Credit theories of money (also called debt theories) are economic theories that propose that credit or debt is an essential aspect of money and do not only apply to government-issued money.
Before the advent of money, people bartered goods and services for each other using various commodities that had more technical characteristics that served as money. However, not every commodity could function as currency.
Money is a medium of exchange.
Money serves as an intermediary medium of exchange by enabling people to trade goods and services without directly exchanging their commodities and services with each other. Money comes in various forms, such as coins, paper notes, electronic records, and cheques; many people keep part of their wealth in banks (credit money) to reduce the risk associated with carrying large sums of cash while increasing convenience when transacting transactions.
Money serves another vital function as a store of value. This means it can be used in future purchases without depreciating over time, unlike shoes that quickly wear out and cannot be stored effectively as savings.
Money serves several functions. First and foremost is its role as a unit of account. This allows people to compare values across goods and services and calculate total costs. Money also makes it possible to track profits and losses, balance budgets, and assess a company’s assets.
It is a store of value.
Money is considered an asset because it serves as both a medium of exchange and a standard of measurement for goods and services. For instance, when buying a new computer, the price may be quoted for T-shirts or corn; however, your final purchase will most likely occur with dollars as currency.
Store of value assets is defined as any tangible commodity that maintains or increases in value over time, such as precious metals like gold and silver, fiat currencies, and tangible investments like stocks. Such assets have historically proven themselves able to resist inflation while increasing in value over time.
Stores of value should be easily transportable and convertible into cash quickly. Gold has long been considered an effective store of value; however, other assets have recently gained in popularity, such as bonds, fixed deposit receipts, and national savings receipts – although they’re less liquid than currency notes or coins but can still be easily exchanged for cash quickly.
It is a standard for future payments.
Money serves as a benchmark for future payments and debts. Its properties of stability in value, general acceptability, and durability make money an ideal means of payment that facilitates lending and borrowing, acts as a store of wealth, and promotes capital formation.
Credit is a form of money created from future claims, obligations, and debts. Most commonly created by banks through loans requiring interest-rate repayment. Credit can then be used to purchase goods and services in the marketplace.
Money is a medium of exchange when it is uniform and divisible, a reliable store of value, a unit of account. Money takes many forms, from metal coins and bills to paper notes and electronic records – but currency, officially recognized by governments worldwide, remains the dominant form.
It is a unit of account.
Money serves as a unit of account, enabling people to compare prices. This makes economic transactions more straightforward and more efficient, as without such a unit of account, it would be difficult to determine the price of cars or houses. Furthermore, we must distinguish between commodity money (like Kent cigarettes or mackerel) and fiat money; commodity money refers to items that serve as mediums of exchange, while fiat money refers to any form of deferred payment, such as credit notes.
Money meets these criteria and makes an excellent unit of account, serving as a divisible, countable, fungible, and stable store of value in society. Money’s various uses include taxes calculations, debt record keeping, and asset valuation – not to mention serving as the universal medium of exchange and store of value worldwide! Plastic money (such as credit and debit cards) also performs similar functions.