Commercial bank money

The term commercial bank money describes the portion of a currency which is made of book money – debt generated by commercial banks. It is the opposite of the terms central bank money, base money and sovereign money, which denote legal tender issued by a central bank or monetary authority.

Commercial bank money is created when banks make use of fractional reserve banking to create account balances and make loans worth many times the value of the actual base currency they hold (typically up to 10 times more).

When a bank creates account balances or lends out money which it does not actually have, that money is generated as scriptural money (book money) – debt claims against the bank by account holders and debt claims by the bank against borrowers.

Commercial bank money is not legal tender, but is widely used to represent base money in transactions. Commercial bank money currently makes up a large part of most currencies.

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Daniel Dreier is editor and personal finance expert at moneyland.ch.