Introduction

This chapter provides the fundamentals of credit relationships and payments and lays the groundwork for the rest of the text. The notion of the IOU economy and IOU networks are presented through systems of financial accounts. The universal challenge of the IOU economy when creditors refuse to enter into fresh exposures vis-à-vis debtors amid risk tail events—and the deleterious effects on real economy activity when the universal challenge binds—is then divulged. The five major techniques that have been adopted as a way to improve the organisation and stability of the IOU economy so as to mitigate the probability that the universal challenge will bind are then unpacked. This includes the introduction of a means of payment and settlement via (1) commodity money or (2) financial money; (3) the introduction of an “ultimate” means of payment—i.e. central bank money; (4) netting; and (5) stable exchange rates.