What Does Credit Creation Mean?

Cash money is available in the form of currency notes issued by the central bank. Credit money is the amount agreed upon to pay later. It is issued by commercial banks and takes the form of cheques. Cash deposit and cash reserve requirements play an important role in the expansion and contraction of credit money. Credit expansion takes places by means of using cheques. Now suppose, person deposits rupees. 1000/= with a bank, ten percent of which will go to the central bank as cash reserve requirements. Hence the commercial bank is left with rupees.900 to be used for advancing loans. The party A that borrows this rupees.900 will either buy goods from or make payment to the other party B.

The party B will receive the cheque for rupees. 900 and deposit it in the account with the same commercial bank. Now the bank receives the deposit of rupess.900. Ten percent of this amount will as usual go to the central bank and the rest of the amount will be utilized in advancing loans. Bank of England is the best example. Bank organized under cooperative societies are called cooperative banks. They work on mutual cooperation of the members.