::: Mutual Banking (1/2) :::

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Dan Clore

Jul 12, 1999, 3:00:00 AM7/12/99
::: Mutual Banking (1/2) :::

not copyright by Gary Elkin (el...@cts.com)


This article discusses the idea of a zero-interest credit system,
commonly known as "mutual banking," which was first suggested by
Pierre-Joseph Proudhon and later taken up by American individualist
anarchists such as William B. Greene and Benjamin Tucker. We'll
first examine an anarchist analysis of the State which underpins
the argument for mutual banking, then go on to see how an updated
version of mutual banking, complete with Internet "e-money" transfer
capability, would work in practice.

"Reduction of interest rates to vanishing point is itself a
revolutionary act, because it is destructive of capitalism."
-- Proudhon

The State as legalized goon squad

1. Anarchists point out that the State is, in effect, society's
biggest criminal gang, since its main function is to serve as a
kind of goon squad, a protection and enforcement arm, for certain
private racketeers called "bankers," "industrial capitalists," and
"landlords." I'll use the United States government as an example,
since it's presently the most powerful goon squad in the world.

As Chomsky (1988, 1993) has shown in great detail, US protection
and enforcement activities in foreign countries is handled primarily
by the military and CIA, whose job is to coerce foreign governments
into allowing their citizens to continue being fleeced by the US-based
racketeers mentioned above; whereas, domestically, the same racketeers
are protected by the courts, police, and prison system. In return for
this protection, the US government receives a kickback from these
clients in the form of corporate taxes, license fees, campaign
contributions, bribes, etc.

The "rackets" in question take the form of three major monopolies,
which the State creates and sustains, namely:
1.) credit-and-currency-issuing monopoly, the basis of capitalist
2.) capital-goods monopoly, the basis of industrial profiteering; and
3.) land-and-buildings-monopoly, the basis of landlordism. Following
Benjamin Tucker (1972), I'll refer to income derived from such
monopolies as "usury," a term that may thus be defined broadly as the
exaction of tribute for the use of any object whose artificial scarcity
and monopolization by an elite class are created and protected by the
State. This definition widens the usual meaning of usury to include not
only interest but profits and rents as well.

The State creates and sustains the first monopoly, of credit and
currency, primarily through legislation that restricts allowable
currency to a "legal tender" that can be issued only by the central
Banks (including credit unions, thrifts, etc.) are then required to
transact all business -- whether as cash, deposits, reserves, or
extensions of credit ("loans") -- only in units of this currency.
Moreover, in order to be granted a bank charter, numerous other
must be met, including the raising of a given amount of deposit capital
a specific period of time; proving to the banking authorities that
bank is necessary; showing that it has a viable chance of success, and
on (Morris and Hess 1974: 81).

Such laws, and the interpretive lattitude given to those who enforce
them, function effectively to restrict banking to an elite class whose
members have enough "standing" in the financial community to raise the
necessary capital and convince the authorities that the proposed new
bank represents no threat to the overall system of finance-capitalist
exploitation. Hence this elite class is able to maintain a monopoly over
the power to issue money as credit, and hence to exact monopoly fees for
its use.

In turn, this State-protected monopoly of credit-issuing power is
combined with other forms of action by the State (e.g. its protection
of titles to unused and unoccupied land) in order to create further
artificial scarcities: notably of land, buildings, and capital goods,
which are expensive items that generally cannot be acquired without
credit. These items are then also sold or rented out at high price by
those who monopolize them. For example, the surplus value extracted by
capitalists from workers can be viewed as a form of monopoly rent
charged by those who own the means of production to those who need to
use them to earn a living.

Although all monopolies are detrimental to society, anarchists like
Proudhon and Tucker have maintained that the credit-issuing monopoly is
by the most pernicious. This is not to say that capitalists'
exploitation of labor or landlords' exploitation of tenants are any less
evil in themselves than bankers' exploitation of debtors. It's merely to
say that monopoly of the power to create money as credit is the main
from which the other two monopolies grow and without which they would
wither and die. For if credit were not monopolized, its price (i.e.
interest rates) would be much lower, which in turn would drastically
lower the prices of capital goods, land, and buildings.

Therefore, if the State would stop protecting the credit-issuing
monopoly -- which is to say, if any group of people could legally form
a "bank" and issue credit based on any form of collateral they saw fit
to accept -- the price of credit would fall to the labor cost of the
paperwork involved in issuing and keeping track of it. As banking
statistics reveal, this cost is less than one percent of principal
(Tucker 1972). Hence, as Proudhon emphasized, a fee which covers this
cost and no more is the only *non-usurious* charge a bank can make for
extending credit. To refer to this legitimate cost-covering fee as
"interest" is to confuse the issue. Anarchist banking would in fact
reduce *interest*, that is, usurious fees for credit, to zero.

"But," I hear, "what about *risk*? Is there no risk in the anarchist's
world that would justify charging more for credit than the cost of
paperwork and similar overhead?" As we'll see in section 2, there is
virtually no risk for a mutual bank, because the credit it extends is
based on more than enough collateral to cover defaults. And, as is
also discussed there, a mutual bank does not actually "lend" money, but
instead *creates* it. Hence there is no excuse for mutual banks to
interest as compensation for "postponing the use" of any previously
existing money that was "lent."

The beneficial results of a zero-interest credit system

Reduction of the interest rate to zero through mutual banking, along
with an end to the State's protection of titles to land not being
occupied and used by its "owners," would lower both profits and rents
toward zero as well. Let's consider profits first.

Under mutualism, capitalists' ability to extract surplus value from the
labor of employees would be eliminated or at least greatly reduced,
because many more workers than now would be able to obtain zero-interest
credit and use it to buy their own tools and equipment, instead of
them from capitalists at exorbitant rates.

Although, at the start of the new system, not everyone would have enough
collateral to obtain credit, many more people would be able to do so
than now. This would result in a huge increase in the purchase of
goods, which in turn would create a huge demand for labor. Such a demand
would then raise employees' wages toward equivalence with the surplus
value produced by their labor. For this reason, workers would be able to
save much more of their earnings than is presently the case, until soon
virtually any person or group of persons, if they so desired, could
accumulate enough wealth to use as collateral, obtain credit, and buy
their own tools and equipment.

In this situation it would be absurd for workers to pay someone else
(i.e. a capitalist) more for the use of tools and equipment than a fee
equal to their depreciation and maintenance costs plus the cost of the
taxes (if any) and utilities involved in housing them. Then, as Tucker
(1972) noted, an employee would be in a position to say to his or her
employer: "Here, boss, you are a good business manager, and I am willing
to continue to work under your superintendence on a strictly equitable
basis; but unless you are willing to content yourself with a share of
joint product proportional to your share of the labor and give me the
balance for my share of the labor, I will work for you no longer, but
set up in business for myself on the capital which I can now obtain on
credit." With their vastly increased bargaining power, employees in this
situation would be able to demand and get workplace democracy.

Of course, on a purely individual level, a dissatisfied employee of the
sort described above would be limited to starting up a relatively
small-scale business that did not require a huge capital outlay.
However, it's important to emphasize that *groups* of workers could pool
their mutual credit and start larger-scale collective enterprises.

By a similar line of reasoning it can be shown that a zero-interest
credit system, combined with an end to the State's protection of titles
land not being occupied and used by those who claim to "own" it, would
lower rents toward zero as well -- that is, toward equivalence with the
maintenance, utilities, and other costs absorbed by the owners of rental

But these are not the only social benefits that would accrue from mutual
banking. Other positive effects would be the elimination or alleviation
of the business cycle and of the tendency toward high inflation, both of
which are largely attributable to the current "fractional reserve"
of expanding the money supply for political purposes. In addition,
banking would greatly reduce the financial pressure responsible for much
of the current "grow-or-die" philosophy of business, which is destroying
the biosphere.

Contrary to popular belief, when a commercial bank makes a so-called
"loan" it does not actually allow the "borrower" to use a sum of money
that the bank already possesses on deposit (the usual meaning of "to
money"). What it actually does is to *create new money*, as credit, by
the process of fractional reserve banking -- a process in which only a
certain fraction of the newly created credit-money (usually between 10
and 20 percent) really exists in the bank's reserve account at the
bank. The rest of the "loan" is created out of thin air, simply by the
bank's crediting the account of the customer for the amount "borrowed"
(Rothbard 1983; Greider 1987).

This process is analogous to an ordinary person's writing a bad check
for more than exists in his or her checking account. As Rothbard puts
"*a bank is always inherently bankrupt*, and would actually become so if
its depositors all woke up to the fact that the money they believe to be
available on demand is actually not there." (Rothbard is right about
this, though he's wrong about much else, as discussed below.)

We should not be surprised to learn, then, that the fractional reserve
banking system actually originated as a form of fraud. Here's the story.

In the days before banks of deposit existed, people often placed large
amounts of gold in the vaults of goldsmiths for safekeeping. The
goldsmiths would then issue warehouse receipts for the gold, which were
used by their holders as a form of paper money that could be exchanged
real gold by anyone presenting them to the issuing goldsmith. However,
many goldsmiths soon began issuing *fake* warehouse receipts for more
than they actually had in storage, and "loaning" them at interest to
"borrowers." This scheme worked quite well unless there was a run on the
vault -- that is, too many holders of warehouse receipts presenting them
at one time for redemption -- which clearly revealed the fraud,
the goldsmith was usually taken out and hanged.

The fractional reserve system of modern commercial banks, in which
enormous amounts of interest-bearing credit-money are pyramided on a
base of "reserves," is a direct descendent of this fraud. In essence,
commercial banking is a giant Ponzi scheme, differing from the old
goldsmiths' racket only in the fact that it has been legalized by a
of unjust court decisions which gave bankers the exclusive privilege of
issuing fake warehouse receipts for something they don't actually
The injustice of these decisions is apparent from the fact that the
of fake warehouse receipts for other types of goods -- for example wheat
(receipts for which have also been used as money) -- is still subject to
criminal penalties.

Fractional reserve banking is highly inflationary because the vast
majority of the money in circulation exists in the form of
credit, created when banks make fractional-reserves "loans,"
to their large corporate customers. (In fact, every dollar in
is interest-bearing at its point of origin, since even currency must be
backed by government securities.) Since all money thus represents an
interest-bearing debt, every business that has "borrowed" to finance its
operations must scramble madly to pay back the interest it owes by
gathering profits from a pool of total dollars that is necessarily
insufficient to repay the total principal and interest outstanding at
any particular time. This fact obviously constitutes a strong incentive
for such businesses to raise their prices and also to expand. For unless
there is sufficient growth, indebted companies won't generate enough
profits to continue financing their debt. Indeed, many investors seek
out highly indebted companies as likely high-growth investments.

Moreover, corporations must also satisfy stockholders, who demand high
growth in order to raise the value of their stock. Like the
capital-goods and landlordist monopolies, the stock market depends on
the State's creation of an artifical scarcity of credit, which makes it
necessary for corporations to sell stock in order to raise funds to
finance their operations (thus incidentally placing companies under the
control of absentee owners). Under mutual banking, however, the easier
availability of credit will make this practice unnecessary, or at least
greatly reduce its importance.

A further inflationary pressure -- perhaps the main one -- occurs
because central government finance their deficit spending by, in effect
,printing the money they need to pay their debts, a practice that
the money supply. This is done by issuing new interest-bearing
which of course puts such governments even further in debt, leading to
printing of even more debt-money, and so on in a vicious circle.

Fractional reserve banking is also a major contributor to the business
cycle, simply because Ponzi schemes have an inherent tendency to
collapse when public confidence in them is weakened for one reason or
another. This is why recessions and depressions in the past were often
triggered by bank runs -- which is to say, when the "inherent
of certain banks was discovered by the public -- whereupon all banks
begin calling in their old loans and refusing to make new ones in order
increase their reserve base, fearful that their own insolvency would
be discovered.

Today, deposit insurance has largely eliminated the problem of bank
runs; but other reasons still exist for banks to contract credit from
to time. The result is a "credit crunch," which shrinks the total pool
available money from which funds for loan repayments can be gathered by
businesses, thus producing a wave of business bankruptcies. Such a wave
causes many weak banks to fail as their bankrupt business customers
default on loans, which in turn causes the remaining "solvent" banks to
tighten their credit even further, producing more business bankruptcies,
further bank failures, and so on, until eventually there's a full-blown

The failure of Libertarianism

Some Libertarians (e.g. Rothbard) have proposed as a solution to such
problems that currency be returned to the gold standard; that banks be
required to maintain a 100 percent reserve of gold or paper currency
redeemable in gold as backing for all extensions of credit; and that the
central bank be eliminated in order to increase competition among banks
(which, among other things, would lower interest rates.) Unfortunately,
however, although this proposal would probably do *some* good, it still
fails miserably as a solution to the major problems of exploitation
which arise from the State's creation and protection of a financial

For consider: Since gold is a naturally scarce commodity, and since the
State would require that this scarce commodity be used as the basis of
all money, the power to issue credit and currency based on gold would
still be monopolized by a financial elite -- namely those who
gold. As Greene (1919) points out, the history of gold-standard banking
in this country demonstrates that gold is one of the easiest commodities
to monopolize, especially with the State's help. But any financial
monopoly, whether based on gold or not, will give rise to further
monopolies of capital goods, land, and buildings. Moreover, although
interest rates might fall under the system Rothbard proposes, they would
certainly not fall to zero. Hence the three forms of usury previously
discussed -- interest, profits, and rents -- would continue, though
at a somewhat lower rate.

In fact, right-wing Libertarians such as Rothbard never suggest that the
fundamental mechanisms of economic exploitation, i.e. the goon-squad
functions of the State, should be dismantled. Rather, they wish merely
to "limit" the State to its "classical" role of performing only
goon-squad functions -- a role in which it would not get into the
businesses of providing social welfare, building roads and bridges,
educating people, protecting the rights of workers, etc. In other words,
Libertarians propose that the activities of the State should be confined
entirely to protecting those key monopolies which allow the racketeering
elite (i.e. bankers, capitalists, and landlords) to continue robbing and
enslaving the rest of the population.

Thus, in order to find proposals that strike at the heart of capitalist
exploitation, we must turn instead to the ideas of libertarian
socialists, and especially to the idea of a zero-interest credit system
of the type first set forth by Proudhon.

An updated version of mutual banking

2. In an article in the Nov. 26th issue of The Economist it is stated:
"The transformation of the Internet from a huge virtual community into
a huge virtual economy may herald the age of electronic money -- and
it, headaches for traditional banks and regulators." What the article
not state is that "e-money" is potentially a means of destroying the
monopoly-capitalist system as we know it. For the lynch-pin of that
system is finance-capital's monopoly of the power to create money as

Along these lines, I want to sketch an updated version of mutual
banking, complete with e-money transfer capability via the Internet. As
I see it, a mutual bank should grow from a collectively owned and
barter association that is responsive to the participatory-democratic
assembly of a radical urban community. Here's a possible scenario:

The new economic system -- not yet self-sufficient but increasingly so
is born when the community barter association begins issuing an
alternative currency accepted as money by all businesses within the
For reasons discussed below, this "currency" does not at first take the
form of tangible monetary tokens (i.e. coins or bills), but is
entirely through transactions involving the use of barter-cards,
checks, and "e-money" transfers via modem/Internet. [1]

Since it doesn't charge interest -- the source of regular banks' profits
-- and since its purpose is to provide economic assistance to the
community, it may be possible to charter this new financial institution
as a nonprofit charitable organization. In order to get non-profit
however, it is essential that mutual-credit organizations not be
described as "banks" "thrifts," "savings and loans," "credit unions,"
which would make them subject to the charter laws governing such
institutions. For convenience I'll refer to an anarchist zero-interest
credit-issuer as a "mutual barter clearinghouse" (or just
for short). Other semantic expedients regarding the official description
of its operations may also be necessary in dealing with the State.

The clearinghouse has a twofold mandate: first, to extend interest-free
credit to members; second, to manage the circulation of credit-money
within the system, charging only a small service fee (probably one
or less) which covers its costs of operation. Such costs would include
making of plastic barter cards, printing personal checks, keeping track
of transactions, paying its workers, insuring itself against losses from
uncollectible debts, and so forth.

The clearinghouse is organized and functions as follows. Members of the
original barter association are invited to become subscriber-members of
the mutual bank by pledging a certain amount of property as "collateral"
(referred to by some other term -- perhaps "pledge" is good enough). On
the basis of this pledge, an account is opened for the new member and
credited with a sum of mutual dollars equivalent to some fraction of the
assessed value of the property pledged. [2] The new member agrees to
this amount plus the cost-covering service fee by a certain date. The
mutual dollars in the new account may then be transferred through the
clearinghouse by using a barter card, by writing a personal check, or by
sending e-money via modem to the accounts of other members, who have
agreed to receive mutual money in payment for all debts.

The opening of this sort of account is, of course, the same as taking
out of a "loan" in the sense that a commercial bank "lends" by extending
credit to a borrower in return for a signed note pledging a certain
of property as security. It's like fractional-reserve banking in this
respect. The crucial difference, however, is that the clearinghouse does
not purport to be "lending" a sum of money that it *already has*, as is
fraudulently claimed, with much hand-waving and doubletalk, by
banks. (Hence the creation of mutual credit does not have to be
described as "making a loan.") Instead it honestly admits that it is
creating new money in the form of credit, but charging no interest for
doing so. New accounts can also be opened simply telling the
that one wants an account and then arranging with other people who
have balances to transfer mutual money into one's new account.

Dan Clore

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