# 2.1 Definitions and Rationale
***Mu·tu·al Cred·it** \[myo͞oCH(o͞o)əl ˈkre-dit] - A* [*multilateral exchange*](https://en.wikipedia.org/wiki/Multilateral_exchange) *network, in which* [*endogenously*](https://en.wikipedia.org/wiki/Endogenous_money) *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-deposits state, in which no money exists within the system. At this stage, all participants are being assigned empty accounts which can be overdrafted up to a predetermined sum..
Money is introduced into the system once a participant, Alice, decides to purchase an item from another participant, Bob. To do so, Alice has to create a deficit on her account which will then appear as a deposit on Bob’s account.
The same way, Carol will have to overdraft her account to purchase an item/service from Alice, returning Alice’s balance to zero.
If Bob now decides to purchase an item/service from Carol, his deposits will be remitted to her, covering Carol’s deficit while returning both their balances to zero. At this stage the network returns to its equilibrium zero-deposits state in which no debts, and hence no money, exist 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 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 of them is allowed to consume. Consequently, the so-created money supply continuously contracts and expands to meet the changing demand of the economy it serves.
Socio-politically speaking, mutual credit systems have the tendency of morally equalizing borrowers and lenders, while significantly reducing the capability of the latters to rent-out artificially scarce currency-units to the formers. Following the logic of its proponents, this way mutual-credit systems expose Capital to the same form of market-competition to which all other goods and services, such as Labor, are subjected.
---
# Agent Instructions: Querying This Documentation
If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question.
Perform an HTTP GET request on the current page URL with the `ask` query parameter:
```
GET https://resource-network.gitbook.io/resource-finance/02-mutual-credit/2.1-definitions-and-rationale.md?ask=
```
The question should be specific, self-contained, and written in natural language.
The response will contain a direct answer to the question and relevant excerpts and sources from the documentation.
Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.