[From Reddit] There have been two phases of mutual banking, I think. There was a practical phase, stretching back into the 17th century, when various land banks and lumbards actually sprung up in places like the North American colonies, where many people had real property but didn’t have ready access to currency. Under those circumstances, access to a circulating medium could be the source of a real economic class divide, and there is a fascinating history of city merchants battling the establishment of mutual currency and credit banks by rural competitors, all of which led to the suppression of the land banks in North America by an extension of the Bubble Act.
That’s the context for the second phase, where a similar form of banking was proposed, often where it was illegal, once again to solve the problem of access (or cheap access) to a circulating medium. William Batchelder Greene’s New England version of mutual banking was a pretty direct attempt to legalize and revive the colonial land banks (although he claimed not to know about them until the 1850s, although he obviously knew about proposals like Kellogg’s “safety fund,” which were similar.) Greene’s neighbors in Western Massachusetts had precisely the right mix of real property and need for currency. The situation for workers in Paris was more complicated, since they were less likely to own real property. This is why Proudhon’s bank would accept a much broader range of securities, and why he explored cooperative marketplace schemes like his proposal for a “Perpetual Exposition.”
The second phase of the mutual bank propaganda went on for a long time, not always, I suspect, in places where the conditions were precisely right. But it was almost certainly a valuable tool for keeping non-governmental currency schemes in the public eye.
Whether mutual banking would make sense now as a transitional method or “after the revolution” as a means of providing a circulating medium depends entirely on local conditions. I am skeptical in both cases, but certainly don’t rule it out in either one.
As for the details of the thing, all the bills of credit issued would be backed by some relatively stable form of security. In essence, each individual provides their own money, and the mutual association simply exists to manage the mutual recognition of value. The percentage of the value of the security which could be issued by the association and/or the amount of insurance levied would depend on conventions worked out among the members. If the percentage remains low, then the danger of loss always rests on the individual members themselves. If members wish to reduce that danger further, then insurance is an option. Obviously, lots of things can go wrong, but the mutual nature of the association is likely to reduce the chances of people trying to take advantage of the system by quite a bit. In a society based on mutual associations, attempting to cheat any of them seems like a very quick route to a very unhappy set of circumstances. But it is probably also the case that even where the conditions are correct to form mutual credit associations, the bills of credit would not be the logical currency for all kinds of transactions. A secured credit currency is fairly “hard,” so it is, for example, good and comparatively inexpensive for use in investment in real property and such. But it might have more overhead than you would want for the cup of coffee or pint of beer you’re going to buy tomorrow, or the week’s groceries, assuming that the community has not simply absorbed minor transactions into some social base.
My personal feeling is that access to raw materials and means of production is probably going to be most seriously changed by changes in property conventions, at least “after the revolution.” And that seems the most elegant and inexpensive way to tackle much of what is wrong with capitalist society.