Countries Are Trigger-Happy with Massive Credit-Money Creation - Yet Shy Away from Direct Money Creation for Development
Why do modern economies readily create enormous amounts of credit money, yet hesitate to use sovereign currency power directly to mobilise the real resources needed to eliminate poverty and build prosperity?
Modern economies have become extraordinarily comfortable with money creation.
Not with government money creation.
With credit-money creation on a gigantic scale.
Every time a bank makes a loan and credits the borrower's account, new deposit money is created. This is not a marginal feature of the monetary system. It is one of the principal ways money is created in modern economies (https://www.bankofengland.co.uk/explainers/how-is-money-created).
The scale is enormous.
Credit-Money Machine
India's banking system has already demonstrated an extraordinary capacity to create and support money through credit. As of July 2026, outstanding total bank credit stood at about ₹220 trillions. Total credit to the commercial sector from all sources was about ₹323 trillions.
At the same time, India's payment and settlement system handles an extraordinary volume of transactions - about ₹324 trillions in June 2026 alone. (https://rbi.org.in/Scripts/Statistics.aspx)
The point of these numbers is not that ₹324 lakh crore of new money was created in a month. It is to show the enormous scale at which the modern monetary system already creates, transfers and settles money, with the central bank continuously supporting the banking system's reserve requirements and payment operations.
Behind this system stands the Reserve Bank of India and its reserve infrastructure. Commercial banks create deposit money when they lend, while the RBI provides the settlement framework within which those payments can be completed, including the liquidity support required for the banking system to function smoothly.
The point is not that all of this money creation represents productive development. It is precisely the opposite question that needs to be asked.
We have built an economic system capable of creating and mobilising enormous quantities of money through credit.
Why, then, are we so reluctant to use the sovereign currency power directly to mobilise the real resources needed to eliminate poverty, build infrastructure, expand productive capacity and raise the living standards of the entire population?
And India is not unusual.
The BIS maintains comprehensive data on credit to the non-financial sector across more than 40 economies. At the end of 2025, total outstanding credit to the non-financial sector across all reporting economies was about $262.7 trillion—around 233% of their combined GDP. Of this, about $163.4 trillion was credit to the private non-financial sector, while bank credit alone to that sector was about $100 trillion. (https://data.bis.org/topics/TOTAL_CREDIT/data?utm_source=chatgpt.com)
These are not marginal quantities of credit.
Credit has become one of the principal mechanisms through which modern economies mobilise purchasing power and finance economic activity.
Governments and central banks have built sophisticated monetary and financial systems capable of supporting credit creation on a scale measured in hundreds of trillions of dollars.
And yet the question we rarely ask is:
What if the same monetary system were deliberately used to mobilise real resources for development - not merely to expand credit?
That is where the distinction between credit-money creation and sovereign money creation becomes important.
Credit can finance investment, production, housing, trade and consumption.
But there is a fundamental question that receives surprisingly little attention:
What does all this money creation actually mobilise?
Because credit-money creation has an important structural characteristic.
A bank does not normally create money simply because society needs something.
It creates money when it makes a loan to a borrower who satisfies the conditions for that loan.
The borrower must normally have sufficient creditworthiness, equity, collateral, expected cash flows or other financial strength to support the borrowing.
This means that the ability of credit money to mobilise real resources is inevitably influenced by the existing distribution of financial capacity.
Those who already possess assets, equity, collateral, established businesses and reliable cash flows are generally better positioned to command large amounts of credit.
Credit creation can therefore expand the economy without necessarily reaching those who need development most.
This is where the distinction between credit-money creation and sovereign money creation becomes critical.
The World Has Learned to Create Money Through Credit
Modern banking has made money creation extraordinarily elastic.
A bank does not need to wait for somebody else to deposit the exact money it intends to lend.
When a bank approves a loan of ₹100 crore and credits the borrower's account with ₹100 crore, the deposit itself is the newly created money.
The Bank of England explains this operational reality explicitly: when a bank makes a loan and credits a customer's account, new money is created; when the loan is repaid, that bank-created money is extinguished.
This mechanism has become the foundation of modern economies.
And governments have encouraged, regulated and supported it because credit creation is considered essential for economic growth.
There is therefore no shortage of willingness to create money.
The hesitation begins when we ask a different question:
Why not use the sovereign currency power directly for development?
Credit Creation Is Not the Same as Development
Consider two ways of mobilising ₹1,000 crore.
Under the first, a bank lends ₹1,000 crore to a financially capable borrower.
The bank creates the deposit.
The borrower then uses the money to construct a factory, buy machinery, acquire land, employ workers and purchase materials.
This can certainly create productive capacity.
But the project had to pass through the balance sheet of a borrower capable of obtaining the loan.
Now consider another possibility.
The government identifies an urgent national requirement:
A railway.
A power system.
A water network.
A hospital system.
Affordable housing.
Universal sanitation.
Mass vocational training.
A manufacturing ecosystem.
The government itself mobilises the required labour, materials, technology and productive capacity and pays for them through its sovereign currency.
There is no private borrower who first has to become sufficiently wealthy or creditworthy to obtain the money.
Government spending itself creates the money used in the payment.
That is the sovereign currency power we examined in our earlier articles.
And this raises a much deeper question:
Why must the mobilisation of real resources for public development necessarily pass through the balance sheet of a borrower at all?
China Offers an Important Intermediate Answer
China did not rely exclusively on direct government spending.
Instead, it developed an extraordinarily powerful financial architecture around state-owned banks, policy banks, state-owned enterprises and directed credit.
The Chinese banking system became an intermediary through which enormous quantities of financial resources could be channelled into infrastructure and industrial development. Most Chinese financial institutions are directly or indirectly majority state-owned, and the state retains extensive influence over the financial system.
The IMF has documented the unusually important role of SOEs in China's credit system. Earlier IMF research estimated that SOEs accounted for a very large share of total bank credit and benefited from preferential access to credit.
More recent IMF research, using data from 137 Chinese commercial banks over 2004–2021, finds that SOE-dominated sectors benefit more from credit following industrial-policy announcements, partly because SOEs are perceived as less risky economically and politically. It also finds that the major state-owned banks have particularly large lending exposures to sectors such as electricity, transport, water and other infrastructure-related activities.
China therefore demonstrates something important:
Credit-money creation can be deliberately organised around national development.
The question is not simply how much money is created.
It is where the money is directed and what real resources it mobilises.
China's enormous infrastructure build-out, industrial capacity and manufacturing ecosystems cannot be understood without examining this financial architecture.
The scale of the resulting enterprises is itself remarkable.
The 2026 Fortune Global 500 includes State Grid at No. 3, China National Petroleum at No. 10, China State Construction Engineering among the world's largest companies, and many other Chinese state-linked enterprises.
China has therefore demonstrated that a banking system can be made to serve a development strategy on an extraordinary scale.
But China's model need not be the final destination.
India Once Had Something Different
This is where India's own history becomes particularly important.
India did not always leave long-term development entirely to ordinary commercial banking.
It deliberately created development financial institutions.
IDBI was established in 1964 with the explicit purpose of providing long-term industrial finance.
IFCI had a similar development-finance role.
ICICI was established as a development financial institution to provide medium- and long-term project finance.
These institutions existed because policymakers understood a simple fact:
Commercial banking and development finance are not the same thing.
A long-gestation industrial project cannot always be financed according to the same criteria as a conventional commercial loan.
Development finance exists precisely to bridge that gap.
But India's development-finance architecture was progressively transformed.
The RBI records that after concessional sources of funding were withdrawn in the early 1990s, DFIs found it increasingly difficult to sustain their traditional operations. ICICI converted into a bank in 2001/2002, and IDBI was converted into a banking company in October 2004.
Thus, India moved increasingly toward a financial system in which development had to compete for credit within a commercial banking framework.
That was a profound institutional change.
A system designed to finance development was increasingly replaced by a system designed primarily to allocate credit commercially.
And this matters to our larger question.
India was not without financial capacity.
It changed the way that capacity was organised and deployed.
The Critical Difference
We therefore need to distinguish three different ways in which money can be created and mobilised for economic activity.
1. Credit-money creation
Banks create money by lending.
The newly created money goes to borrowers capable of obtaining credit.
2. Development finance
The financial system deliberately directs long-term, large-scale credit toward projects that expand productive capacity.
China has taken this approach to an extraordinary scale.
3. Sovereign money creation for public development
The government itself spends its sovereign currency to mobilise real resources.
No private borrower needs to create a corresponding debt first.
These are not the same thing.
And the third possibility - the direct use of sovereign currency power for public development - is the one that receives the least attention.
Why Not Use Sovereign Currency Power Directly?
This is the question that should make us uncomfortable.
India possesses sovereign currency power.
It is no longer operating under the classical monetary system in which the creation of money is mechanically constrained by the need to maintain convertibility into gold or foreign currency.
India moved to a managed floating exchange-rate regime in 1993.
The monetary constraint is therefore fundamentally different from the one that existed under a fixed, externally constrained monetary system.
Yet our economic policy continues to behave as though the primary question is:
Where will the government get the money?
That question is appropriate for a household.
It is not the fundamental monetary question for a sovereign currency-issuing government.
The relevant question is:
What can the economy actually produce?
And that is where the argument becomes much more interesting.
If India has unemployed people, underused factories, inadequate infrastructure, unmet housing needs, deficient healthcare and education, and enormous scope to expand productive capacity, why should the availability of rupees be treated as the primary obstacle to mobilising those resources?
The government can create money through its spending.
The real limitation is not whether the government can create the money.
It is whether the economy has the real resources that the newly created money can mobilise without generating excessive inflation.
This is the point at which sovereign currency power becomes something much greater than a question of government financing.
It becomes a question of what a nation can build.
And perhaps the most important question is not why India cannot create enough money for development.
It is:
Why are we using so much monetary capacity to expand credit, while hesitating to use sovereign currency power directly to mobilise the real resources needed for development?
Money Is Not the Scarce Resource
Suppose India has millions of unemployed or underemployed people.
Suppose factories are operating below capacity.
Suppose infrastructure is inadequate.
Suppose millions of families lack decent housing.
Suppose there is a shortage of hospitals, schools, transport, water systems and energy infrastructure.
Suppose the country has engineers, construction workers, technicians, teachers, doctors, manufacturers and entrepreneurs who could be productively employed.
The question is not:
Can the government create the money required to employ them?
It can.
The question is:
Can the economy mobilise the real resources required to employ them without creating unacceptable inflation?
That is a completely different question.
Money can be created.
People cannot be created instantly.
Steel cannot be created instantly.
Cement cannot be created instantly.
Energy cannot be created instantly.
Land cannot be created.
Machines, skills, technology and productive capacity take time to develop.
Real resources are the constraint.
Public Investment Can Do Something Credit Cannot
There is another advantage to direct public investment that is rarely discussed.
A government does not have to wait for an investment project to generate profits before society can benefit from it.
A public development programme can simultaneously:
create employment;
provide income;
create infrastructure;
expand productive capacity;
provide essential services;
and raise living standards.
In other words, consumption and development need not be separated.
This is an important difference between financing development through credit and using sovereign currency power directly for public development.
China has demonstrated how powerful a banking and credit system can be when it is deliberately directed towards infrastructure and productive capacity. But even that need not be the final destination.
Sovereign currency power allows a government to go further: to mobilise real resources for development while deliberately incorporating employment, income, essential consumption and improvements in living standards into the development process itself.
For a country with hundreds of millions of people still seeking a decent standard of living, that possibility deserves to be examined seriously.
The Paradox of Modern Monetary Systems
And here is the paradox.
We readily accept enormous amounts of credit-money creation when:
- a bank creates a loan;
- a corporation borrows;
- a household takes a mortgage;
- a business expands its balance sheet;
- the banking system expands credit to the economy;
- governments accommodate and support massive credit expansion.
But when the sovereign government proposes using its monetary power directly to mobilise unemployed labour and build public productive capacity, the immediate question becomes:
"But where will the money come from?"
Why?
The money can be created in either case.
The difference is what the money is being created to mobilise.
China Went Further Than Conventional Credit
China's achievement deserves particular attention.
It did not merely create more credit.
It built institutions capable of converting financial capacity into long-term development capacity.
State-owned banks.
Policy banks.
State-owned enterprises.
Infrastructure programmes.
Industrial policy.
Long-duration financing.
Large-scale project finance.
The IMF has explicitly documented China's extensive use of preferential credit, direct subsidies, research funding and collaboration with state entities in priority sectors. It also notes that directed credit to manufacturing has contributed to industrial production growth, while warning about the risks associated with excessive investment and debt.
China's experience should therefore neither be romanticised nor dismissed.
It demonstrates both the power and the risks of directing financial resources toward development.
But China's experience also leaves open a more fundamental possibility.
China largely used the banking system as a powerful intermediary for building productive capacity.
The sovereign currency power goes one step further: the government does not need a borrower to stand between its monetary capacity and the real resources it seeks to mobilise.
The Sovereign Currency Power Goes Further
The world has learned to create enormous amounts of money through credit.
China demonstrated that credit creation can be directed toward national development.
But the sovereign currency power goes further.
Government can create money through spending itself, without first requiring a private borrower to create the corresponding debt.
This means that the government can mobilise resources for purposes that commercial borrowers cannot or will not finance.
And it can do so while incorporating consumption, employment and welfare directly into the development process, rather than relying entirely on investment to generate prosperity later.
That does not mean unlimited spending.
It does not mean ignoring inflation.
It does not mean every government project is productive.
It does not mean that real resources are unlimited.
It means that financial affordability is not the fundamental constraint.
The fundamental constraint is the availability of real resources.
The Question India Should Ask
India has already demonstrated that it can create enormous amounts of credit money.
It once built development financial institutions specifically to channel finance toward long-term industrialisation.
China demonstrated what can happen when a vast banking system is deliberately aligned with infrastructure and industrial development.
India now possesses something even more fundamental:
sovereign currency power.
Why should that power be used primarily to support an ever-expanding system of credit, while the nation continues to tolerate poverty, inadequate infrastructure, underemployment and enormous unused productive potential?
The question is not:
How much money can India create?
The question is:
How much real wealth can India create by mobilising the money it has the sovereign power to create?
That is the question that deserves to be asked.
Because the ultimate objective of an economic system is not to create money.
It is to create prosperity.
And prosperity is not measured in financial balances.
It is measured in the real goods and services available to people, the productive capacity of the nation, the opportunities available to its citizens, and the quality of life they can attain.
Money is not the scarce resource. Real resources are.
Rajendra Rasu
The author writes on monetary systems and political economy
Comments
Post a Comment