Where does money come from? The dual circuit of money creation

Abstract

The workings of monetary systems have been controversially discussed. Mainstream economists assert that money creation is a ‘top down’ process governed by centralized monetary policy decisions (central banks => banks => customers), while heterodox economists emphasize ‘bottom up’ dynamics in the opposite direction, driven by customers’ demand for credit. The article draws on sociological insights into the complementarity of formal and informal structures to show how this paradigmatic alternative can be read as a real structural dualism, with two conflicting but complementary chains of influence and initiative. It suggests a ‘dual circuit’ of money creation, with a formal ‘top down’ chain inscribed in institutional competencies, clearing and control mechanisms, and an informal ‘bottom up’ chain emerging spontaneously from everyday maneuvers and pragmatic accommodations by participants. Both chains are contradictory in theory but compatible in practice. This dualistic solution cannot be officially acknowledged, but it is highly viable and apt to operate under complex, uncertain, and variable conditions.