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Debt-based monetary system
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A debt-based monetary system is the system where paper money is supplied as a bill of credit to an economy primarily by the purchase of debt, such as Wikipedia:government bonds. This form of money is called "debt-based" because as a condition of Wikipedia:money creation, it is required to be paid back at some point in the future, usually with Wikipedia:interest. A monetary system that introduces Wikipedia:full-reserve banking into the system is still "debt-based" if the economy's base money remains a creation of Wikipedia:government debt.
When coupled with Wikipedia:fractional reserve banking, this system becomes a credit-based monetary system, where both paper money and Wikipedia:bank credit are supplied as interest bearing debt. Some economic and political commentators believe that debt-based paper money and fractional reserve banking together cause several economic problems such as, high Wikipedia:government spending for debt servicing, economic Wikipedia:recessions and depressions, and the consequent loss of property by borrowers during the downturn.
In contrast, a debt-free monetary system is the system where paper money is supplied as a bill of exchange to an economy primarily by Wikipedia:capital expenditure. Banks are prohibited from lending at interest, and are required to apply 100% reserve banking.
