The term “credit” is derived from the Latin term for belief or trust.

Perhaps the most common understanding of credit is “buy now, pay later.” It means that you can walk out of the store with something simply because you have given your word that you will pay for it when the bill arrives. This may be expanded to include buying on time where the payment of the bill can be spread out over several months and made in “installments.” The store may charge you more for the item on the installment plan than if you paid cash up front. Nonetheless this notion of credit still seems to be primarily its root sense of belief or trust.

As anyone who has filled out a credit application knows, the ability to purchase something is partially a function of one’s social status, character, or history rather than just how much money one has in the bank or under the mattress. If money represents the power to acquire things, then clearly money is not just the cash that one possesses.

Excessive buying on credit, which used to be called living beyond your means, is often cited as one of the causes of the current economic mess. Everyone knows you can’t go on forever running up debts. Sooner or later it will catch up with you, and… What? You may have to declare bankruptcy in order to be forgiven for your debts without having to forgive your debtors. Does this tell us something about the nature of money?

The point here is simply that someone declaring bankruptcy probably got himself there by spending money he did not have. Credit means you can “spend” money you do not “have.” If you spend money you do not have, someone else has money that no one had before. Does buying on credit always increase the amount of money in circulation? Almost. The department store where I have a charge account is willing to let me walk out with a shirt because I have agreed to pay for it in the future. The store can record the “sale,” but it does not actually have the money yet. However, if I draw on a credit line with a bank to pay a bill, the transaction does seem to “create” money. I pay the bill with money that exists only as a new entry in the bookkeeping for my account. The person I pay can use that money just as though I had paid them with cash I had stored under my mattress, and it continues to circulate through the economy. If I “pay off” my credit line, then the money created by it no longer exists. I use money that has circulated through the economy to me, and by erasing the balance on my account the bank is siphoning money out of the economy and thereby reducing the “supply” of money.

Credit in this form is a powerful means for financing business. A bank can extend credit to a business and it uses this money to begin or to expand its operations. (see Bank Loans)

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