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What is Mutual Credit?

What is Mutual Credit, anyway?
Why should I care?
Here are some descriptions and explanations:


0. A system in which the currency necessary to mediate a transaction is created at the time of the transaction as a corresponding credit and debit in the balances of the two parties. These systems, unlike fiat and bank issued currencies, do not require any centralized money supply management. They do require a record keeping system.

1. Anthony Migchels:

"Mutual Credit is just simple bookkeeping. When opening an account one gets a credit line and can start spending by going into debt. When doing so, the unit is created. It is so mindblowingly simple it boggles the mind how the banks have gotten away with their silly antics for so long.

Mutual Credit is undoubtedly the unit of the not so distant future, although Social Credit may be a good alternative for Government units." (

2. From the Wikipedia:

“Mutual credit is a type of alternative currency in which the currency used in a transaction can be created at the time of the transaction. Local exchange trading systems (LETS) are mutual credit systems. Typically this involves keeping track of each individual's credit or debit balance. Although the effect is like a loan, no interest is charged, and since mutual credit allows for trading and cancelling balances with others, debts can be paid off indirectly.” (Wikipedia -

3. John Rogers:

" I think it is important that we all clarify our meaning of the term mutual Credit. My understanding of the 'mutual' part of mutual credit is that it means that *any* trader has the power to issue or allow credit to any other trader, so long as they meet the requirements of the central trading rules set by the 'bank' (credit limits for instance). This is how 'currency' or medium of exchange is made available to any participant. (from a Facebook posting, 2013)

4. "Drew Little excellently summarizes Tom Greco‘s definition of mutual credit in another Shareable article:

According to Thomas Greco (author & thought leader in alternative currencies), in a mutual credit system, the members empower themselves to do the same thing that banks have done for years. Members create their own money in the form of credit but save the cost of interest, while distributing the money themselves according to their own needs. In this type of system, having a positive balance proves that value has been delivered to the community while a negative balance indicates that a member has received that much more from the community than she or he has delivered. A negative balance thus represents a person’s commitment to deliver that much value to the community sometime in the near future." (

5. Matthew Slater

The simplest expression of mutual credit is an IOU network. A group of people can trade amongst each other without exchanging a dime, but just by keeping track of what is owed. It works as long as the participants return to zero (on average) before leaving the system. The hallmark of a mutual credit system is that the balances of all the users should add up to zero – which is to say that when all the debts are paid off, nobody owes anybody." (

with Katalin Hausel:

"Ledgers in banks and other corporations are used to store promises to pay real money, because promises are easier to track and transport than physical cash. Users of the ledger agree to settle the balance at a later date with a single net payment of cash; if at the end of the accounting period the net balance is close to zero, settlement is not even necessary and the balance can be carried forward.

While conventional bank credit is created on a balance sheet as an asset/property, on a ledger the credit between accounts can be created more as a dynamic relationship between several accounts. This credit is not minted or printed, it has no physical form and no fixed quantity. Starting from zero, Alice can pay Bob 10 units. Then Alice’s account is -10 and Bob’s +10. The total is zero. Bob can pay Carol, and Carol, Alice. When Alice’s balance is back to zero she can walk away, having paid and been paid without the hassle of shipping accounting tokens back and forth in armored vehicles. The stigma of debt does not apply to short term liquidity loans between trusted traders. It costs nothing to extend and is not scarce and thus interest does not apply. More than that, the credit and debit cannot exist without each other, so how can my credit be your shame?

Using a ledger in this way, as a closed system with accounts extending credit to each other, is sometimes called mutual credit. This term focuses not so much on the clearing aspect, but on the fact that credit can be made available to anyone at any time, and the risk entailed by that credit is spread out across the whole system. In the event of an account being abandoned rather than being closed at zero, the whole system deviates from the perfect zero. Similarly, all members are affected equally when the total supply and total demand leave perfect equilibrium. This notion of economic equilibrium is a guiding principle of a mutual credit economy.

A local currency can build solidarity within the local economy insofar as it actually diverts spending towards the local economy. But there is a deeper solidarity within a mutual credit system because the value of the system depends on the engagement of the members and the quality of their experiences. The wealth gains that come from good governance, a glut of production and the well-being of the precarious members are distributed much more in a mutual credit system than in a commodity money system, where all the wealth gains are sent to the top of the pyramid.

This system of mutual credit is ideal for becoming the money of the solidarity economy." (