Credit money is any future claim against a physical or legal person that can be used for the purchase of goods and services. [1] 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) in specie, on demand. Treasury securities are Government bonds issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are Government bonds issued by the United States Department of the Treasury through the Bureau of the Public Debt. A Corporate Bond is a bond issued by a Corporation. The term is usually applied to longer-term debt instruments generally with a maturity date falling at least a A money market account is a Deposit account with a relatively high rate of Interest, and short notice (or no notice required for withdrawals
Credit money is naturally used as money, and may even be the primary type of money. Money is anything that is generally accepted as Payment for Goods and services and repayment of Debts. Banknotes which are not backed by specie, whether are or are not legal tender (see fiat money for the latter case), are credit money, inasmuch as they are simply promissory notes issued by a certain bank, or system of banks. The terms fiat currency and fiat money relate to types of currency or Money whose usefulness results not from any intrinsic value or guarantee that it can be
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Examples of credit money
An example of a credit money banknote which is not legal tender is seen in Scotland, where banknotes from a well-trusted bank function as currency. Scotland ( Gaelic: Alba) is a Country in northwest Europethat occupies the northern third of the island of Great Britain. Scotland technically recognizes no legal tender, and thus functions nationally on private banknote credit money, which is represented by promissory Pound Scots notes. The pound Scots (Pund Scots was the national unit of Currency in the Kingdom of Scotland before the country entered into political and Currency union These notes are issued by three major Scottish banks (among them the Bank of Scotland) which are not central or government-backed banks. The Bank of Scotland plc is a commercial and Clearing bank based in Edinburgh, Scotland.
In the United States during the Great Depression, trust in banks dropped very low, and there was the risk of a bank run on a private or state-banks. A bank run (also known as a run on the bank) occurs when a large number of Bank customers withdraw their deposits because they believe the bank is or might In the United States, the Federal Deposit Insurance Corporation was created in 1933 to insure deposits in checking and savings accounts,[2] thus effectively making the federal government the final creditor for bank-drafts and promisory notes issued by all participating banks and credit unions. The Federal Deposit Insurance Corporation ( FDIC) is a United States government corporation created by the Glass-Steagall Act of 1933 Insurance, in Law and Economics, is a form of Risk management primarily used to hedge against the Risk of a contingent loss
In the case of legal-tender banknotes (see fiat money), the issuing bank is generally the central bank or reserve bank of a government, which, by authorizing the note as legal tender, assumes the role of creditor. The terms fiat currency and fiat money relate to types of currency or Money whose usefulness results not from any intrinsic value or guarantee that it can be A central bank, reserve bank, or monetary authority is the entity responsible for the Monetary policy of a country or of a group of member states For example, in the United States, paper currency consists of Federal Reserve notes, which are banknotes issued by the United States Federal Reserve system of federal central banks. These notes function as credit money because they are backed by the treasury of the United States, but not by fixed amounts of gold or silver.
In terms of the money supply, credit money is generally associated with that part of M2 which is not M0. In Economics, money supply, or money stock, is the total amount of money available in an Economy at a particular point in time
Credit money in history
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. The Crusades were a series of military campaigns of a religious character waged by much of Christian Europe against external and internal opponents The Poor Fellow-Soldiers of Christ and of the Temple of Solomon (Pauperes commilitones Christi Templique Solomonici commonly known as the Knights Templar or the Order 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. A central bank, reserve bank, or monetary authority is the entity responsible for the Monetary policy of a country or of a group of member states
See also
References
- ^ Mises, Ludwig von. Money is anything that is generally accepted as Payment for Goods and services and repayment of Debts. Commodity money is Money whose value comes from a Commodity out of which it is made Credit is the provision of resources (such as granting a Loan) by one party to another party where that second party does not reimburse the first party immediately thereby generating Money creation is the process by which Money is produced or issued The terms fiat currency and fiat money relate to types of currency or Money whose usefulness results not from any intrinsic value or guarantee that it can be Representative money refers to Money that consists of Token coins other physical tokens such as certificates and even non-physical "digital certificates" The Theory of Money and Credit. The Theory of Money and Credit is an economics book written by Ludwig von Mises, originally published in German as Theorie des Geldes und der Umlaufsmittel Indianapolis, IN: Liberty Fund, Inc. . 1981, trans. H. E. Batson, 1981. [Online] available from http://www.econlib.org/library/mises/msT1.html; accessed 9 May 2007; Internet. Chapter I, section 3, paragraph 25.
- ^ Federal Deposit Insurance Corporation (2006-7-24). FDIC: The First Fifty Years (Chapter 1). FDIC. Retrieved on 2007-01-15. Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century. Events 588 BC - Nebuchadrezzar II of Babylon lays siege to Jerusalem under Zedekiah 's reign
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