What is Credit Money
Credit money is any future monetary claim against an individual that can be used to buy goods and services. There are many forms of credit money, such as IOUs, bonds and money market accounts. Virtually any form of financial instrument that cannot or is not meant to be repaid immediately is credit money.
BREAKING DOWN Credit Money
During the crusades of the middle ages, the Knights Templar of the Roman Catholic church, a religious order that was heavily armed and dedicated to holy war, held valuables and goods in trust. This led to the creation of a modern system of credit accounts that is still prevalent today. Public trust has waxed and waned in credit money institutions over the years, depending on economic, political, and social factors.
Credit Money and Debt Markets
As noted above, specific types of credit money include bonds. These are a major segment of the financial markets. For example, the market for U.S. government debt (Treasury bonds or T-bonds and Treasury notes or T-notes) ticked in at $14 trillion in January 2018. In 2018, the size of the global debt markets (more than $100 trillion) was near twice the size of the equity markets (close to $64 trillion). Together they form the global capital markets. The U.S. capital markets are the largest worldwide, with the U.S. equities market being 2.4x and the U.S. bond markets being 1.6x the size of the runner-up, the European Union. U.S. capital markets account for 65% of total funding for economic activity and drive domestic growth.
Bonds allow governments (at the national, state, and local level), corporations, and nonprofits like colleges and universities, to access funds for a variety of growth projects, including funding roads, new buildings, dams or other infrastructure. Corporations will often borrow specifically to grow their business, buy property and equipment, acquire other companies, or invest in research and development for new products and services.
Outside of banks, bonds allow individual investors to assume the role of a lender in these situations. Public debt markets can open up a particular loan to thousands of investors, providing opportunities to fund portions of the capital needed. These public markets allow lenders to sell their bonds to other investors or to buy bonds from other individuals – long after the original issuing organization raised capital.