Bank Credit

Depositor checking accounts constitute some three-fourths of all currency used in the United States. Backed by these resources and the strong Federal Reserve System (which will be discussed later in this chapter), the commercial banking system is the greatest generator of credit to assist the business and financial community. Bank credit is the most important kind of money in circulation. It is also the ultimate source of other forms of credit in use today.

The principle difference between bank credit and other forms of money lending is that no cash changes hand when a bank loan is made. Rather, a paper amount is set up in the borrower's account. This is called check-account credit and is backed by a specified cash reserve required by the Federal Reserve Board.

The paper transaction is in effect money, although no physical currency is printed. It acts as a multiplier to the amount of physical currency in circulation, since only a percentage of actual currency is required as reserve against checking-account currency. The ability of banks to create money is an important aspect of the economic and financial climate in the United States.

Bank credit differs from business credit in a number of ways, but primarily in terms of the type of resource which changes hands in a transaction. A bank furnishes money, while a business supplier furnishes goods or services. After the transaction is completed, however, both are creditors in the same way. The customer owes money to each.

As a general rule, business credit terms are shorter than the periods of repayment offered by banks. Payment for goods or services usually comes due in 30, 60 or 90 days, depending on the industry. Bank loans, on the other hand, are generally longer term.