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Also known as endogenous money, inside money is a term used to identify debt that is considered an asset to the holder while also being a liability to another party, such as the issuer of that debt. This set of circumstances makes it possible use that debt as money, effectively allowing the holder to utilize the debt as a way to be approved for additional credit, since the expectation is that the debt will eventually be paid. The general idea is that money must be put in before it can be taken out and used for specific purposes.
Inside money is a different concept from outside money. Essentially, outside money has to do with the placement of resources into a production system from some type of outside source. Sometimes called exogenous money, this approach then causes the system to react to what is happening in the financial sector of the economy. By contrast, inside money makes it possible for the financial sector to respond to whatever is taking place in the production system.
One of the most common examples of inside money is the deposits that customers make at banks and similar financial institutions like credit unions. Those deposits form the basis for the bank being able to respond to the needs of others in the community who are in need of loans for cars, mortgages, and other loans. The money that is taken in and held in checking accounts, savings accounts, and various types of investment accounts on behalf of those customers makes it possible for the institution to set reasonable limits in the amount of money that can be issued in the form of loans. The expectation is that those loans will be repaid according to terms, allowing the bank to continue providing access by the depositors to their funds while also earning returns based on the interest generated from the loans.
Judicious use of inside money can aid in maintaining a balanced economy. Just as the use of outside money can help provide a degree of balance by allowing the production system to react to what is happening in the financial sector, inside money helps to balance the scales by providing a means for the financial sector to react to events in the production system. When both types of money are functioning in harmony within the wider economy, the end result is stable economic situation that tends to benefit consumers and businesses alike.
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