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.

Credit money is naturally used as money, and may even be the primary type of money. In certain cases, banknotes which are not legal tender may be seen as credit money, inasmuch as they are simply promissory notes issued by the bank. An example is the case in Scotland, where banknotes from a well-trusted bank function as currency. Scotland technically recognizes no legal tender, and thus functions nationally on credit money, which are represented by promissory Pound Scots notes. These notes are issued by three major Scottish banks (among them the Bank of Scotland) which are not central or government-backed banks.

In terms of the money supply, credit money is generally associated with that part of M2 which is not M0.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 banks 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 insure deposits in checking and savings accounts.