Money. We use it every day. We earn it, spend it, repay it. But where does it actually come from? Who creates it? And above all: is its creation mechanism compatible with a world of finite resources? Behind the technical debate over monetary theory lies a political and civilisational question of rare urgency.
I. Two Theories, Two Worldviews
Modern economics has long been torn between two radically opposed conceptions of money. Not two variants of the same model — two distinct ontologies: two ways of understanding what money is, where it comes from, and what it does to a society.
Exogenous money rests on a simple idea: the quantity of money in circulation is set from outside by a central authority — the Central Bank or, historically, a physical standard like gold. Money is treated as a scarce commodity, a limited stock passed from hand to hand. David Ricardo, the 19th-century Currency School, and to some extent the classical economists all held this view. Within this framework, money is neutral in the long run: it affects only prices, never real output. Fisher's equation summarises the logic: MV = PT — money supply × velocity of circulation = price level × volume of transactions.
Endogenous money is produced inside the economic system, through the interaction between commercial banks and borrowers. Money does not exist before credit — it is credit. It is born from the financing demands of firms and households, not from an arbitrary state decision. Thomas Tooke in the 19th century, then Keynes, Schumpeter and the post-Keynesians theorised it: money is active, never neutral, because it allows the anticipation of future wealth to finance present production.
| Exogenous Money | Endogenous Money | |
|---|---|---|
| Source | Central Bank (external) | Commercial banks (internal) |
| Determinant | Gold stock / monetary policy | Agents' credit demand |
| Causality | Money causes prices | Activity causes money |
| Accounting nature | Net asset / commodity | Asset-liability / debt |
| Elasticity | Inelastic (vertical) | Infinitely elastic (horizontal) |
These two visions are not expert quarrels: they determine who controls money, who benefits from it, and what constraints weigh on our societies.
II. Why One Is Called Inflationary, the Other Deflationary
These labels are not arbitrary judgements. They follow mechanically from the dynamics specific to each system.
Endogenous Money and Inflation: Supply Without a Natural Limit
In an endogenous money system, supply adapts to demand. If banks extend credit too liberally, the money supply grows faster than real productive capacity. Knut Wicksell formalised this at the end of the 19th century: when the interest rate set by banks stays artificially low relative to the real return on capital, firms borrow massively to invest. Excess demand drives up the prices of production factors, then final goods — the inflationary spiral is set in motion.
Inflation can also arise from distributional conflict: the price-wage loop, where money creation validates cost increases ex post to avoid bankruptcies, sustains a durable rise in the general price level. Endogenous money is therefore potentially inflationary not by nature, but through the credit dynamics it unleashes.
Exogenous Money and Deflation: A Scarcity That Can Turn Pathological
Conversely, the scarcity constraint inherent in exogenous money can tip into a deflationary trap. In a fixed-stock system, any rise in productivity or trade requires lower prices to maintain equilibrium — not catastrophic in itself. But in the event of a negative shock — a banking crisis, a collapse of confidence — monetary contraction can trigger what Irving Fisher called debt deflation: prices fall, the real value of debts rises, agents sell assets to deleverage, which pushes prices further down. The spiral is self-sustaining, and the economy implodes — as in 1929.
The lesson: neither inflation nor deflation is inevitable, but each system carries a structural bias that no regulation fully eliminates.
III. How Money Is Actually Created
Here we must demolish a persistent myth — the money multiplier — which holds that banks only lend money previously deposited by savers, multiplied by a reserve ratio.
Loans Create Deposits, Not the Other Way Around
In operational reality, the opposite is true. When a bank grants a loan, it makes a simultaneous double accounting entry — seen here from the bank's perspective, whose balance sheet is the mirror image of what the borrower experiences:
- On the asset side: it records the borrower's debt acknowledgement (the loan). For the bank, what the client owes is a positive value — a receivable.
- On the liability side: it credits the same client's deposit account with the corresponding amount. For the bank, this deposit is a debt to its client — an obligation to return that money on demand.
This reversal is fundamental: what is a debt for the bank is wealth for the client, and vice versa. It is this accounting symmetry that allows money to exist without any prior backing. This operation creates scriptural money ex nihilo — from nothing but the promise of future repayment. Monetary destruction occurs symmetrically upon repayment: as the borrower repays the principal, the entries cancel out and the money supply contracts.
The Real Constraints on Banks
This does not mean banks create without limit. They face leakages that force them to refinance in Central Bank money:
- Cash leakage: clients withdraw banknotes, which only the Central Bank can issue.
- Interbank leakage: payments between clients of different banks require central money transfers through the clearing system.
- Reserve requirements: a percentage of deposits must be held at the Central Bank (around 1% in the eurozone).
The actual sequence is: loans → deposits → refinancing in central money — not the reverse. The Central Bank supplies central money on demand to ensure system stability. It does not control the quantity of money created, but its price: the policy interest rate.
IV. The Mechanics of Compound Interest: A Time Bomb
Interest is the remuneration for the lending service: it covers the lender's opportunity cost, default risk, and anticipated inflation. Nothing illegitimate on its face. The problem arises with capitalisation: compound interest.
Unlike simple interest (applied only to the initial capital), compound interest applies to the capital plus all previously accumulated interest. The formula:
FV = PV × (1 + r)ⁿ
creates an exponential "snowball effect". At 5% annually, a capital doubles in 14.4 years. At 10%, in 7.2 years. A powerful wealth-creation engine for savers — and a trap for borrowers.
The Invisible Structural Imbalance
Here is the technical critique orthodox economics prefers to ignore: when banks create the principal at the moment of lending, they do not simultaneously create the money needed to pay the interest.
For all debts to be honoured at the aggregate level, new credit must be continuously injected into the circuit to supply the liquidity needed to service interest. In other words: total debt structurally grows faster than the money supply available to repay it. Without permanent expansion of credit and economic activity, the system faces the risk of mass default and brutal monetary contraction.
Compound interest is not merely a financial tool — it is the hidden engine of a perpetual growth imperative inscribed in the very architecture of money.
V. Which Favours Growth? Which Can Remunerate Savings?
Growth: Endogenous Accelerates, Exogenous Stabilises
Endogenous money is the fuel of innovation and economic take-off. Schumpeter saw it: credit allows the entrepreneur to mobilise resources for new productive combinations before having realised any profit. It is investment that creates income, and ultimately savings — not the reverse.
Exogenous money anchors investment in the reality of available savings. Hayek argued that endogenous money creation distorts relative prices and causes overproduction crises or asset bubbles. Exogenous growth is slower, but potentially more stable. In practice, the most dynamic economies of the 20th century all used endogenous money creation to finance their industrialisation and innovation. Exogenous stability is a theoretical ideal rarely achieved without high social cost.
Savings: Two Visions, One Shared Fragility
In the exogenous model, the interest rate is the price of savings scarcity. Savings are structurally remunerated because they constitute the indispensable resource for financing the economy.
In the endogenous model, savings are no longer the condition for credit, but its consequence. Banks remunerate deposits not to be able to lend, but to reduce their refinancing costs on the interbank market. When the Central Bank maintains very low or negative policy rates to stimulate the economy, the return on savings can fall below inflation — and savers lose real purchasing power. The "liquidity trap" described by Keynes then becomes a reality experienced by millions of households.
Neither system structurally guarantees the remuneration of savings. Both condition it on macroeconomic equilibria that can tip at any moment.
VI. Radical Critique: The Two Dead Ends of a Failing System
This is where conventional economic analysis stops. Debunk'Onomy goes further.
The Exogenous Dead End: The Investment Blockage
Fixed-quantity money produces what we can call the investment blockage. In this system, the next borrower must wait for the previous one to repay their loan before money becomes available again. The only existing money circulates in a closed loop — and any shock that reduces this circulation paralyses the system in cascade.
The consequences are mechanical: if the money supply contracts, buyers can no longer afford to purchase the output of indebted producers. Those producers can no longer repay their own debts. And if, on top of everything, some agents prefer to keep their money "at home" — Keynes's liquidity preference — money is hoarded, the circuit seizes, and the economy asphyxiates with no automatic restoring force to save it.
This is precisely what endogenous money creation by banks unlocks: by continuously injecting new monetary units into the circuit through credit, it prevents the asphyxiation of the investment blockage. It allows the economy to "breathe".
But we must be precise: endogenous money does not dissolve the investment blockage. It defers it in time.
Exogenous money asphyxiates the economy through lack of air, here and now — the blockage is synchronous, visible, immediate. Endogenous money gives the economy oxygen on credit, making it sign a contract stipulating it must produce more air tomorrow than it received today. This is not breathing freely — it is breathing on a drip.
Hyman Minsky formalised this in his financial instability hypothesis: as debt accumulates faster than real incomes, debt service ends up strangling future consumption just as scarcity did in the exogenous system. The blockage returns — disguised as solvency, deferred, rendered invisible until it suddenly isn't. It is the same pathology, deferred and amplified by compound interest.
The Endogenous Dead End: Infinite Growth on a Finite Planet
If endogenous money unblocks the economy, it generates a constraint of another nature — a far graver one. The relationship between money creation and growth is not symmetrical — it is asymmetric and unidirectional in its necessity: endogenous money creation structurally imposes a growth imperative, and growth in turn calls for more credit. The two feed each other in a spiral no one controls.
Here is the mechanism: each loan creates money. That money must be repaid with interest. But the interest is not created at the moment of lending — it must be drawn from existing money supply or generated through new credit. To avoid generalised default, the system must grow continuously: more output, more credit, more repayments, more credit again. Growth is not an option in this system — it is a mechanical survival condition, formalised rigorously by Mathias Binswanger, deepened from complementary angles by Édouard Cottin-Euziol, Augustin Cersiron and André Peters, and confirmed through ecological economics by Tim Jackson and Herman Daly. It is also one of the cornerstones of the analysis developed in L'Économie de l'Équilibre (Duval, 2026).
And this growth is not abstract. It translates into an exponential extractive pressure on natural resources: more raw materials, energy, agricultural land, water, biodiversity sacrificed on the altar of debt.
The Planet Does Not Grow With the Debt
This extractive constraint would not be tragic if the planet could grow at the same pace as debt, and if decoupling between economic growth and ecological destruction were possible. It is not.
Thirty years of empirical data are unambiguous: absolute decoupling between GDP and resource consumption has never been demonstrated at the global scale. Efficiency gains are systematically overtaken by rebound effects and increased activity volumes — Jevons's paradox at planetary scale.
Earth's biocapacity is finite. Rockström's nine planetary boundaries are not metaphors: six of them are already breached. And our monetary system, in its endogenous form, structurally demands that they be breached ever further to avoid collapsing under the weight of its own interest payments.
We thus face an irreducible contradiction: a monetary system based on compound-interest debt can only be stable in a perpetually growing economy, in a world of infinite resources. Neither condition exists.
VII. Beyond the Dilemma: Towards a Negentropic Monetary Architecture
The real question is not choosing between exogenous money (rigid, deflationary, blocking) and endogenous money (flexible, inflationary, extractive). These two systems are two sides of the same entropic coin: they consume the real world to sustain their own dynamics.
What must be conceived is a third architecture — a money whose creation is not indexed on debt but on regeneration. A money that creates no growth imperative because it does not rest on compound interest devouring its own foundations. A money that finances the restoration of the commons rather than their extraction.
This is precisely what the NEMO IMS system — NEgentropic MOney International Monetary System — proposes: escaping the endogenous/exogenous dilemma by refounding the very logic of monetary issuance. No longer debt as the source, but the regeneration of living systems as the standard of value.
The exogenous vs endogenous debate is a quarrel within an exhausted paradigm. The real rupture lies elsewhere: in the capacity to conceive a money that does not destroy the conditions of its own existence.
Jean-Christophe Duval