The Legal Construction of Credit Money

Research Project

In the Euro area, only a small fraction of the total money supply is held as cash; the majority is credit money, primarily created by commercial banks when they issue loans. Banks generate new money by crediting borrowers with sight deposits, underscoring the central role of private banks and private credit in today’s money creation. This mechanism, which forms the backbone of our monetary system, has significant implications: on the one hand, it allows the money supply to flexibly adjust to demand; on the other hand, it is often linked to financial instability and social inequality. 

This research project investigates how private credit becomes money and examines the role of law in shaping this transformation. Money is not understood as a given, but rather as a social practice framed by law. This approach enables an exploration of how and to what extent the creation of credit money has been legally constructed and how changes in the legal framework of money might particularly impact issues of distribution.