3. Exogenous & Endogenous Money

A Noteworthy Distinction


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


But I think it's fair to say that there are 3: To the above we must add the idea of money being chartal - a tokenistic issuance of the state which cannot be described either as a commodity or, as discussed here, as debt.


All of these play their part in the story of money throughout history. And I think it's fair to say that they will continue: money will continue to be predominantly debt, created endogenously, on demand, within the banking system. If we are lucky in campaigning for democratic and human rights, capitalists will leave the public sector and countries all over the world can have democratic, debt-and-interest free national currency bases - money which, although entirely consistent with debt-based concepts of money, could just as easily be described as chartal. And technologies like crypto-coins, which are designed to mimic commodity forms of money, will continue to be traded.


, all currencies of the world today and surely the largest part of the story of money throughout history is the fact that money is creditary, debt, a creature of financial systems organized to mediate debts.


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 - supposedly - 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 fundamentally non-physical and takes the form of legal agreements, for example, a legal title or legal claim, freeing it from many of the problems and constraints of physical, commodity forms of money.


It's a debate that appears to have been waged for millennia.


A fairly modern reference is e


Now, it would seem redundant almost to the point of absurdity to explain why money isn't like gold or silver. And if you've read earlier sections of this website, you already know that money throughout the world today - all the national currencies of the world - is debt. In that sense, it's an absolutely, unequivocally settled debate. However, there's something in the contrast of these two types of money that gives something very important to understand.


One way to think about the differences between these monies is the way in which they are exogenous or 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 any frame of reference we happen to be concerned with and endogenous monies would be monies which originate within it. Exogenous monies would include physical objects that exist in their own right, outside of human relationships; like, for example, gold or silver. These monies are in some way already existing monies that would have to be introduced into our frame of reference before they can be used. For example, if you want to buy something, the money has to have made its way into your possession by some previous means. Those means might include, for example, prior earnings, or, if you need access to debt, by some type of 'lender'.


By contrast, endogenous monies originate within our frame of reference and therefore do not need to be introduced into it. The money does not need to have been previously earned and it doesn't need to be introduced by borrowing or lending either. Endogenous money is created inside our frame of reference. We can do this because these monies are socially constructed; they are of the realm of human relations and agreements and they don't conform to the same rules or limitations as measures of variously constituted metals.


Understanding these contrasts could hardly be more important, because they clearly point to stark differences in how they work and how we should all relate to money. You may already understand that, while money is categorically endogenous and socially constructed, most of the world's people live hopelessly subject to money as if it were exogenous to them.


If money were exogenous, like gold or silver, then we would know where it comes from; it would come from mines or other similar production facilities. And we would know how it would be introduced into circulation too; it would be introduced largely as interest bearing loans, in order to ensure the maximized long-term profits of financial capitalists. We know how ordinary people would get access to exogenous money; 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. It's almost impossible to imagine exogenous money being given a democratic foundation; it would require massive state intervention and, for example, the nationalization of gold/silver prodction and the establishment of interest free financing for both the public and household sectors. These great improbabilities say nothing of the other impracticalities of commodity forms of money; like, for example, doubling the movement of all transported goods in the world with the transport of physical monies to pay for them.


It's fair to say, then, that exogenous concepts of money aren't only inaccurate, they're profoundly harmful to us all. No such system could begin or be maintained in a state of justice or fairness. Without massive state intervention, all money would be the interest bearing private property of economic elites - because it would all be loaned into circulation. It would be a world in the grip of a wealthy minority, replete with the immense weight of interest bearing debt we're all familiar with under global capitalism. And yet, as mentioned, it is this concept of money which has been fostered in the minds of almost all human beings.


Looking now at endogenous money, where money is 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.


Governments too would 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. 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 pay for all our goods and services and most/all financial transactions can be carried out at low cost, mostly by mere instruction alone i.e. banks can credit and debit accounts simply by raising one number and lowering another. We can say this system would be 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 two conceptions of money point to vastly distinct prospects for society. Thankfully, the former is impossible and the latter, which would support greatly elevated rights for all living people, is already the reality of money.



Exogenous money:


  • Is the property of an elevated financial class.

  • It is 'loaned' into circulation according to unstable cycles (put it in, take it away 'business cycles').

  • Circulates as interest-bearing debt. (Tribute economy.)



Endogenous money:


  • Is a social/democratic institution.

  • Is issued and accessed according to fair rules, according to human and democratic rights.

  • Supports a largely interest-free economy.



I'll leave you with a few quotes from industry figures whose words make it clear that money, throughout the world, is creditary and endogenous. 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 developed 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 repaid. We are not, nor ever were, "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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