Monday, May 12, 2014

Turner Turns (12) Transferable Securities

When I create credit, I get an IOU from the borrower. It has limited value, as most people will not know the person who issued it like I do, so they will have no reason to trust them, even if I do. It will be quite difficult for me to sell it someone else, if I need my money back.

When a business creates credit, it will get some kind of security in return. It will be quite hard to exchange for money, unless the person or business granted credit is widely known and trusted. The security might be difficult to sell, if the business finds it needs cash for some reason.

Banks are different. They can sell securities to the central bank and get currency in return. This currency is legal tender, which is mandatory for settling debts. This gives the bank a big advantage when creating credit/money.

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