3. Exogenous & Endogenous Money

A Settled Debate


Historically, and even continuing to the present day, there have been two fundamentally opposing views on money.


On one side, is the belief that money is, or should be, a physical 'thing' derived from the security and reliability of the physical world, beyond human relationships and beyond the realm of human corruption. Such money, they say, takes the form of precious metals, or other rare or valuable materials that are hard to reproduce or fake. These we can call commodity forms of money; they are physical objects or materials that are believed to still have value and worth even beyond their use as money.


And on the other side, is the idea that money is really socially constructed, that it is a product of human relationships and is given its life in society and law. In other words, money is non-physical and takes the form of legal agreements, for example, a legal title or legal claim, freeing it from many of the constraints of physical, commodity forms of money.


It's a debate that's been waged for millennia.


A fairly modern reference is economist Joseph Schumpeter (see here), who said that there are two fundamental conceptions of money: the idea that it is commodity-like, like gold or silver, and the idea that money is creditary i.e. debt.


Now you already know that money throughout the world today is debt. But I want to offer a slightly different way of thinking here. I want to get closer to what these different alternatives really mean for us, the users of money and society as a whole. I want to propose that another way to think about these competing ideas is between monies that are exogenous and monies that are endogenous to their users.


The words exogenous - meaning 'outside' - and endogenous - meaning 'inside' - refer to some frame of reference, so exogenous monies would be monies that originate outside the frame of reference we happen to be concerned with at any time. Exogenous monies would include physical objects that exist in their own right, outside of human relationships. Exogenous monies are already existing monies that would have to be introduced into a scenario before they can be used. For example, if people want to buy things the money has to have made its way into the scenario by some previous means (people without money can't buy things), or if people need access to money through debt, then that money has to be introduced from the outside, usually by a 'lender'. Notice that this is pretty much the entire way that we commonly think about money.


The other thing to say about the exogenous money theory is, as you should all by now know, that it's entirely wrong.


The alternative theory of endogenous money refers to monies which come into being within our frame of reference, eliminating the need for them to have to find their way in, or be introduced, from the outside. These monies are of the realm of human relations and agreements, for example, legal titles and claims. These are socially constructed monies and operate very differently from, for example, lumps of different colored metals.


Examining these differences could hardly be more important, because they are starkly different and very much opposed to one another in how they work and how they determine the way we all relate to money. They concern questions like: Where does money come from? How does it enter circulation and on what terms? How do ordinary people get access to money and, again, on what terms? How do governments get access to money and on what terms? Is it even practical to use this money? And can we be sure that these systems of money start off and are able to be maintained in a state of fairness and justice?


How would we answer those questions if money were exogenous to its users, like gold or silver? We know where it would come from, it would come from mines or other simlar production facilities. And we know how it would be introduced into circulation; it would be introduced largely as loans, in order to ensure the maximized long-term profits and status of financial capitalists. We know how ordinary people would get access to it; by borrowing it at interest (if they are allowed to). And we know how governments would get access to it; by borrowing it at interest too. The only way we can imagine exogenous money like this having any democratic foundation is with massive state intervention i.e. if the state seized the mines and established interest free financing for both the public and household sectors (and that is not something commodity money advocates are likely to promote).


Although exogenous monies aren't restricted to commodities, it's clear that commodity monies cannot be regarded as practical for use anyway, because we really will not send shipments of silver, gold or other weighty money items back and forth continuously all around the world in support of global trade; it's obviously far too expensive and unnecessary. And we cannot say that such a system would either start or be able to be maintained in a state of fairness; without massive state intervention, then all this money would be private capitalist money circulating as loans i.e. as interest bearing debt to and under the control of the very wealthy. This would be a world in the grip of a super-rich, non-contributing elite, replete with the immense weight of interest bearing debt and the routine cycles of boom and bust we're all familiar with in the capitalist world today.


So commodity monies are not only impossible, the very idea that we might think about money in those terms could set up some of the most corrosive, hierarchical and impoverishing relationships in society that it's possible to imagine. But let's take a quick look at the two main reasons why, despite its horrors and its innate impossibility, people advocate for commodity money anyway:


  • The idea that commodities maintain their value over time. Well, to some extent this is true. But it also costs more to store physical gold and silver than weightless numbers in a computer system. If you'd left your gold in secure storage since 1913, it would have lost many times its own value over that period in storage costs alone. And anyone who would rather keep their saving in commodities can always... simply swap thier money for the commodities they think should be money in the first place.


  • The idea that governments or others with the power to create money will, if money is made only of cheap, infinitely reproducable materials, create far too much of it for their own selfish purposes.


The latter point is where we must concede ground. Money, it seems, will always be potentially vulnerable to those who have the power to abuse its creation. Of course, commodities offer us no solution. Perhaps electronic 'crypto' currencies will offer an answer, but they represent no credible threat to the currencies of the world today and until they operate not like commodity monies but like socially just monies, then they don't offer the answer either. Perhaps the best we can do at this point is to ensure that people are economically literate enough to better monitor and police the mechanisms by which money is created.


Looking now at endogenous money, if money were endogenous, then we can say where it comes from; it would come into and out of existence as and when people need it, as we go into and out of debt. Ordinary citizens would have access to money, not by "borrowing" it, but through a process of money creation that requires no "lending" and no interest.


Govenments too can have a democratic relationship to money and, for example, create money endogenously debt and interest free. A persistent debt and interest free currency base is a good idea if we want people to be able to keep savings, immune from demands for repayment (we do). And governments can hold international debts in the same way we as household hold debts internally within society: facilitated by endogenous money creation and free of both lender-borrower relations and interest.


Endogenous money is also practical to use; it doesn't require the shipment of vast quantities of physical materials in order to support our trades and most/all financial transactions can be carried out at very low cost, mostly by mere instruction. We can say this system is a lot fairer; it is not the world in the grip of a super-rich minority, vast numbers of other people are not left rightsless and inevitably poor, we are not drowned under an impossible weight of interest bearing debt (most of our debts would be interest free) and it might even offer resistance against the boom-bust business cycle, if banks are deprived of some of their power to create a glut of money one minute and then a dearth of it the next.


Those were two clearly distinct prospects for money and economic society. One of them is, thankfully, impossible. The other should be the foundation of an impressive set of real rights for all people, even though they are currently being suppressed.


For the sake of completeness, let's consider a conceptual middle ground between these two positions. A pseudo-commodity money form could be created by a government, for example, out of the paper notes and base metal coins we're all familar with. Such money would be endogenous for that government, so long as it is not required to "borrow" it into existence or pay interest on it. But that same money will be exogenous for the rest of us who use it, who would have to be required to reach out of our situation in one way or another in order to gain access to it. Government created monies then, if not supported by strong household/citizen rights, will fall short of the democratic possibilities of endogenous money and leave us still at the mercy of many corrosive forces we're desperate to overcome.


Clearly, whilst the formal currencies of the entire world today are endogenous, none of us, neither households nor governments, have access to money on endogenous terms, free of unnecessary lender-borrower realations and free of interest. It's clear here that what makes the difference is not the technology or form of money, but our perceptions of money, what we believe it to be. The image of exogenous money is being imposed on us in order to take money away from democracy and and put it firmly in the hands of a hierarchical social order.






In summary, it should be seen that exogenous monies foster a sense of separation between money and its users and in practice subjects us to top-down economic forces we have no power to repel. This is money that dictates, that is taken away from democracy to build a steep socioeconomic hierarchy that grants great power and privilege to a few at the cost of the democratic rights of everyone else. It is perhaps here that we find the most revealing source of present day economic hierarchy and violence.


Conversely, endogenous monies are monies that are of the people and capable of expressing the democratic and human rights we might expect all people to enjoy and all governments to protect.




Exogenous money exists:


  • As the property of an elevated financial class.

  • 'Loaned' into circulation at their discretion (put it in, take it away 'business cycles').

  • As an interest-bearing debt to them (tribute economy).



Endogenous money exists:


  • As a fundamental democratic institution and not owned by anybody until it's been earned.

  • Issued or circulated according to fair rules, according to human and democratic rights.

  • In support of a largely interest-free economy.




I'll leave you with a few quotes from industry insiders whose words make it clear that money, throughout the world, is creditary and endogenous, ending forever any belief or claim that it is not. We can also be quite confident, I think, that credit is history's oldest and most represented form of money.[1] Money is a social construct, a product of civil society, a legal agreement that comes into being at the point we need it, whenever we go into debt and conversely leaves existence when that debt is honored. We are not, nor ever were we, "borrowing" anyone else's money in order to facilitate debt and we should not be paying interest.






Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU.

David H Friedman, Federal Reserve Bank of New York.



Banks lend by creating credit. They create the means of payment out of nothing.

Sir Ralph Hawtrey, British economist and civil servant.



[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts.

Modern Money Mechanics, Federal Reserve Chicago.



We tend to assume that [...] Banks take deposits from savers and lend money to finance capital investment... But in fact banks create money and purchasing power, and most lending is unrelated to capital investment. [...] we need new approaches both to economic theory and public policy.

Adair Turner, Senior Fellow, Institute for Economic Thinking.



Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit "creation"--credit is created literally out of thin air (or with the stroke of a keyboard). The loan is not created out of reserves. And the loan is not created out of deposits: Loans create deposits, not the other way around.

Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves,
Paul Sheard, Standard & Poor's Ratings Services.



...banks do not have to wait for depositors to appear and make funds available before they can on-lend those funds. Rather, they create their own funds, deposits, in the act of lending. This fact can be verified in the description of the money creation system in many central bank statements, and it is obvious to anybody who has ever lent money and created the resulting book entries. [...] private banks are almost fully in control of the money creation process.

The Chicago Plan Revisited, The IMF.







1. See: Henry Dunning Macleod's The Theory of Credit (1889), Henry George's The Science of Political Economy (1898), Alfred Mitchel-Innes' What is Money? (1913), The Credit Theory of Money (1914) and David Graeber's Debt: The First 5000 Years (2011).




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