Scholars now believe that credit was the original kind of money, preceding coin or paper currency, based on current studies in economic history, anthropology, and sociology. Some of the oldest texts discovered in ancient times have been interpreted as counts of debts due by one party to another – before the development of money itself. This type of value obligation – i.e., I owe you X – is effective credits money once that obligation may be transferred in kind to someone else. For example, I may owe you X, but you may transfer your claim against me to your brother, in which case I now owe your brother X. You and your brother have effectively done business on credit.
During the Middle Ages crusades, the Roman Catholic Church’s Knights Templar, a religious order strongly armed and committed to holy war, held treasures and possessions in trust. There are many good at money lending in toa payoh his resulted in the development of a contemporary system of credit accounts, which is still in use today. Public faith in credit money institutions has risen and fallen throughout time, depending on economic, political, and social reasons.
- Credit money is the creation of monetary value through the establishment of future claims, obligations, or debts.
- These claims or debts can be transferred to other parties in exchange for the value embodied in these claims.
- Fractional reserve banking is a common way that credit money is introduced in modern economies.
- Analysts reference an equation referred to as the multiplier equation when estimating the impact of the reserve requirement on the economy as a whole. The equation provides an estimate for the amount of money created with the fractional reserve system and is calculated by multiplying the initial deposit by one divided by the reserve requirement. Using the example above, the calculation is $500 million multiplied by one divided by 10%, or $5 billion.
- Credit money is monetary value created as the result of some future obligation or claim. As such, credit money emerges from the extension of credit or issuance of debt. In the modern fractional reserve banking system, commercial banks can create credit money by issuing loans in greater amounts than the reserves they hold in their vaults.
- Credit is part of your financial power. It helps you to get the things you need now, like a loan for a car or a credit card, based on your promise to pay later. Working to improve your credit helps ensure you’ll qualify for loans when you need them.