Mutual Credit with Prepayments

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.

from the Investor Guide.

“Mutual credit” (sometimes called “multilateral barter” or “credit clearing”) is a term mostly used in the field of complementary currencies to describe a common, usually small-scale, endogenous money system.

The term implies that creditors and debtors are the same people lending to each other, but there are several nuances. Some think of mutual credit as a type of currency but this can be problematic because no currency or money is ‘issued’ in the sense that most people would understand it. Cash is very rarely ‘issued’, accounting normally taking place on a ledger, therefore it could also be called ‘ledger money’, a money system, accounting for exchange or credit clearing system. The accounting is explained under multilateral exchange.
from Wikipedia

The advantages of mutual credit

Mutual credit has the properties of being local, low operational cost, distributed, resilient to external economic shocks, non-inflationary, and producing just enough and just in time credit.

There are many ways to implement mutual credit. Successful ones, like Hawala for international money, trade a specific resource within a trusted community. Mutual building societies work well when they are local and within an established group of active members with other social connections. Australian indigenous economies worked well for fifty thousand years with small groups where ‘country’ and the value it produced was shared and transferred across generations. Successful commons, like the many cases of water sharing throughout the world, take the form of combining mutual credit (benefit) and mutual obligation.

Low cost

In the mainstream economy, money takes on three roles. It is a store of value, a means of exchange, and a generator of more money through debt. The latter is economically inefficient and distorts economies. It is economically inefficient as it replaces mutual benefits and obligations with monetary costs we call financial risk. Creating financial risk, in contrast to business risk, is an unnecessary expense. The economic distortions caused by financial risk take the form of hoarding of money leading to scarcity, an increasing wealth gap, poverty traps, the boom/bust cycle of economic activity and the overexploitation of natural resources.

When a community uses mutual credit, for a specific purpose, economic transactions produce no extra physical money. Instead, mutual credit can operate seamlessly in the mainstream economy using money created or approved by governments. Not creating extra money typically reduces the cost of running a mutual credit system compared to debt. The cost of running a debt system is the interest paid.


A successful implementation is one where the cost of operating the mutual credit system is lower than a debt-based system. Mutual credit can use debt, and there are alternatives. If mutual credit does not require the creation of extra money, it is likely to succeed. A community can make it difficult to create new money and devise ways to detect any additional money.

With regular bookkeeping, we notionally create extra money within an entity when the entity makes a profit. Making a profit in the form of extra money on the books makes it difficult to detect the actual creation of extra money. The exchange of goods and services creates value and profits. Profit appears on the profit and loss statement. Not-for-profit entities show gains on the balance sheet rather than on the profit and loss. Using not-for-profit entities makes it easier to detect the creation of extra money.

We can achieve the transfer of extra value, or profit, without creating extra money by transferring a right to goods and services from the future use of assets. We can give a return on investment from assets by creating a right to future production at a lower price depending on when the production occurs relative to when the buyer makes the payment. The rules of accounting make it challenging to put future rights onto profit and loss. Instead, we record them as balance sheet changes of rights and obligations.

The alternative of transferring extra value with more money fixes the profit, which still may or may not occur. If a profit does not happen, mutual credit makes adjustments. Adjustments to future transactions are lower cost than adjustments to past transactions.

In summary, a reliable method to achieve the transfer of value without the transfer of extra money is to organise entities into not-for-profit entities and to distribute profit as prepayments with discounts on future production.

A modern form of mutual credit

Mutual credit requires trusted reliable record keeping. Mutual credit consists of rights and obligations extending over long periods. A successful mutual credit system needs safe, trusted, private, secure, scalable and transparent record-keeping. Modern communications and technologies provide a solution with software platforms. The tech giants have shown how this can work. For example, Amazon achieves it by making a small profit and distributing the increase in value with higher share prices or capital gains.

Building and operating small not-for-profit platform cooperatives can distribute profits widely throughout the community in a scalable, economical and transparent way. Prepower One is an example of a renewable energy cooperative using a not-for-profit platform cooperative.


Mutual credit is a way of reducing the operating cost of investing. It does this while retaining the idea of making a profit on invested savings. Traditional financial instruments, like interest, assume a profit will happen, and when it doesn’t, it has complicated and expensive ways of redressing the discrepancies. Prepayments with discounts distribute a profit when the goods or services are provided. If there is no profit it delays the distribution until it happens. If more profit than expected is made the not-for-profit distributes the profit immediately. The resulting systems have emergent properties predicted by advocates of mutual credit.



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Kevin Cox

Kevin works on giving individuals control over their online information - particularly their financial information with local communities.