Credit Money: Unveiling the Dynamics of Borrowing and Lending


Money occupies an essential place in our economic exchanges and our financial system. It is often perceived as a simple representation of exchange value, but it goes much further. Indeed, money is both a claim and a debt, thus embodying the relationships of commitment between individuals within society.

Understanding Credit Money

Defining Credit Money

Credit money is a fundamental concept that revolves around trust and financial relationships. At its core, credit money represents the virtual currency created when one party lends funds to another. Unlike physical cash, credit money is intangible, existing as a promise to repay the borrowed amount along with an agreed-upon interest.

The Role of Lenders and Borrowers

In the intricate dance of credit money, lenders and borrowers are key players. Lenders, often financial institutions like banks, extend credit to borrowers based on their creditworthiness and financial stability. Borrowers, on the other hand, tap into credit money to fulfill various needs, such as starting a business, purchasing a home, or covering unexpected expenses.

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The Mechanics of Credit Money

Credit Creation Process

The creation of credit money is a fascinating process. When a borrower approaches a lender for funds, the lender evaluates the borrower’s risk profile and determines the terms of the credit, including the interest rate and repayment schedule. Upon agreement, the lender creates a digital representation of the borrowed amount, effectively generating new credit money.

Fractional Reserve Banking

One of the cornerstones of credit money is fractional reserve banking. This system allows banks to lend out a portion of the deposits they hold. For instance, if a bank receives $100 as a deposit, it might keep a fraction, say $10, as reserves and lend out the remaining $90. This practice increases the overall money supply and amplifies the impact of credit money on economic activities.

Money is a claim and a debt

In economics, a claim is an element of the assets of an agent’s balance sheet, that is to say a wealth that has a positive value for him; she is
necessarily the counterpart of a debt and it gives the creditor the right to demand from the debtor, at the term provided for by the contract concluded between the two agents, the reimbursement of this debt.

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With regard to money, this claim can take various forms: either be written on paper and become a banknote, for example; either be written in the books of accounts of the issuing institution (we speak in this case of scriptural money); but also be represented by a political or religious symbol affixed to a metal part.

Thus, for an economic agent, having a right of ownership over money, as is the case with the possession of a banknote or a sum registered in an account in the name of the agent in a bank second-tier means owning a claim on the Central Bank in the first case (the monetary institution that has the monopoly on the creation of banknotes today), on a second-tier bank in the second .

Symmetrically, this means that the Central Bank has a debt towards the agent who owns the note it has issued: this debt consists in guaranteeing the bearer the value written on the note as soon as the latter asserts his right to use the note as a means of payment (the claim consists for the bearer in asserting this right for the value written on the note).

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Analogously, the second-tier bank has a debt to the agent who owns the amount in the bank account. Currency is, however, a particular claim, since it has a general legal tender. This makes it possible to arrive at another essential component of its definition: money is a debt which makes it possible to discharge all debts.

Metallic money and credit money: two different foundations of trust

Typically, credit money is therefore opposed to commodity-metallic money: as soon as money has an intrinsic value which is equal to its monetary value, there is in principle no relationship of claim and debt which conditions and makes possible its circulation; conversely, when it comes to credit money, the monetary support has no intrinsic value and the value of money depends fundamentally on the relationship of claim and debt.

The institutional device that produces confidence in money rests on radically different bases in each of these two cases:

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When it comes to commodity money, the bedrock of trust depends on a collective agreement constructed by the payment community, according to which the selected commodity or precious metal is socially recognized as trustworthy.

In this case, the three types of trust identified by M. Aglietta and A. Orléan – methodical trust, hierarchical trust and ethical trust – are based on the metallic constraint: agents accept the chosen asset as currency because they know that the other agents, but also the political and monetary authorities cannot free themselves from this constraint based on the intrinsic value of the asset, nor influence the volume of money available simply because of their will. Here we find the position defended by many economists, such as V. Pareto (1848-1923) or J. Rueff (1896-1978).

With regard to credit money, the basis of confidence is based on a system in which political and monetary institutions (State, central bank, second-tier banks in particular) occupy a fundamental place.

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In this case, the three types of trust are based exclusively on an institutional constraint: the agents accept the currency because they are convinced of the fact that the political and monetary authorities cannot free themselves from the essential rules, i.e. say conventions, which have been drawn up within the payment community (missions of the central bank, rules governing debt monetization operations carried out by second-tier banks, prudential rules to govern the behavior of banks

The Future of Credit Money

Technological Advancements

The evolution of credit money is intricately tied to technological advancements. With the rise of digital platforms and fintech solutions, accessing credit has become more convenient and streamlined. Online lending platforms and peer-to-peer lending models have democratized credit, allowing a broader range of borrowers to tap into credit money.

Blockchain and Cryptocurrencies

Blockchain technology and cryptocurrencies have also introduced a new dimension to credit money. Decentralized finance (DeFi) platforms leverage blockchain to enable peer-to-peer lending and borrowing without intermediaries. Cryptocurrencies like Bitcoin and Ethereum have the potential to reshape the traditional credit landscape by offering alternative forms of collateral and payment methods.


In conclusion, credit money is an indispensable pillar of the modern financial ecosystem. It empowers individuals and businesses to pursue their aspirations, fuels economic growth, and fosters innovation.

However, responsible usage and a clear understanding of the dynamics of credit money are essential to prevent excessive debt and financial instability. As technology continues to evolve, credit money will likely undergo further transformations, paving the way for new opportunities and challenges in the financial realm.

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