To restore true wealth creation, we must believe in people, wrote Nate Fischer, Co-Founder and CEO of New Founding in 2019.

David Graeber has written a persuasive critique of the way mainstream economics treats money. His “credit theory of money,” which holds that all money is credit, is interesting.

But he stops short of the true nature of money. Graeber describes how credit is created by banks, but—contrary to his implication—banks do not simply create credit out of thin air. Credit is fundamentally a human creation.

Live Credit Vs Dead Credit

Credit can feel cold, numbers-driven, and even inhuman, epitomized by scores or ratings agencies—and an utter lack of imagination. This is credit severed from entrepreneurial judgment, granted solely on the basis of calculation. I call this dead credit.

Credit must extend beyond this. Finance at its heart is about betting on people. Live credit is the basis on which these bets are made.

This often gets lost behind layers of financial intermediaries. These often present themselves as “institutional,” governed by rigorous analysis and procedures that let them carefully measure and control risk. Such rigor is critical to the financial system and the prudent creation of credit. But this rigor fails—both to stimulate wealth creation and even to control risk—when it becomes detached from the ultimate aim of allocating credit to people who will use it to create more wealth.

The best bets are not those whose outcomes are universally clear. They do not give credit to people who do not need it—to those who have ample money and few ideas to use it on. Though such investments may be safe, they generate little return on investment because they don’t produce more wealth than they start out with—in asset management-speak, there is zero alpha in their origination. In an economy where these investments predominate, real returns will approach zero.

The best bets are themselves entrepreneurial judgments. They are bets on other people whose entrepreneurial potential—and ability to use credit to create wealth—is underappreciated by the market. Such bets are the heart of true wealth (and information) creation in finance. They can drive enormous economic growth.

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