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-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.