Acknowledgment and Settlement of Debt

By Will Ruddick

Tags: debt, matrix, obligation, clearing, settlement, commons


When helping a community (association of service providers) develop a mutual credit (Community Inclusion Currency CIC) based on their capacity to offer each other services, we follow a standard formula. It starts with discussions, resource mapping and the identification of goals, local capacity and gaps in that capacity. After demonstrations, trials and fine tuning a group may all award each other a credit (CIC) (ex. 300 shillings worth) of goods and services.

But prior to this the group may have already developed formal and informal debts between each other. If these debts are not accounted for, the credit they have created may have a lot of resistance to circulation since members already holding the past unpaid debts of others may refuse to accept any CIC. How do we acknowledge and settle historic debts using a Community Inclusion Currency? Often, acknowledging and settling debts is one of the first things a community will do to maintain a healthy economic commons.

An example matrix of inter-member debits measured in national currency can be estimated as follows below:


Above it shows that Bob spent 200 + 50 with Jim and Anna, while receiving 200 + 200 from Jim and Anna. Bob therefore has a credit of 400 and a debt of 250 for a Net of 150 shillings of credit. In other words he is owed 150 shillings of goods and services. Sally, on the other hand has spent 250 with others and holds a credit of 100, so in net she is in debt 150 shillings. Below you can see each member's net debit or credit.


If each member of the group is accredited with 300 shillings worth of credit (CIC) and Sally and Jim already have debts of -300 and -250 shillings respectively, then acknowledgment of this debt should be made clear before people are expected to freely exchange.


If after creating the CIC based on audited capacities of the members they acknowledge the debts they hold, then Sally and Jim (in debt) would give vouchers to Bob and Anna (in credit). Note that by doing this they have not paid their debts yet, they have simply accounted for them. In doing so Bob and Anna have an opportunity to redeem those Vouchers (IOUs) as payment for goods or services from Sally Jim or each other - even when there are no shillings available in the community. The CIC provides a buffer of credit that helps the community clear their debts and also plan toward community projects.

Once Bob and Jim are able to spend their 150 and 100 CIC vouchers respectively, among the others then all debts are settled and everyone would have returned to 300 CIC balance. Note that even once old debts are settled new debts can and will occur and imbalances in CIC balances will occur. In order to encourage timely settlement, demurrage or Gesell Taxation can be applied to all balances and directed toward a community fund that is redistributed to members based on voting.

The basic premise presented here is that a CIC can act as a tool to both acknowledge the obligations of community members as described in the matrix above and help them come to settlement and even plan for group projects. The transparent flow of CICs help communities see and manage their Economic Commons, while over time the matrix and other methods can be sufficient to help the community plan and come into balance. Indeed, I want communities to use such tools (mutual credit and obligation clearing) to develop thriving socio-economic systems that require little to no currency at all but rather forms of basic record keeping, certification and endorsement.

The matrix method of group obligation clearing shown above was as introduced to me from Hans-Florian Hoyer who has researched its use as far back as Stephen Colwell (1859) ‘Ways and Means of Payment‘ and (1864) Bruno Hildebrand ‘Geld und Credithwirtschaft’. A computational approach for larger groups has been detailed by Fleischman, Dini, & Littera, G. (2020) ‘Liquidity-saving through obligation-clearing and mutual credit’.