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IPFS News Link • Economic Theory

Understanding the Difference Between Credit and Real Money

• - Alasdair Macleod

Due to its abuse pariculaly by governments, it is credit which presents the greatest risk to our finances today. To appreciate why this is so requires an understanding of what credit represents, and how it differs from real money, which is physical gold without counterparty risk. Credit is always matched by debt: your financial asset is always someone else's obligation. The collapse of credit's value happens when a currency (which is also credit) is not attached by exchangeability to gold. That is the danger facing the entire dollar-based financial system today, now that we see the US dollar is ensnared in the US Government's debt trap

.Most people probably think that credit evolved after money in the form of coin, but that is incorrect. Credit existed long before, defined in the value of deliverable goods. A thousand years before Rome's Twelve Tables, the Phoenicians traded throughout the Mediterranean and even as far as Cornwall, where they procured valuable tin. The Phoenicians would have had the same problems faced by businesses today. In order to undertake their trading ventures, they required credit, because they faced expenses before they returned from their voyages many months later with vendible products.