Credit Money

Matt Lyons

Credit Money

The liability of a bank to its customer, which can be used as a medium of exchange in the economy.

The validity of the term “credit money” has been questioned by other schools of thought. Clearer distinctions between money, credit and debt can be made based on international accounting standards and legal definitions. Alternately, Modern Monetary Theory posits that all money a form of debt, and therefore the term “credit money” lacks conceptual clarity.

For further reading, we recommend our main articles on the Origin Of Money and Modern Monetary Theory.

The Origin of Money
https://themoneyquestion.org/the-origin-of-money/

Modern Monetary Theory
https://themoneyquestion.org/modern-monetary-theory/

2 Replies to “Credit Money”

  1. Pat Cusack says:

    Failure to distinguish credit (an ambiguous noun) from its precisely defined accounting counterparts – viz. credit, the verb, e.g. “credit the item to this account”, and credit, the adjective, e.g. credit-balance, credit-item, etc. – leads to confusion.

    In Australian law, the only definition of “credit” (the noun) I’m aware of appears in our “National Credit Code” [Schedule 1 to the National Consumer Credit Protection Act 2009], where we find the following, under Section 3: –

    “For the purposes of this Code, credit is provided if under a contract, payment of a debt … is deferred.”

    But even this does not define the ambiguous noun; rather, it defines HOW or WHEN credit “is provided”. Note that “credit” is now a complex, compound concept, requiring (a) the PRIOR existence of a DEBT and (b) the deferral of its payment. Clearly (a) is a necessary precedent, but is insufficient to complete the definition.

    I believe the proper accounting term (viz. credit-balance) overcomes the ambiguity problems surrounding “credit” (the undefined noun) and clarifies the true “debt” relationship associated with it like nothing else.

    The fact is that every newly “loaned” credit-balance appears in a bank liability account and cannot represent a loan at all. It represents a liability to pay money – only 3% of which can ever be discharged.

    No debt arises from a bank “loan”. A customer’s “obligation” arises solely from their signed “promise-to-pay”, not from a PRIOR DEBT owed to the bank.

    Reply
    1. Zack (Moderator) says:

      Pat Cusack,
      Thanks for adding your views! The definition for credit money has been updated with more context and alternate perspectives.
      Zack

      Reply

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