itself, being a means of exchange and representation, and not a means of utility and intrinsic value, should not have a price, but should have a use-value equal to, or reflecting, the exchange-value of the goods it represents (not its own intrinsic value, which is nil), its basis. This point is very crucial. Again, the use-value, or principal, of money is its buying power, and is equal to the exchange-value of the items it represents as credit. If five dollars, backed by canned goods, can buy a loaf of bread, that is its use-value. It is limited by the exchange-value of the canned goods.

The value of money should always be equal to its basis. If we print money, and say one dollar can currently be redeemed in two giant gumballs, the dollar’s use-value is equal to the exchange-value of the giant gumballs. This is because if we don’t want to exchange our giant gumballs, printing dollars is pointless; they have no use. The only intrinsic value (use-value) of money is as a means of exchange (that is, the exchange-value of other things). If money (not the things it represents) has an exchange-value itself (a price, $5 for $6), this is a price above the actual value it represents.

The exchange-value, or price, of money, over that of its use-value, is called monetary interest. If five dollars can be sold for six equally valued dollars, the exchange-value of five dollars is six dollars, with five dollars in principal and one dollar in interest being made. If I can sell tickets to nothing, having no intrinsic or redemptive value, these tickets bear an artificial exchange-value, and I am making interest. If they held purely representative value, the tickets would be useless, and would not exist. If you will equally accept four giant gumballs or $1.50 (when two giant gumballs are still worth $1) for a box of snappers, my money obviously carries an exchange-value that is higher than its use-value, because it is valued at three giant gumballs, but it can be exchanged as four. This is the nature of interest on money. As you can see, interest is quite a paradoxical concept.

Clearly, interest on money is only created by force, as an act of robbery, since a means of exchange has no intrinsic value, but only redemptive value in the basis with which it is represented. The system of force in place that allows such a system of interest to occur today is called the tax system. If we don’t pay our taxes, often added into the price of our rent (if we don’t own the buildings or land that we use), with US dollars, we will be forcibly kicked out of our homes, our possessions will be taken against our will, and we will be left out in the cold. If we resist, we will face consequences much more severe than the ones we ourselves may impose on the other party (the state).

Supply and Demand

The price of money, like all others things, is subject to the law of supply and demand (in this case, monopolistic supply). In order to understand the current nature and flow of money, we must first understand how markets function. The law of supply and demand can be reduced simply to this: Consumers want more product for less money, and producers want more money for less product. Simple: Everyone wants more for less. The only time they don’t seem to want more for less is when they are extending concern to others, but this is arguably an extension of selfhood.[2]

When there are no barriers-to-entry into a market—that is, when anyone can start selling things without licenses, permits, and other extra expenses—, competition is able to form. In a perfectly competitive market the prices, or exchange-values, of goods and services remain in equilibrium at the cost of production. This means that there is no surplus or increase, like interest, created. In such a market, firms must accept the same prices for their goods as everyone else, considering they are of the same quality and quantity. They are called price-takers, because if they raise their prices, they will lose business. When such equilibrium prices are reached, supply and demand meet, and there is neither scarcity or surplus created.

The opposite of a competitive market is a monopolistic market, which exists due to barriers to entry in the market. Unlike a competitive market, in a monopolistic market, the prices, or exchange-values, of goods and services are not restricted to the cost of production, and price-gouging can occur. Monopolies are price-makers, because they determine the price. This means that a surplus, like interest, can be created. Such an increase is a return for something other than labor. In other words, such a return is theft.

Inflation and Deflation

Another related problem associated with the value of money is that of price inflation and deflation. Inflation occurs when money becomes less valuable, more available, and prices rise. If we can pay for a pineapple with $2, and tell the other party that those two dollars can be redeemed in two carrots from us later, but, when the time comes, refuse to exchange two carrots for less than $3, we have made $1 in a price change called inflation (and we’d have to be willing to put a third dollar in the economy for that to be met, or claim slave-labor by force). If, instead, we declare that $2 can buy three carrots, we have lost a carrot, in a price change called deflation. Deflation is when money becomes more valuable, and less available, and prices drop. In order to put an end to inflation, banks must not print unbacked fiat currencies (not to be confused with currencies backed by services rather than goods). Such an act reduces the value of money by making it more available in comparison to its basis.

When money is used as a store of value, hoarding ensues, and its value as storage exceeds its value of redemption; the money becomes deflated. If, for instance, one prints money which is backed by baked goods, and the money is traded to someone who keeps it, the baked goods will expire and the money will be devalued. If money is backed more generally, and things in the economy expire (due to hoarding) faster than the rate of redemption, this will also lead to deflation and scarcity of currency. In order to curb deflation, and to encourage the healthy circulation of money, and to keep it at its clearance price, demurrage, a holding-fee, or value-loss, must be imposed on money, equal to the entropy of its basis. For this reason, Silvio Gesell remarks, in The Natural Economic Order, that,

Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money.

So we must make money worse as a commodity if we wish to make it better as a medium of exchange.[v]

So long as banks can do as they please, and are unchecked by competition and democratic ownership by its members, the application of demurrage and proper rate of issuing currency is unlikely. Thomas Greco, Jr. says,

Money, as it emerges from the banks that create it, is not distributed fairly, because the allocation decisions are not made democratically but rather by elite groups of corporate bankers who are not held properly accountable. They act in their own interests, pursuing goals that are typical of any corporate business—profit and growth.[vi]

The owning class of the banks only serve to benefit from the inflation of currency, as they can release fiat money printed from thin air, owing nothing in return, passing a secret tax on to those who hold its basis. They don’t benefit so much from deflation, except that deflation which is caused by interest and hoarding on behalf of their class.

The Theft of Our Labor

What is the dollar, but a representation of our labor? After all, if you recall, its very basis is our own freedom from coercion; if we don’t use it to pay our rent and taxes, we will be removed from our homes. Dollars are ultimately redeemed, by way of taxes, in our own freedom from harm. They are also redeemed in the goods and products in the economy, which were created by our labor, and those of others, who must pay their taxes as well.

You see, the Federal Bank releases money based on the GDP, the Gross Domestic Product— of which most are a contributor—, but tacks on the amount of interest that can be taken without causing a revolt.[3] Money represents our labor, as contributors into the GDP. It is a title of ownership, very much like a house or a car title. As the holder of a title is entitled to their car or home, the holder of money is entitled to labor or product. But we are not the original holders of the titles to our labor, we are slaves in a very serious sense of the term. If I were to write a title to your car, lacking your permission, and use this title to trade with others, this is similar to how the Federal Bank issues money into the economy, which is backed by our labor. It releases titles of ownership to our labor, money, but these titles are not given to us, the rightful holders, directly. Instead, they are loaned at interest to our landlords and employers, and we only receive our own titles of ownership, with which we may make our exchanges, after performing labor for them (and at the end of the year, we must have enough to pay for our “protection,” by way of taxes). Similarly, if I wrote a title to your car, which was enforced by the state, you’d have to perform services in order to buy back your car.

This is the nature of slavery today, the reason we are commanded about. If not for this, we’d cooperate, and reap the benefits together. Instead, a small class takes all of the rewards for themselves, which they had no hand in producing. The only reason hierarchical firms exist right now is because employers are given the privilege of holding slave-bills, the US dollar.

To make matters only worse, taxes and interest are not paid by employers and landlords, but are instead added into their expenses, and thus put into the prices that consumers pay. Clarence Lee Swartz suggests,

When a manufacturer borrows money to carry on his business, he counts the interest he pays as part of his expenses, and therefore adds the amount of interest to the price of his goods.[vii]

When a customer, such as you or I, walks into a business and buys a t-shirt, or a sub sandwich, they are not only paying the wages of the workers, the cost of the ingredients, and the utilities; they are also paying for a portion of the rent of the building, a portion of the taxes, and a portion of the interest (the returns to the landlord, the state, and the banker). On top of that, because employers are given special privileges, and are all monopolists to that degree, they may charge prices above these costs, called profit. This is the money that the boss gets, simply for their privilege, and not for their labor, and it is paid by the consumer, as profit is also added into the price. At the end of the day, the wage worker pays all of the taxes, interest, rent, and profit in the economy, because any of the consequences of these faced by the ruling class are quickly passed down the line. The ruling class pays for little to nothing with their own labor, and just about everything with ours.

Free Banking

The only reason money maintains any exchange-value (not to be confused with use-value) at all isn’t because it takes great skill to create, but because its basis has been monopolized by the state. If the state were to step aside, and free banking were permitted to exist, the issuance of money would be brought under the laws of competition, and of supply and demand. This would bring the rate of issuing money down to its cost, which is near zero. Kevin Carson, contemporary mutualist author, suggests that,

In a genuinely free banking market, any voluntary grouping of individuals could form a cooperative bank and issue mutual bank notes against any form of collateral they chose, with acceptance of these notes as tender being a condition of membership. [viii]

Without monopoly and the massive amounts of interest that comes with it, hierarchical banking institutions would be subject to competition and would be likely to lose patronage to banks that offer democratic ownership, transparency, and accountability to its members. It’s only because the hierarchical banks hold state-given privilege—the exclusive license to distribute Federal money— that they have patronage in the first place. People have to pay their bills. In a scenario of free banking, mutual banks could outcompete, simply by not ripping their customer base off (with interest, inflation, etc.)! Mutual banks of issue, democratically-owned by their policy-holders, would issue credit at its true cost, without CEOs to raise the prices on the people, only in order to fly around the world and live an extravagant lifestyle without any work. The passing of the bill must come to an end.

The end of an exchange-price on money, commonly called interest, would encourage the end of all usurious prices, including rent from land and profit from labor and capital. Money is the foundation of the economy, and when it is out of equilibrium, so too is everything else. Without a disequilibrium in money, it does its job of facilitating transactions more fully, and exchanges occur more frequently, adding to the vitality of the economy.

At zero-percent interest rates, everyone can take out a loan for money and succeed. They can put their interest-free loan toward mental capital, such as a college degree, or they can invest in physical capital and open their own shop or buy a share in a democratic cooperative. Kevin Carson says that,

Near-zero interest rates would increase the independence of labor in all sorts of interesting ways.[ix]

He says that,

Abundant cheap credit would drastically alter the balance of power between capital and labor, and returns on labor would replace returns on capital as the dominant form of economic activity.[x]


As compensation for labor approached value-added, returns on capital were driven down by market competition, and the value of corporate stock consequently plummeted, the worker would become a de facto co-owner of his workplace, even if the company remained nominally stockholder-owned.[xi]


What can be done about the problems we now face, due to the monetary system we now have? What can we do to change things? The answer is very simple, and quite obvious. As Alfred Westrup said,

The evil is entirely corrected by making all products […] the basis of paper [today, digital] money, and providing for its redemption in any of them. [xii]

We must create our own system of money, our own systems of law, and outcompete. If people can smuggle drugs and alcohol, why not currency, so long as they are informed of its necessity? Or law for that matter? Systems of complimentary currencies which are considered legal by the state do very little to solve problems, because they are oftentimes based directly on the value of the dollar, or because they are taxed, which removes the entire purpose from having an alternative. Therefore, an agorist approach is in order.

If we were to create our own monetary systems, we would immediately benefit by reducing our own costs. By creating a means of exchange without interest, and using it for transactions, we can undercut the prices currently offered on the market, which include interest, rent, profit, and associated business fees due to bureaucracy. If we can sell at the same rate without adding these expenses, we can offer cheaper products, without taking a cut in wages. Who doesn’t like better prices? Not only that, but we can be more in control of the ingredients and parts used in our products, bringing up standards.

Such an economy cannot pay all of our bills from the start, but as the economy grows and develops from simple, low-capital investment markets into specialized, high-capital investment markets, more and more dollars will become freed up to pay those bills, and will eventually become obsolete and undesirable altogether. An economy which doesn’t generate such bills to start with easily competes to take the place of the one that does.

How is it done? How can we start? To start such a bank, people merely need to get together and agree on a system of rates of issue. It would be sloppy, and hard to keep track of, to have a currency for each producer, and unstable to use a single basis, so it’s in the benefit of both producers and consumers, both wanting to encourage the ease of transaction, to agree to use a common form of credit. Instead of using a fixed currency, as when it was fixed to an hour of hard labor, for instance, a currency that is used as a basis of multiple industries is better allowed to float, and act as a more abstract unit of measure, simply representing a percentage of the entire value in the economy, rather than the exact value of the hour’s hard labor (or any other single basis). As money is increased, goods and services must increase, and vice versa![4] The system should be uniform, and money should be loaned to individuals fairly and evenly, without interest. Simply create a system of accounting, and issue credits (with a graduating cap) and debits. As soon as credit is spent, debts are accrued, which must be repaid.

The debtor retains great freedom in exercising their means of repayment. They retain their choice of industry and “self”-employment (a term which will no longer have any meaning, as the distinction of self-employment and employment by others will be lost altogether, along with that of boss and worker, when mutual credit is established). Any differences in skill and ability will be sorted out in the market as it approaches equilibrium.

Some may take longer to pay back their debts, and others may pay them rather quickly, but all will only be responsible for their own costs. This is natural. Inequality of skill and ability is natural, and mutual credit does not try to solve this with the bandage of communism, but it does remove economic inequalities of opportunity, which very frequently keep people from taking care of themselves. Remove these inequalities, and society flourishes, poverty diminishes, and, though complete equality of outcome may not be possible, the gap between rich and poor greatly closes in on itself.

The purpose of mutual credit is to allow the individual to maintain absolute rights to their own labor and to have a fair, safe, and stable economy in which to trade it. The function by which this is done is by giving everyone access to an interest-free loan, which is backed by their own collateral or good will, and which adjusts according to fluctuations of its basis (the collateral or good will). This, along with the deregulation of the economy (both on the side of capital and labor), would fulfill the purpose by entitling everyone to their own labor, allowing them access to self-employment and enriching, free, lives.


[1] It’s interesting to note here that it’s easier for hunter-gatherers to make loose exchanges, as they are more generous to one another in general, being related by blood, and having more genetic stake in preserving each other’s well-being, while also engaging in more regular and direct interpersonal, or face-to-face, contact.

[2] We commonly refer to our selves as the physical boundaries of our bodies, but this is not sufficient for terms of political economy, which extends selfhood to rightfully gained property, nor is it sufficient for terms of spiritual development, which extends selfhood to the needs of others (even if these others are usually limited to close friends, lovers, and family). Self, then, should perhaps be better understood as being related to our range of concern. In political economy, to care about one’s own interests is to care about one’s own range of concern, which oftentimes includes the well-being of others, who may in turn provide sentimental value, a support network, or some other utility, which is good also for our own well-being. That range, however, is limited, as people do not often give freely to strangers.

 [3] If too many people are evicted from their homes and businesses, the power and legitimacy of the government will be more and more questioned, but if only a small minority have their homes taken, the passive majority will look the other way, rather than acknowledge their human duty to preserve and uphold ethical means of relation. Taxes work in a similar manner.

[4] If you’d like to read further about the process, see “Credit, Collateral, and Spot-Pricing” or “The Proper Rate of Money.”


[i] Milton Friedman

 [ii] Robin Dunbar

 [iii]Thomas H. Greco, Jr., 128.

 [iv] Francis Dashwood Tandy, 79.

 [v] Silvio Gesell, 296.

[vi] Thomas H.Greco, Jr, 9.

[vii] Clarence Lee Swartz, 65.

[viii] Kevin A. Carson, 186.

[ix] Ibid., 187.

 [x] Ibid., 186.

[xi] Ibid., 187.

[xii] Alfred B. Westrup2

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