Credit Alchemy

The monetary transmutation that defines our time:
Banks lend what they don't own and create money out of thin air with every loan granted. The operation seems impossible until you understand that modern money functions as a digitized promise, a social relationship that exists as long as everyone pretends to believe in it.

When you request a loan of five hundred thousand euros to buy a home, the financial institution doesn't look for that amount in its reserves. It simply records the figure in your account through an accounting deed. The money is created in that instant, backed only by your promise to repay it with interest. The magic works because the monetary system abandoned the gold standard and adopted the principle of fiduciary trust.

This ability to create money from scratch represented a crucial civilizational advance during the Industrial Revolution. It made it possible to finance railway infrastructure, factories, and communication networks without waiting for someone to save the necessary sums beforehand. The modern economy exists because banks can materialize non-existent capital for projects that will generate future value.

But the system contains a structural contradiction that no amount of superficial regulation can resolve. If banks create ninety percent of the money in circulation through private loans, they effectively control the allocation of global economic resources. They decide which sectors receive funding, which innovations materialize, and which regions develop. This is a civilizational responsibility exercised by entities that optimize for quarterly profit, not for systemic sustainability.

Speculative speculation was inevitable once financial institutions discovered that generating money to gamble in financial markets was more lucrative than lending it to productive businesses. This logic creates distortions that go beyond the simplistic dichotomy between productive investment and parasitic speculation.

Apple exemplifies the complexity of the problem. It had $102 billion in cash but borrowed an additional $17 billion to repurchase its own shares. The operation was not corporate irrationality but perfectly rational tax and financial optimization within existing incentives. It cost less to use money created by banks than its accumulated capital, allowed it to deduct interest from tax benefits, and transfer value to shareholders without paying dividend taxes.

The example reveals that the problem lies not in individual business decisions but in incentive structures that cause optimized financial strategies to generate negative systemic externalities. Apple acted rationally, but private rationality breeds collective irrationality.

Tax havens add an offshore dimension where banks can create money without oversight from national central banks. A German entity establishes a subsidiary in the Cayman Islands and grants loans in US dollars to international corporations, creating eurodollars that escape both European and US regulatory control. It is estimated that twenty trillion dollars circulate in these opaque interbank markets.

The concentration of monetary power has reached levels that transcend traditional asset management. State Street, Vanguard, and BlackRock control majority stakes in more than 1,500 US companies. While technically passive managers reflecting investor decisions, their size grants them systemic influence that goes beyond fiduciary management. When the same three entities hold significant stakes in all major airlines, does this encourage competition or implicit collusion?

Herein lies the first paradox that no reformist analysis satisfactorily resolves. The decentralized money creation system generates both economic dynamism and systemic instability. Financial bubbles appear to be the inevitable price of the liquidity that enables accelerated growth. Eliminating banks' ability to create money would stabilize the system but sacrifice its capacity to finance disruptive innovation.

The second paradox is that the proposed alternatives replicate similar problems with a different distribution of risk. Granting central banks a monopoly on money creation concentrates power in technically independent but politically appointed institutions. The history of central banks shows that their independence is contingent and reversible when political pressures intensify sufficiently.

Sector-specific credit quotas and differentiated interest rates based on loan purpose face implementation challenges that their proponents underestimate. How can real estate speculation be distinguished from legitimate housing investment? What prevents companies from redefining their activities to access preferential rates? Who determines which sectors deserve preferential financing and according to what criteria?

Venture capital, often labeled as speculation, finances innovations that traditional banks deem too risky. Many technologies we consider productive emerge from initially speculative funding. The distinction between productive investment and parasitic speculation becomes more blurred upon closer examination.

The third paradox arises at the global systemic level. The current monetary system does not recognize planetary ecological limits, but the proposed alternatives also fail to offer convincing mechanisms for incorporating environmental constraints into monetary creation decisions. How can ecological sustainability be translated into operational criteria for granting credit? Which institution would have the legitimacy and technical capacity to carry out such assessments?

I acknowledge the profound limitations of this analysis. The complexity of the global monetary system includes interactions between national fiscal policies, international capital flows, exchange rates, commodity cycles, technological innovation, and geopolitical stability—variables that no analytical framework can fully capture and that alter the functioning of any implemented monetary reform.

But these limitations do not invalidate the central thesis: whoever controls the creation and initial allocation of new money determines the direction of economic development more than subsequent redistributive policies. This is a responsibility too important to delegate solely to criteria of private profitability, but also too complex to transfer entirely to public bureaucracies.

The solution likely requires experimentation with hybrid architectures that combine financial market efficiency with democratic oversight of systemic objectives. This could include public development banks for strategic sectors, more sophisticated macroprudential regulation, greater transparency in offshore markets, and international coordination to avoid destructive regulatory competition.

Money is a social institution that can be redesigned, but alternatives should be tested gradually rather than implemented through radical transformations that could generate systemic collapses worse than the problems they intend to solve.

Credit alchemy will continue to transmute promises into economic power. The question is whether we will be able to direct that transmutation toward ends that transcend private accumulation without sacrificing the innovation that makes collective prosperity possible.