Credit-money is created and destroyed today via the lending process by the banks. However, we had credit-money for thousands of years before the central banking emerged. Credit-money was then created decentrally.
These are the key phases of credit-money history:
The first monetary systems started with commodity-based base-money and decentral credit-money
The next phase was sovereign-coin based base-money and decentral credit-money
The next phase was national base-money (either from the sovereign or central bank) and private credit-money
The next phase was the current central banking based base-money and its central credit-money system
How did it work in the past? It was all based on the bill of exchange — these are legal documents enforced by the court system. Anyone can issue a bill of exchange, it has only 8 attributes, including the wet signature of the borrower. The borrower has to pay, not to the issuer, but the owner of the bill of exchange. This gives value to every bill of exchange as they are backed by the borrower’s obligation to pay. This allows the use of bills of exchange as a means of payment.
The bill of exchange system is a peer to peer system backed by the court system. Every lender can create new credit-money — the bills become the credit-money, till they are paid back to the holder. One doesn’t need banks to create the credit-money, every person can do this via a bill of exchange.
This system works as well today, even without the blockchain. This system has been the basis of all decentral credit-money systems in the last 5’000 years.
SmartCredit.io’s vision is to create a self-reinforcing DeFi lending platform. The first version of our non-custodial crypto lending platform available in the Ethereum main-net: https://appv2.smartcredit.io.
In the previous article, we looked at the two dimensions of money — base money and credit money. We also looked at the different kind of monetary systems that existed in the last 5’000 years and possible scenarios for the future.