A credit clearing system is an arrangement in which the members of an association of traders, each of whom is both a buyer and a seller, agree to allocate to one another sufficient credit to facilitate their transactions amongst themselves. That means they simply keep a record of their purchases, sales, and account balances, allowing some members to buy before they sell. In the long run, each member is expected to earn (from their sales) as much as they spend (on their purchases).
When a members buys something from another member, the price is subtracted (debited) from account of the buyer and added (credited) to the account of the seller. Thus, members’ balances will fluctuate over time, being sometimes negative (in debit) and sometimes positive (in credit).
In such a system, the total amount of credit outstanding at any point in time can be thought of as the money supply within the system. That will be the sum of either the positive balances or the sum of the negative balances. These two sums of course must always be equal to one another, the total of all account credits must always be equal to the total of all account debits.
Here below is a table that describes the credit clearing process. Click on the image to download the full sized file.
Note how the money supply fluctuates up and down as credit balances are spent and debit (negative) balances are reduced when sales are made by those who previously had a debit balance.
Credit clearing is the highest stage in the evolution of reciprocal exchange, which, in effect, makes money as we’ve known it obsolete. The fact is that goods and services pay for other goods and services, whether we use money as an intermediate payment medium or not. Direct credit clearing makes the use any third party credit instrument (money) unnecessary.
What does this mean for the quantity theory of money? We should stop thinking of money as a thing, the quantity of which is all important and controlled by some outside authority like a government or central bank. Instead, we see that money can be thought of as simply a system of accounting for credit in which the quantity can fluctuate according to the needs of traders to exchange value with one another, and the quantity of credit allowed is determined only by the amount of valuable goods and services available to be traded.
The fact is that present day banking is mainly a credit clearing process in which additions and subtractions are made to their customers’ account balances. However, banks perpetuate the myth that money is a “thing” to be lent. If a client’s balance is allowed to be negative, the bank considers that to be a “loan” and will charge “interest” on it. Has the bank loaned anything? Not really. What they have done is to allocate some of our collective credit to the “borrower.” For this they claim the right to charge interest.
It is clear from the example below that any group of traders can organize to allocate their own collective credit among themselves interest-free. Done on a large enough scale that includes a sufficiently broad range of goods and services spanning all levels of the supply chain from retail, to wholesale, to manufacturing, to basic commodities, such systems can avoid the dysfunctions inherent in conventional money and banking and open the way to more harmonious and mutually beneficial trading relationships.
t.h.g. August 6, 2007. Revised December 22, 2014.