Defining mutual credit

I've been talking about mutual credit for well over a decade now and it has become apparent that different people mean different things by it. Up to a point, that's okay because everyone I talked to understood well enough that it meant the units for payment between members of the group were 'created' and 'destroyed' as members spent below a balance of zero, furthermore that going into 'commitment' was not a privilege reserved for an issuer, but that any member could do it.

Recently I found that Trustlines, a startup implementing Ripple as a smart contract on Ethereum, were using the term in their promotional materials, and I didn't understand what they meant by it. A quick search yielded two definitions

An alternative to currency-based transactions whereby two parties transact using a system of credits and debits to an account. A barter community is an example of a mutual credit system. Investopedia
An alternative form of currency that can be created when a Transaction occurs, similar to a loan, but typically without interest being charged. A mutual credit system usually requires a method for tracking each participant's balance that can be reduced or eliminated if an offsetting transaction is made. Interbank forex counterparties often extend mutual credit to one another when executing forex trades.

I was struck by how different these were. Both come from a perspective of finance which doesn't dwell on monetary or accounting theory, and both are a bit vague. I concur with the first for mentioning barter systems, and the second for calling it a form of currency. I'm much more interested though in a definition like this one from Thomas Greco, but which is actually a definition of mutual credit clearing.

the process of offsetting purchases against sales within an association of merchants, manufacturers, and workers. Page 59, The End of Money and the Future of Civilisation

This definition goes beyond pure accounting though, to specify a context, and in my opinion doesn't say quite enough about the mechanism. Most of monetary radicals, including those at Trustlines haven't taken Greco's lead in this respect and are talking about mutual credit.

So I feel the time has come to offer a definition of my own. When I first started thinking about this some years ago I realised I didn't even know what kind of thing mutual credit was; I started calling it an accounting methodology, thinking about the near-blasphemous one-table approach I use in all my databases. In that light, mutual credit is when you record the transactions between members of a group and add them up to get the balances.

An Accounting methodology:

An accounting methodology in which credits/debits incurred between accounts on a ledger are recorded as transactions (similar to a general ledger), but usually used for credit clearing. Clearing all the transactions gives a balance for each account and the sum of all positive account balances equals inverse of the sum of all negative account balances.

The accounting methodology says nothing about the ethics, intentions or governance of the system. There is something deeper happening in LETS and business barter systems that need to be be expressed. It is something about how anyone can issue credit and other members of the group accept it. Normally when there are multiple issuers of credit, the credit of each issuer circulates at a discount according to the perceived default risk of the issuer. This is very fair, but adds a layer of management and hence cost to the system. I realised that in the systems I work on, the members mutualise the risk of default, and so can do away with that extra layer.

A financial/social technology

A financial agreement between those account-holders that the liabilities of each are acceptable for payment of the liabilities of all, at parity. The common accounting unit is possible because all member's liabilities are fungible. A default by any one party is felt as a loss of liquidity of the whole group.

This second definition is one of the forms of solidarity I imagine in a solidarity economy. It recalls many 19th century 'mutuals' in which money (and hence risk) was shared between members. To me it means that members of a group share risk and rewards. If one of their number nears default, the others have an incentive to support them; If one member accumulates a surplus in relation to the others, they are obliged to spread it around by spending it within the group.

A definition is powerless without consensus, so I'm very keen to hear your feedback, especially if you understand accounting.


Mutual credit is:
A social technology (what is called in some traditions an 'institution') which facilitates and encourages value production from members by use of a shared accounting unit which is explicitly not instantiated as a commodity. By agreement, each member is afforded credit creation capacity on the basis of an assessment of their productive ability. Each credit is recorded alongside an equal and equivalent debit.

“Mutual credit” is the credit that participants in a credit clearing circle give one another as a way of avoiding the need for money in reciprocal trade. That is what makes it “mutual.” All participants are co-responsible with one another for maintaining the value of the credits and the health of the trading circle. All are committed to accept the credits at face value in payment for the goods and services they sell.
It is naïve to think that “anyone can issue credit and other members of the group accept it.” That is the reason why so many currencies and exchange systems have failed. The credit issuing privilege (credit lines) must be based on the capacity of each participant to provide value to the community. Credit lines are an expression of the amount of trust that participants place in each other. This is not a judgment about anyone’s personal worth; it is simply a measure of the value of the goods and services that each participant has available for sale within the circle. In financial terms, credit lines monetize the value of goods and services that are in the market ready to be sold.

Matthew, the Wikipedia page on mutual credit ( has in recent weeks been updated to include my early definitions and some pertinent history going back to my second book, New Money for Healthy Communities, published in 1994.

Here is an excerpt:
In his 1994 book, New Money for Healthy Communities, Thomas H. Greco, Jr. discusses mutual credit at length, along with the process called "credit clearing" which is the process that gives mutual credit its potency as an alternative system for enabling the exchange of value without depending on bank borrowing or conventional money. In his book he described[1] an early proposal for a credit clearing system that was put forth by Bilgram and Levy in their book, The Cause of Business Depressions (1914), then on page 85 he equates "mutual credit" with "reciprocal trade," all of which he more fully developed in his subsequent book, Money Understanding and Creating Alternatives to Legal Tender. In that book’s chapter titled, Mutual Credit –The Foundation For Community Currencies (Chapter 13), Greco defines mutual credit as “the generic term which we use to describe an association of traders who have agreed to create and utilize their own exchange medium,” then explains, “a mutual credit system might, like LETS, use a ledger or system of accounts for recording the trades and tracking the account balances of its members, but it might also utilize circulating notes. These notes can be issued to members against their credit lines, in effect, providing a physical representation of that credit. Just as a cash withdrawal is debited against (subtracted from) a bank account, the amount of any notes thus issued would be debited against the member's mutual credit account.”[2]

I'm disappointed to see that you still seem to adhere to the position that "anyone can issue credit and other members of the group accept it."
The amount of credit issuance allowed to each account should be based on the value of goods and services that each account has ready to sell. Some accounts will need to earn before they can spend credits. This does no damage the solidarity of the group, nor does it make a distinction about anyone's personal worth. It simply acknowledges the fact that different accounts have different amounts of value to offer to the group NOW. The issuance of credits by buying monetizes that value and those credits are available for others to earn and spend. If that still does not make sense to you, we need to have a conversation about it.

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