Introduction to Finance

LEARNING ACTIVITY
Go to the U.S. Treasury website, http://www.treas.gov. Go to “Services,” and click on 
“Coins and currency.” Then click on “Bureau of Engraving and Printing.” Find recent 
information on redesigned currency.
Credit Money and Deposit Money
Credit money
is money backed by the creditworthiness of the issuer. Recall that paper cur-
rency issued in the United States is called fi at money because the government proclaimed 
the currency to be legal tender for purposes of making payments and discharging public and 
private debts. Fiat money is a form of credit money. 
The use of physical (coin and currency) money to complete transactions can be costly and 
ineffi
cient if large amounts and/or long distances are involved. As a result of these constraints 
on the use of physical money, along with concerns over confi dence in the banking system, a 
special type of credit money called deposit money has grown readily in importance in the U.S. 
monetary system. 
Deposit money
is backed by the creditworthiness of the depository institu-
tion that issued the deposit. While deposit money is a form of credit money, it is not fi at money 
in that it has not been proclaimed by be legal tender by the government for payment of debts. 
Deposit money takes the form of demand deposits held at commercial banks, or other 
checkable deposits held at S&Ls, savings banks, and credit unions. A demand deposit gets its 
name from the fact that the owner of a deposit account “demands” that all or a portion of the 
amount in his or her demand deposit account be transferred to another individual or organiza-
tion. Checks or drafts have traditionally been used to transfer demand deposit or other check-
able deposit amounts. Let’s return to our example in which the ABC business fi rm deposits 
$1,000 at First Bank to set up a $1,000 demand deposit account in ABC’s name. ABC then 
writes a $1,000 check against its deposit account and sends the check to an equipment man-
ufacturer as payment for purchase of equipment. The equipment manufacturer deposits the