Saving and investment in a mutual credit world

Nothing we do to try to move to a sustainable, healthy and democratic society will work as long as we have the current money system, because money has two conflicting functions. It can be used to buy and sell things, and it can be used to store, hoard, accumulate and become wealthy with. As long as that’s the case, money will gravitate towards stored wealth, because money attracts money and gives access to the political system. This continues until so much money is concentrated, and so little is circulating that the economy crashes – as it has many times – and will continue to do so until those two functions are separated. During crashes, communities are devastated and ordinary people suffer. During booms, nature is destroyed. So there’s never a ‘good’ part of the boom and bust business cycle.

This little spiel is becoming my mantra. And the solution, I become more convinced every day, is mutual credit, or something mutual credit-ish. A family of ideas that take store of value away from the exchange medium, rather than something prescriptive. Groups of people are building these mutual credit-type solutions all over the world. A new, decentralised economy can be built around them from the edges, in communities, and it can be federated to the global level. It will work if we use it. I think its time has come now that we have the internet; the ability to federate; a growing awareness of what’s happening to nature; and a Covid-induced economic slump.

But what I’m asked most is ‘OK, if mutual credit is the exchange medium, how do we save and invest, including buying homes, in this new mutual credit world?’ Well, what I’m finding is that there’s a range of answers to that question. Here are some ideas, and I’ll try to get some people in the know to add more in the comments.

We’ll need to be able to store value in the new economy, and if using the exchange medium as a store of value is a bad idea, then how do we do it? As mutual credit doesn’t incur any interest, it’s more beneficial for someone with a positive balance to spend their credit units than to hoard them. Plus there are credit limits, and so it really isn’t a good way to store value. If it were, credits would be taken out of circulation and hoarded, and cause exactly the same problems as conventional money, namely draining wealth from communities and concentrating it in ways that corrupt democracy. But there are ways to save, store value, buy property and provide security that don’t drain wealth from communities. The trick is to design them so that they’re as easy for the public to engage with as mortgages, savings accounts and investments and so that they lead to the same beneficial outcomes – housing security and nest eggs for rainy days. When mortgages, credit cards, share ownership or credit default swaps were first mooted, I’m guessing that a lot of people would have been sceptical. New tools for storing value might appear complicated at first, but people will always step up to provide them in ways that are easy for people to engage with.

The store of value function in the new economy is performed by real things in communities, rather than by the exchange medium. Real things in communities can’t be extracted and concentrated. Individuals can hold some of this real value in the form of something called ‘use credits’, and they can help build the infrastructure of their local economy at the same time. Here’s an example. A local community energy scheme want to build a new solar array on the roof of a large building. It will cost £50,000, that they don’t have. So they issue energy credits – tokens for use of the electricity that will be generated by the solar array when it’s built. The tokens are offered at a discount – so local people can buy £1000 of future energy credits for £900, say, until the £50k is raised. When the energy is being generated, you can then either use the credits to purchase electricity at a discount, or sell them at the full price for a profit. Here’s another example: a local restaurant wants to spend £10k on a new stainless steel kitchen, and does so by issuing future meal credits at a discount. Or a local smallholder needs £20k for a barn and a new tractor, and so issues future farm produce credits at a discount. I’m sure you can think of many more ideas. So, let’s look at some of the ‘wins’ with this scenario:

1. People with a bit of extra money can get a return on their investment.
2. It’s risk-free; if the group don’t get enough investments to build the array, you get your money back, and if it gets built, you get electricity or profit.
3. It’s a nice little store of value, because the electricity is real and useful, and so people will want your tokens – that is if you don’t use them yourself.
4. The community energy group doesn’t have to give away part of their company, or get into debt, so wealth stays in the community, rather than being leached out with shareholder dividends or interest payments.
5. The community energy group builds renewable infrastructure and creates jobs, which is good for the community.
6. More electricity is generated from more environmentally-friendly sources.
7. The community has more real assets, so local people don’t have to pay extractive corporations for their electricity.
8. People can use their mutual credit units to buy use-credit tokens, as long as the issuers have a mutual credit account – which of course they should, as community organisations; so it’s a way to store value for those who find it easy to sell, but difficult to find things to buy.
9. Savings become inflation-proof: savings in money might fall in value, but a unit of electricity is always a unit of electricity.
10. It provides security for people. If you can invest in future rent-credits, energy-credits or food credits, you’re guaranteed a home, electricity and food – the kinds of things that humans are always going to need. That’s real security, rather than bits of paper or numbers that are not guaranteed to be worth anything in future.

We need to move quickly, and we need to make the new economy attractive to those with money to invest, and to make sure that they’re rewarded in new economy assets. That way, we’ll be attracting investments in pounds and dollars, and using them to build the new economy, paying returns in the currency of the new economy – mutual credit units and use-credit obligations. Then when investors realise those returns, they’ll automatically become participants in the new economy, and they’ll be helping to build it. So prepayment at a discount is not about shares, it’s not debt, and it’s not derivatives. It’s a community-based method of providing risk-free returns for investors and getting things done in communities without sucking wealth out of them.

You might think that this all sounds a lot more complicated than getting money and putting it in a deposit account, but people probably thought that when deposit accounts were introduced. Individuals and organisations will rise to the occasion and step up to provide easy, seamless platforms for you to become involved in this new kind of saving and investment. Mutual credit will start to level the playing field first, preventing extraction from communities. And all these new ideas and instruments will be convertible with conventional money for a while yet, as conventional money is required to pay taxes. This is a slow burn – but you can get involved with existing new economy institutions and mutual / trade credit immediately. Investors will become more interested in these kinds of investments as capitalist investment opportunities shrink, which will mean that the rewards for the production of essential commodities like property, energy and food remain in communities and don’t accrue to extractive individuals and institutions, including banks.

Value can be stored in housing too, of course. The ideal scenario is for everyone to be housed, but (as with trade and investments) without money being extracted from the community. In conventional property development a landowner sells to a developer, who sells to a property owner who can then sell to another property owner who can occupy the property or rent to tenants, and so on. Each transaction apart from rental is done using money borrowed from the banking system. At the moment, if you buy a house for £200k, you might get a mortgage, and end up paying over £400k over the 25 years that it might take to pay back. £200k of value is sitting in your house, which is still in your community (houses don’t move), but £200k has left your community, to contribute to increasingly-concentrated wealth. Private landlords, many of whom own multiple properties and don’t live locally, represent another route for wealth out of your community.

Alternatively, in the mutual model, landowners, developers, local authorities (providing planning permission), investors and occupiers can set up local, multi-stakeholder, ‘custodian’ groups that could be co-ops, community land trusts, cohousing projects, partnerships or completely new kinds of institution. These multi-stakeholder groups offer future rent credits, at a discount, to investors who fund the development, and are able to occupy the property or receive an income, including a profit, from the rents that come in from the housing or commercial space that’s built. No banks are required in this model, and no interest is payable. Once property is mutualised in this way, occupiers, investors, developers and managers may change, but the property is held in common by the custodian group, and never (conventionally) sold again – although it can change hands. This system delivers housing security to greater numbers. At the moment, the system isn’t working for most people, and especially young people, who can’t get on the property ladder at all. In places like London, the only truly affordable housing available is via fully-mutual housing co-ops. If you’re a member of this kind of custodian group, you’re therefore a part-owner, who can pass on occupancy and other rights to your children.

To obtain full ownership of your home, instead of arranging a mortgage and paying interest that leaves your community for 25 years, you can work with the custodian group in the same way that you would work with an Islamic mortgage institution (for which interest is not allowed). Instead of lending you money, and dumping all the risk on you (which means losing the property to the lending institution if you’re unable to keep up payments for any reason), an Islamic institution will buy the house with you, and rent it to you at an agreed rate that allows the institution to make a fair profit. If you put up 10% of the house price as a deposit, say, then 10% of the rent goes to you, and 90% to the institution. You can make occasional large payments, or pay a bit extra on the rent each month, so that an ever-larger proportion of the rent goes to you, until eventually, 100% of the rent goes to you, which means that you’d be paying all the rent to yourself, and therefore you own it. You can leave the property at any point, and you’ll still get the proportion of the rent that’s due to you, from the next occupier. With the mutual set-up, the custodian organisation is community-based, and so all moneys paid remain local. Other interesting things can happen in this kind of system too – for example, if you’re cash-poor, you could earn rent credits by maintaining the property yourself, or even by providing other useful services to the custodian group. The custodian organisation will of course be part of the local mutual credit club, and therefore payments can be made in mutual credit units, cash, or a mixture of both.

This purchasing method confers the same privileges and exclusive home ownership as now – that is, once paid for, you’re then rent and mortgage-free and can pass on the property in your will – but it’s more affordable, and without the extraction and interest involved in the current system. The only difference is that the property can’t be bought and sold through the banking system any more. Properties can change hands using the same kinds of community-based mechanisms as outlined above. Again, you won’t have to understand all the nuts and bolts of these new mechanisms, any more than you have to understand the inner workings of banks or credit card companies now. People will rise to the occasion, including community-based estate agents, to make all these functions easily understandable and accessible.

There’s a book on the way about building a new economy around a mutual credit core.

About the author: Dave Darby lived at Redfield community from 1996 to 2009. Working on development projects in Romania, he realised they saw Western countries as role models, so decided to try to bring about change in the UK instead. He founded Lowimpact.org in 2001, spent 3 years on the board of the Ecological Land Co-op and was a founder of NonCorporate.org. and the Open Credit Network.