Mutual credit
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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. 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.
[edit] Advantages & Disadvantages
One economic advantage of mutual credit is that the currency supply is self-regulating--the money supply expands and contracts as needed, without any managing authority. The availability of interest-free loans is a great advantage to members of the system. One major downside of mutual credit is the possibility of exploiting the system by running up a negative balance and then leaving. This problem is often addressed by caps on negative balance which can be raised as balances are paid off, or by limiting the system to a small, close-knit community based on trust, where the community holds people accountable. For this reason, most mutual credit systems are small (under 2000 members).
[edit] Examples & Types of Systems
LETS is an example of a mutual credit system. A number of different mutual credit systems have been proposed. Mutual credit can be combined with a number of features of alternative currency systems. For example, it is usually (but does not need to be) a local currency, and it can have a demurrage fee for the holding of balances.
[edit] References
- T.H. Greco. "Money: understanding and creating alternatives to legal tender". White River Junction, Vt: Chelsea Green Publishing, 2001.
