(Photo credit: johnnylemuria)
Before we begin, I want to emphasize that this system is not mine. It is the creation of Thomas Greco, and is detailed in his book, The End of Money and the Future of Civilization.
The first thing to understand is that money is credit. It is a promise. It is created by loans. Our mainstream money is loaned from a bank, and that loan must be paid back, with interest. Now, this system had worked quite well, but it could be improved upon. Businesses and individuals don't need to go to the bank for the everyday loans that we all need. They can get their credit, their loan, from the community. In return, they can give credit to others in the community, creating a credit commons.
This idea is in use right now, has been for decades, and is very popular, in the form of B2B (business to business) barter networks. This is the essence of mutual credit clearing. These business are giving each other interest-free lines of credit, based on the goods and services they offer. When one line is debited, another is credited, and so it goes, back and forth. Trade happens, and profit is made, without having to use dollars.
The one important innovation that the Thomas Greco system would add is that instead of valuing the trades in dollars, they would be valued on an objective standard, such as an index of commodities. This would give the businesses involved the reassurance that no matter what happens to the dollar, their trades would be safe and unmanipulated.
Finally, 'B2B' talk may conjure up thoughts that this is only for large businesses, and only helps them. For the purposes of a mutual credit clearing network, everyone counts as business, because everyone has goods and services they can profitably trade. Every individual in the community could have a place in the network.