Posts Tagged ‘credit money’
What is Credit Money?
Credit money is any future claim against a physical or legal person that can be used for the purchase of goods and services . Examples of credit money include personal I.O.U.’s, and in general any financial instrument (such as a treasury bond, savings bond, corporate bond or bank money market account certificate) which is not immediately repayable (redeemable) on demand. In certain cases, banknotes which are not legal tender may be seen as credit money, inasmuch as they are simply promisory notes issued by the bank (for example, see Pound Scots).
In terms of the money supply, credit money is generally associated with that part of M2 which is not M0.
During the Crusades in Europe, precious goods would be entrusted to the Roman Catholic Church’s Knights Templar, who effectively created a system of modern credit accounts. Over time this system grew into the credit money that we know today, where banks create money by approving loans - although the risk and reserve policies of each national central bank set a limit on this.
Sometimes, as in the United States during the Great Depression, trust in bank policies drops very low, and there is the risk of a bank run without government or other intervention. In the United States, the Federal Deposit Insurance Corporation was created in 1933 to prevent bank insolvency from affecting depositors.
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