Mutual Credit

Mutual credit is a way of accounting for exchange in a network of peers. A simple ledger tracks the trades (usually denominated in the national currency), recording everyone’s balances. The numbers in a member’s account are not commodities, but quantified relationships: at the point of exchange, the sellers account is credited, the buyers debited. The overall balance of a network is always zero – the positive and the negative are tracked through the system until they can be redeemed against each other. The tendency of the system is to return to balance, as members are required to match buying with selling over time in order to maintain their ability to trade.


Since the beginning of the 20th century, mutual credit, or something like it, has tended to spring up whenever economic calamities make money scarce. WIR Bank was founded in Switzerland in 1934, during the Great Depression. It enables businesses to trade with each other on credit in a co-ordinated way, and currently facilitates around a billion euros of trade per year without money.


The large-scale, for-profit business barter industry has developed since the second world war, overseen by the International Reciprocal Trade Association, comprising 400 000 businesses and trades valued at $14 billion in 2019. Sardex is another successful business-to-business mutual credit network involving 4000 members, with trades approaching €50 million per year. Grassroots Economics are building mutual credit networks in Kenya and currently have over 50 000 active small businesses.


Mutual credit requires participants to collaboratively manage the risk of issuing and accepting credit, and (particularly for businesses) to be able to include their balance in their usual accounting systems. This requirement has meant that mutual credit systems have either remained small and community-based (like time-banking), or have had to centralise to scale up (like WIR Bank). Even scaling up via centralisation has its limits, as risk management and brokerage requirements make running the network increasingly costly.


Mutual Credit Services has developed the ‘Trade Credit Clubs’ model to integrate shared ledgers and mutual credit into ordinary business-to-business transactions on a decentralised basis. Information about existing trade credit arrangements (the usual 'thirty days to pay' on invoices) is shared within a trusted group, co-ordinating the liquidity for maximum impact with minimal changes to business-as-usual. The tables below (with an arbitrary set of transactions between three parties, and the resulting balances) illustrate the steps in setting up a Trade Credit Club.

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The first table shows business-as-usual, with no information sharing between trading partners. Cash flow volatility imposes high working capital requirements (red cells), whilst gridlocks lead to systemic late payment and a high administrative burden from chasing multiple invoices.


The second table illustrates what happens when the trading partners submit headline invoice data to a simple shared ledger. The result is continuous clearing of obligations, with similar effects to multilateral obligation set-off: working capital requirements are reduced in proportion to the degree of internal trade and payment gridlocks are resolved. In addition, one payment at the end of the mutually-agreed period (thirty days by default) settles everything, reducing administrative burden. A participants outstanding balance is equivalent to any other entry in accounts payable/receivable, although this requirement for novation of an obligation to the network as a whole distinguishes a shared ledger from multilateral obligation set-off (where all relations remain between existing bilateral trading partners). This means that a shared ledger is only viable in the context of a relatively high-trust group.


The final table demonstrates the further reductions in working capital required for internal trade when participants agree to roll over some portion of their outstanding balances (in this case up to £100 each) at the end of each period. Balance limits can be determined by mutual assessment of risk and trustworthiness. This is equivalent to pooling and co-ordinating the trade credit that already finances a large proportion of economic activity (particularly between SMEs), and requires and rewards additional collaboration. The mutual acceptance of indefinitely rolled-over balances also has the effect of hardening some portion of the groups available trade credit into an internal means of settlement.


The key immediate benefit is therefore shared trade credit risk: since all invoices are paid on demand in mutual credit, the failure of a member imposes no immediate loss on any other member. The loss of a member from the group causes a general loss in spendability of the credit, but in a sizeable group, this becomes marginal. Collaboration is rewarded: as members see the overall reduction in risk, they are likely to mutually increase their maximum credit limits, generating increased liquidity and opportunities for internal trade. Purchasing power is limited only by members’ willingness to trade – there can be no externally imposed credit crunch.


Of course, such groups cannot get too large, since this would make it hard for any member to assess how trustworthy the group is as a whole. This limits the pool of ‘internal’ trading partners and thus the benefits of membership. The Credit Commons Protocols shared ledger technology resolves this by enabling groups to trade with each other by federating recursively into groups of groups, supporting scale, diversity, and complexity without imposing unacceptable risk or the costs associated with centralisation.


In the context of a group of groups, the internal willingness to pool trade credit becomes, from the point of view of other member groups, a form of mutual assurance when offering credit to an established group of businesses as a single entity, default would require the collapse of the whole group, rather than any single member. Once again, credit risk is reduced and confidence is increased.


When Trade Credit Clubs are deployed in high-trust, granular trading clusters as a follow-on to multilateral obligation set-off and federated together, the need for money to settle obligations can therefore be reduced still further. Community wealth building and circular economy benefits are directly proportional to the trust people have in each other, and hence the credit they will extend and accept. This in turn provides an economically viable framework for participative governance in a renewed commons.


Mutual credit is not intended, by design, to act as a long-term savings instrument; a large positive balance is more an indication of exposure to the future ability and willingness to trade of other group members (where risk clearly increases over the longer intervals) than it is a condition of wealth. If mutual credit worked as a long-term, reliable claim on wealth, the incentive would be to hoard it, reintroducing systemic shortage of liquidity. Instead, it encourages spending of surplus for a dynamic, high-turnover economy with a credit supply (set by the aggregate of mutually-agreed balance limits) that ‘breathes’, expanding and contracting according to need.


However, economies also need instruments for saving and investment. Use-credit obligations allow persistent positive mutual credit balances to be used for investment in infrastructure, providing both a return and new productive capacity whilst keeping the network in balance. As harder units suitable for saving, they can also be used (instead of fiat currency) to settle outstanding mutual credit balances.

Further reading

Mutual Credit - Introduction, Dave Darby, lowimpact.org.

The Alternative to the Current Money System: Tim Jenkin, Matthew Slater, and Dil Green, Dave Darby, lowimpact.org.

Explaining Mutual Credit to Small Business Owners, Dave Darby, lowimpact.org.

Mutual Credit Services - keeping communities alive after COVID: Trade Credit Clubs and credit clearing, Dave Darby, lowimpact.org.

The mutual credit society, Matthew Slater, creditcommons.net.

About Mutual Credit, Credit Commons Society, creditcommonssociety.org.

The End of Money and the Future of Civilization, Thomas Greco, 2009, Chelsea Green.

Stodder, J. and Lietaer, B., The Macro-Stability of Swiss WIR-Bank Credits: Balance, Velocity, and Leverage, Comparative Economic Studies, 2016.

Motta, W. et al., Self-Funded Social Impact Investment: An Interdisciplinary Analysis of the Sardex Mutual Credit System, Journal of Social Entrepreneurship, 2017.

Pirrong C., The Economics of Central Clearing: Theory and Practice, International Swaps and Derivatives Association, 2011.