# 2.1 Definitions and Rationale

**Mu·tu·al Cred·​it [myo͞oCH(o͞o)əl ˈkre-dit] - A multilateral exchange network, in which endogenously created money serves as medium of exchange. Mutual-credit money comes into existence as a result of a transaction between two parties in the form of a corresponding credit and debit on the balances of the parties involved. As a result, the total amount of money deposits within the system always matches the total amount of deficits. While definitions may vary, such a credit system is considered to be fully mutual if debtors and creditors are essentially the same people and frequently switch roles. **

A mutual credit network begins its life cycle in a zero-deposit state in which no money exists within the system. At this stage, all participants are assigned empty accounts, which can be overdrafted up to a predetermined sum.

Consider the following example in which Alice, Bob, and Carol have all been assigned empty accounts.

Money is introduced into the system once a participant, Alice, decides to purchase an item from another participant, Bob. When she does so, a deficit is created on her account and a deposit appears on Bob’s account.

In the same way, Carol overdrafts her account in order to purchase an item or service from Alice. This returns Alice’s balance to zero.

If Bob now decides to purchase an item or service from Carol, his deposits will be remitted to her, covering Carol’s deficit while returning both of their balances to zero. At this stage, the network will return to its equilibrium zero-deposit state in which no debt, and hence no money, exists within the system.

Money created via this mutual debt cycle retains its value by the fact that each money-unit in existence is required by someone within the system in order to close their debt; hence, the supply of money always entails matching demand. The global limits of this elastic money supply are determined solely by the number of participants within the network and the amount of debt each is allowed to consume. Consequently, the created money supply continuously contracts and expands to meet the changing demands of the economy it serves.

Socio-politically speaking, mutual credit systems tend to morally equalize borrowers and lenders. They significantly reduce the capability of lenders to rent out artificially scarce currency units to the borrowers. According to the logic of their proponents, these mutual-credit systems expose capital to the same form of market competition to which all other goods and services, such as labor, are subjected.

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