In Phase I (‘pre-accommodation’), existing credit money forms increase in volume and new forms of private credit money come into being due to financial innovation. A new debt certificate (IOU) ‘enters’ the Money Matrix: It becomes pure private money if issued against private assets or public-private money if issued against public assets. The duration of this pre-accommodation phase cannot be determined with certainty, but it makes sense to think of it as an institutional evolution that stretches well over decades.
A given credit instrument has to satisfy four criteria to be considered a systemically relevant private credit money form: First, from a supply side perspective, it must be a short-term IOU that is held by the issuing institution as its liability and that has been created on the basis of a swap of IOUs of different maturities. Second, from a demand side perspective, this short-term IOU is held as an asset by agents who consider it ‘cash’, i.e. the most liquid form of an asset capable of doing immediate purchases of commodities or other financial assets. Third, the IOU constitutes a promise to pay higher-ranking money to which it trades at par or quasi-par and in which it is instantaneously or almost instantaneously convertible. The aspect of par clearance vis-à-vis higher-ranking money forms is what ultimately makes the IOU ‘money’ in the sense of being part of the Money Matrix. Fourth, from a systemic perspective, it is systemically relevant if its default would lead to a systemic crisis and an implosion of the wider credit money system.