Credit Card Guide

What is a Credit Money?

20 April 2011 by CreditCardsCo™

Making a promise to pay in writing is using Credit Money. A German author named Ludvig von Mises defined the term Credit Money as any claim against a physical or legal person that can be used for the purchase of goods and services. He wrote this definition in his book, The Theory of Money and Credit.

Basically, any personal IOU's or promissory notes from the bank - in general any financial instrument that is not immediately redeemable as hard currency can be considered to be Credit Money. Credit money can be used as money, whether or not they are legal tender. As long as it is a personal guarantee or as a banknote — it can be used as credit money. Credit money is generally not backed by the State or the Government. That is actual money.

Examples of Credit Money

One of the best ways to think of credit money is to think of a bank deposit. When you put money into a bank account or make a deposit, you earn interest on the money. The money is used by the bank for development for small businesses by offering them loans.

In effect, the actual money that you put in the bank is being used by someone else. The money is still there in your account, earning interest everyday. This is Credit Money. It can be taken out of the bank at anytime, it can be used by you to make purchases and it can pay bills. But the actual money is being used by the bank.

Another great example of credit money is credit card loans. Say you have a credit cards with a 20,000 dollar limit. Now when you need money, you approach a bank for a credit card loan. If the loan is taken from the bank that issued the credit card, it will most likely be pre-approved and will come with minimal, if any, documentation needed. It is one of the quickest and easiest sources of unsecured finance. The lower interest rates make it a very attractive proposition to take a loan than compared to making cash withdrawals. This money is credit money — based on your credit-worthiness rather than any collateral.

Credit Money Usage

The first known usage of credit comes from the times of the Crusades. The Knights Templar of the Catholic Church first created a system of credit when they were entrusted with large amounts of the precious gold. The modern credit system takes it roots from their system.

Scotland takes its banknote from the concept of credit money too. The banknote of Scotland although not legal tender, is accepted as currency. Technically, Scotland recognizes no legal tender. Private banknotes make up most of Scotland's currency. Most of these notes are issued by the three major Scottish banks including the Bank of Scotland. These banks however maintain deposits with the Bank of England to cover for the notes that are used.

Credit money is used across the United Kingdom as legal tender. The Bank of England notes for example, are also not legal tender, although they are used as currency in England and Wales.

Credit Money in America

During the times of the Great Depression in the United States, people had lost their trust in banks. People believed that most banks would become insolvent and tried to withdraw their deposits. There was fear that most banks would be state run.

The United States came up with the Federal Deposit Insurance Corporation in 1933. This institution was setup to insure deposits in checking and savings accounts. Effectively, credit money like promissory notes from the bank were then backed by the guarantee of the Federal Government.

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