A Deeper Understanding of Mutual Credit
Community Gardens and Common Pooled Resources
In this blog I explore how a mutual credit system can be derived from commitment pooling through the lens of a community garden example. Mutual credit systems operate on the principle that the balance of trade among all participants always sums to zero. This system ensures that for every credit issued, there is a corresponding debit, maintaining equilibrium. The Commitment Pool is central to the clarity of this process, enabling families to contribute and withdraw resources fairly and can be viewed as a mutual credit system. I’ll break this down with a example to understand how this works in practice.
Understanding Credit and Debt in the Commitment Pool
Before diving into the example, it's crucial to understand how credit and debt are generated and resolved. The diagram above illustrates this process:
Commitment: When a family makes a commitment (e.g., a promise to contribute labor or resources), this commitment is logged into the system. These can be created as voucher on sarafu.network.
Acceptance: Once the commitment has been allowed access into the pool, it generates two possibilities:
Credit (+): The family gains credit by having their vouchers allowed into the pool, (also called reciprocal drawing rights).
Debt (-): Once their vouchers are in the pool, the pool records a corresponding debt that must be fulfilled.
Fulfillment: When the commitment is fulfilled (e.g., the family provides the promised labor), the credit and debt cancel each other out, bringing their balance of trade back (Credit - Debt) to zero. Note that these commitments can be reissued.
This cyclical process ensures that the mutual credit system remains balanced, with all credits matched by corresponding debts, which are eventually settled.
Slide 1: Introduction to the Commitment Pool
Situation: The community garden is established, and a stewardship council introduces a Commitment Pool on Sarafu.Network to manage access fairly (shown as a virtual winnowing basket) - note that they could have seeded any virtual assets into the pool. Three families wish to participate by contributing vouchers representing days of labor or services (A, B, C).
Commitment Pool: The pool aggregates the seeded vouchers (commitments) from Stewards (F) and gives access to the families. Each family's commitment will be tracked, and they can receive tokens (F) in return, which can be used to access the garden.
Balance of Trade (B): The balance is calculated as Credit (C) minus Debt (D). In this case each family has been given access and hence has credit int he pool - while the Stewards are now in debt. In this slide the sum across all families (+1,+1,+1) and steward (-3) equals zero, ensuring fairness and sustainability.
Slide 2: Exchanging Vouchers for Access
Situation: Families use their drawing rights to gain access to the garden. They exchange their vouchers (A, B, C) for (F) vouchers.
Reciprocal Exchange: The families exchange their commitments for access, maintaining the mutual credit balance. Note that the Stewards now have more credit in the pool while all the families now have a debt.
Balance Adjustment: As vouchers are exchanged, the balance of trade is updated, with each family's debt increasing while their credits are utilized and the Stewards credit increases correspondingly. The total system balance remains zero as always.
Slide 3: Accessing the Garden
Situation: Families use their tokens (F) to gain physical access to the garden. The tokens are sent to the stewardship council.
Stewardship Role: The council manages the pool, ensuring commitments are honored and that the garden operates smoothly.
No Change to Pool: Although tokens are exchanged between people, the underlying commitments in the pool remain unchanged, and the balance of trade across all participants stays zero.
Slide 4: Stewardship and Resource Withdrawal
Situation: The stewardship council uses the their (F) vouchers to purchase the vouchers of the families' from the pool.
Resource Utilization: The council uses the commitments to manage the garden, drawing down the families' debts.
Balance Reset: As services are provided, the families' debts are reduced, and their credits are reset, returning the system to equilibrium with a total balance of zero.
Slide 5: Fulfilling Commitments
Situation: After fulfilling their commitments (e.g., working in the garden), the families receive their vouchers back, symbolizing the completion of their obligations.
Cycle Completion: The first cycle of commitment and fulfillment ends. The system is ready for a new cycle.
Balance of Trade: The balance of trade across the system returns to zero, demonstrating the sustainability and fairness of the mutual credit system.
Slide 6: Starting a New Cycle
Situation: The system is back to where we started in slide 1. Lets see what else is possible with a common pool resource and reciprocal drawing rights.
Slide 7: Inter-Family Services 1
Situation: Family 2 decides to contribute more vouchers (B) to gain additional access to the garden (F).
Flexibility: Families can adjust their commitments based on their needs, showing the flexibility of the system.
Balance Adjustment: Family 2's balance adjusts as they add more commitments and the Stewards debt decreases, while the total system balance remains zero.
Slide 8: Inter-Family Services 2
Situation: Family 3 wants some of Family 2’s services, so they exchange their vouchers (C) into the pool to draw out some of Family 2's commitments (B).
Nuances:
Inter-Family Transactions: Families can trade services directly through the pool, extending the mutual credit system beyond garden access.
Balanced Trade: The overall balance remains zero, demonstrating the robustness of the mutual credit system.
Slide 9: Inter-Family Services 3
Situation: Family 3 pays Family 2 for services using commitments pulled from the pool. This transaction fulfills the exchange between the families.
Nuances:
Service Fulfillment: The system supports the direct exchange of services, allowing families to benefit from each other's commitments.
Balance Stability: The overall balance remains zero, ensuring that every debit has a corresponding credit, maintaining stability.
Mutual Credit as a View
The pool is not only a tool for garden access but also a platform for broader credit systems, including the potential integration of national currencies or stablecoins. The pool can manage both commitments of time/labor and digital assets/currencies, broadening its use. By tying credit and debt to clear individual commitments, the system ensures transparency, preventing ambiguity common in traditional credit systems.
The +/- balances and over all system balance of trade being zero which indicate a mutual credit system are a way of viewing the Commitment Pooling system.
The Commitment Pool, as demonstrated as a common pooled resource in the community garden example, is a powerful tool for fair resource distribution - from which a mutual credit can be derived. By ensuring that the balance of trade always sums to zero, the system maintains fairness, where all contributions are matched by corresponding benefits. This clarity in commitments, further enhanced by the potential integration of digital assets, fosters trust and long-term sustainability in community-driven mutual credit systems for resource coordination.
A final note on what makes a mutual credit ‘mutual’. There are many possible forms of pool mutuality that I’ll list below:
Mutual Assets: In this case we had a group of Stewards managing a pool. (The assets of all everyone being held together with reciprocal drawing rights).
Mutual stewardship: The pool could be collectively managed by all the participants (everyone is part of the Stewards).
Mutual Investment: Each participant could have their own pool with each others vouchers in it.
I would add also "4. Mutual Risk", as described by Matthew in his blog. If user A fails to fulfill their commitment, then the risk is equally distributed to everyone else (pure mutual credit) or only to those having user A's vouchers (commitment pooling). Technically, this is the innovative approach which could help mutual credit systems to scale: buying someone else's voucher is also a way to endorse their reliability/trustworthiness. I guess, this is the main difference from a "pure mutual credit" system. I'd be curious to know if you thought about others.
I will wait until my more tech literate colleague is back from bereavement leave.