Credit Where It Counts: The Case for a New Credit Constitution and How to Build One

A mortgage closes with a small, anticlimactic miracle. The borrower signs. The loan officer smiles. Then a number appears, not because the Federal Reserve “printed,” but because a bank extended credit and created a matching deposit. Spendable money arrives as an accounting entry.

That same loan officer has two files open. The first is a mortgage package: clean collateral, automated comps, an obvious exit via securitization. The second is a working capital line for a machine shop with signed orders and a plan to add a second shift. One loan feels “safe” because it is standardized; the other feels “risky” because it requires judgment.

That difference, one of template versus judgment, is an expression of America’s financial priorities. In a modern credit economy, banks create most new money when they lend. What matters, therefore, is not only how much credit we create, but what we enable the newly created credit to buy. This essay argues that because banks create money by lending, the United States needs a credit constitution: a visible set of incentive rules and measurements that steer newly created credit toward production rather than toward bidding wars for existing assets.

The post-2020 credit cycles that shaped the U.S. economy made the trade-offs impossible to ignore: housing unaffordability hardened into a macroeconomic fact, commercial real estate stress produced an “extend-and-pretend” politics, tighter bank standards tightened the spigot precisely where small firms rely on it, and more credit creation migrated into nonbank channels large enough to shape macroeconomic outcomes.¹ The result is politically combustible: expensive shelter, fragile intermediaries, and a growing sense that the system manufactures wealth by capitalizing scarcity rather than by financing capacity and wages.

If money is mainly created when private institutions extend credit, then America’s prosperity and stability depend on the composition and distribution of that credit: what gets financed, what gets standardized, and what gets backstopped when the cycle turns.

This essay will proceed in four parts. I will begin with a restatement of the modern view of money creation (credit, not loanable funds). I will then explain why real estate keeps winning in U.S. banking. Next, I will argue that state capacity begins with legibility—what we do not measure, we cannot govern—and show why credit composition is the missing public instrument panel. And finally, I will offer a practical reform sequence consisting of purpose tags, a public scorecard, and narrowly conditional privileges, which together can tilt new money toward capacity without breaking the banking system.

A Taxonomy of Credit Creation

In modern banking systems, the act of lending creates a deposit. Loans create deposits; the “funding” and reserves come after as part of settlement and regulatory plumbing.² This is not a semantic point. It means the banking system is not merely allocating preexisting purchasing power; it is allocating newly created purchasing power.

Two conclusions follow. First, the allocation of bank credit is the allocation of new money and thus serves as the near-term path of growth, prices, and balance sheet risk. Monetary policy determines the price of money (the policy rate) as well as the points at which money enters.³ Second, because private credit creation is the dominant money creation mechanism in normal times, the notion of neutrality with respect to the direction of money is a myth. The state cannot avoid shaping outcomes: it can only do so consciously or unconsciously. Risk weights, appraisal conventions, capital rules, guarantee programs, tax preferences, securitization law, and the legal privileging of certain collateral types all work to steer credit even when nobody admits it.

The tragedy is that our mainstream economic frameworks have trained policymakers to treat money as a veil over the real economy; this is important for price levels, but not for the structure of production, the fragility of balance sheets, or the path of bubbles. If banks are treated simply as passive intermediaries, then a credit boom that inflates an asset market looks like “growth” until the bust arrives. In practice, the neutrality assumption is a blindfold, as it prevents us from asking the decisive question of any credit expansion: what did it buy? Faulty theory is one thing, but bad plumbing, in a financial system as in a house, can cause real material damage.

A practical credit taxonomy makes the problem visible. For this purpose, we can say that new credit comes in three categories: Category 1 is consumption credit, or household borrowing that lifts demand without building new supply; Category 2 is existing asset credit, which includes mortgages and leverage used chiefly to trade claims on homes, land, and securities that already exist; and Category 3 is production credit, which refers to lending that finances new capacity (plant, equipment, working capital, and innovation, etc.) that can pay for itself over time.⁴

American finance has, by drift, favored Category 2. Today, mortgages alone account for roughly $13 trillion of household debt, while productive credit remains harder to obtain for many small and midsized firms.⁵ The reasons are not mysterious. Existing real estate is standardized collateral with deep appraisal practices, mature securitization channels, and enormous political salience. A system that rewards standardization in this way will default to financing standardized collateral. Underwriting productive investment, especially at small and medium scale, requires more relationship knowledge, monitoring, patience with learning curves, more tolerance for intangible value, and these are, of course, difficult qualities to come by in the best of times.

When new money is created primarily to buy and sell existing assets, the economy is, in effect, using the banking system to bid up scarcity. It is financing price, not production. That can look like prosperity for a while because rising asset prices lift measured net worth and collateral values. But that prosperity is ultimately illusory, as it is conditional on the continuation of credit growth. The moment credit growth slows, as it inevitably does, prices stall, refinancing becomes difficult, and paper wealth proves fragile.

Category 2 is also the least stable. It creates a feedback loop between prices and lending capacity. Rising prices improve measured collateral, which relaxes constraints, which expands lending, which pushes prices higher. The loop generates the illusion of “safety” precisely when risk is growing systemwide. When the loop stops, because rates rise, underwriting tightens, or households hit debt limits, the system discovers it has leveraged itself against its own optimism.

Credit dispensed under Category 3 behaves differently. When credit finances new output, the system has something real to show for the leverage: more capacity, higher throughput, better logistics, lower unit costs. Naturally, credit is still risky; projects can fail and investments can fall short of making profitable returns. But the macroeconomic dynamic is less self-referential because the financed activity adds supply. This is why the same amount of credit can be either inflationary and unstable or growth-producing and stabilizing. The composition of the credit stream, and how to get it right, is the missing factor in most discussions of national productivity.

Why Real Estate Keeps Winning

If the credit mix matters so much, why is it so rarely governed? One reason is that the mechanisms that regulate it are technical and scattered across agencies: the Federal Reserve, the OCC, the FDIC, the CFPB, the FHFA, the SEC, the CFTC, Treasury (especially the Office of Financial Research), and state banking and insurance regulators. Another is that the political coalition for Category 2 is broad and assertive: homeowners like higher prices, local governments like higher property tax bases, and financial institutions like forms of collateral they can model reliably. And yet another is that when crises arrive, stabilization often focuses on preserving collateral values rather than preserving the flow of productive credit.

But drift is also a by-product of specific institutional choices. The reason real estate becomes the system’s favorite destination is not mystical; it is political economy. In many metropolitan areas, land use restrictions and entrenched permitting vetoes make housing supply inelastic. When credit accelerates into an inelastic market, it mostly bids up existing properties rather than producing new ones, and the result is slower productivity growth and spatial misallocation that can persist for decades.⁶

The tilt shows up in the aggregates. The Federal Reserve’s weekly H.8 data (as published on FRED) track real estate loans at U.S. commercial banks as a dominant and steadily growing category, an empirical reminder that, at the margin, the money creation franchise has been busy capitalizing land and structures rather than underwriting new productive capacity.⁷

Commercial real estate offers a smaller but revealing example of how the system can protect old claims even when fundamentals wobble. During the recent period of higher rates, commercial real estate loan modifications rose, often extending maturities and adjusting terms; this is an adaptive behavior that may be prudent in the short run but that also illustrates how credit regimes become sticky in favor of existing collateral.⁸

Three channels matter. First, prudential rules and examiner culture: Capital and liquidity frameworks often treat well-underwritten mort­gages as low-risk and highly “eligible.” That can be defensible at the micro level. But it becomes macro-distorting if the system collectively treats housing leverage as safer than financing productive cash flow. Examiner culture matters too: a bank officer can justify a mortgage with standardized documentation and a familiar collateral story; a loan officer underwriting a new production line has to defend judgment, and judgment is penalized when cycles turn.

The design of public backstops is also decisive. When public policy guarantees or subsidizes certain categories of lending, it reduces private risk sensitivity, and thus shapes the flow of money. If guarantees are written broadly around asset categories rather than around output performance, they will inflate prices more than they build capacity. The state ends up socializing the tail risk of asset booms while leaving productive investment to fight for scraps.

Third, securitization and shadow funding: When assets can be packaged into bankruptcy-remote structures and sold as quasi-safe claims, the system can manufacture money-like liabilities against long-duration collateral and weaken screening discipline. What looks microprudent becomes systemically procyclical. The financial system becomes a machine for minting liquidity against titles, not a tool for financing production.⁹ None of these channels is, by itself, the whole story. But together they create a stable bias: it is easier to create money against titles than against throughput.

What We Do Not See, We Cannot Govern

The United States is awash in macro data (e.g., CPI prints, GDP revisions, payroll surveys), and yet we do not publicly track the most consequential flow in a credit money economy: the purpose of newly created purchasing power. We can see broad balance sheet categories, but we cannot, at scale, distinguish credit that expands supply from credit that merely bids up existing assets.

This measurement gap is why debates about “too much regulation” versus “too little regulation” go in circles. Without a public instrument panel, citizens cannot tell whether a boom is building factories and new homes, or merely capitalizing scarcity and leverage. And in a system where nonbank credit has become large enough to move the macro needle, the data blind spot is widening precisely where the state’s informal guarantees and crisis tools increasingly operate.

The fix does not require omniscience. It requires one new field in the reporting architecture: purpose tagging at origination, standardized enough to aggregate but coarse enough to be administratively cheap. Start with the three categories noted above: consumption, existing asset, and production; then add subcodes where politics demands clarity: e.g., “new housing supply” versus “existing housing stock”; “business equipment and modernization” versus “business financial claims.” Banks already ask, implicitly, what a borrower is doing with proceeds; the change is to standardize the answer so it can be aggregated, compared, and audited ex post.

Once that instrument panel exists, the rest of the agenda becomes less ideological and more empirical. The fight is no longer over abstractions (“markets” versus “planning”), but over the visible allocation of newly created money—over whether the system is inflating assets or financing output. We have quietly delegated a core public function, where new money enters, to an unaccountable mix of private incentives and technical rules. That is drift disguised as “the market at work.” That bias is a form of hidden governance.

Credit as State Capacity

The United States has never been purely laissez-faire in its developmental phases; indeed, its most robust periods of industrial growth were characterized by deliberate acts of financial statecraft that aimed to harness the flow of credit. Alexander Hamilton’s core insight, which animated his tenure as secretary of the treasury, was not that the state should run the economy but that the prevailing credit constitution shapes what the private economy can become. His “American School” of political economy, consisting of a national bank, reliable public credit, and institutions that widen the space of investment, acted as the scaffolding that made a productive national economy possible in the days of the early republic.¹⁰

That tradition was sustained in the early nineteenth century by developmentalist statesmen like Henry Clay and John Quincy Adams; it reappeared with the highest stakes under Abraham Lincoln’s presidency, which ought to be remembered as much for its internal financial achievements as for its moral and military ones. After all, the Civil War forced the United States to confront a basic fact: a nation that cannot mobilize resources at speed risks political extinction. Lincoln’s administration suspended specie payments, issued legal tender, chartered and supervised national banks, and built a federated architecture through which private credit could expand on a sovereign foundation. Money was no longer neutral but constitutive. Banking ceased to be treated as a passive conduit; instead, it was made into a designed financial architecture for carrying risk on purpose and at scale.¹¹

Without wanting to reinstate the exact policies of the 1790s or the 1860s, the lessons for today should be clear and actionable: a commercial republic such as the United States can design money and credit as public infrastructure, and it can bind that infrastructure to transparent metrics so citizens can judge whether it is serving production or speculation.¹²

In that sense, governing credit composition ought not to be seen as mere technocratic tinkering. Rather, it should be regarded as nothing less than a broad effort at rebuilding state capacity in the most literal sense: the ability of a sovereign entity to allocate newly created purchasing power toward the expansion of output, wages, and resilience rather than toward asset inflation. An oft-heard criticism is that any attempt to shape bank credit is “command and control.” But the status quo is already just that, though invisibly so, through technical rules that privilege some collateral types over others. Credit guidance, properly understood, is a set of incentives and measurement tools that make the direction-setting explicit and accountable.

The question is how to turn this principle into a plausible agenda. The state does not need to issue commands about which factory to finance or which technology to favor. It only needs an instrument panel, a public scorecard, and a few narrowly conditional privileges; these policy items can be distilled into three steps for implementation:

(1) Purpose tagging: Require the abovementioned loan purpose taxonomy and reporting system at origination (consumption, existing asset, production) for banks and for dominant credit-originating nonbanks. The phase-in can be straightforward: the federal banking agencies—the Federal Reserve (for bank holding companies), the OCC (for national banks), and the FDIC (for state-chartered nonmembers)—working with Treasury’s Office of Financial Research to coordinate a common taxonomy, can begin by imposing the requirement on insured banks and bank holding companies (where reporting already exists) before extending it to major nonbank lenders that originate or warehouse credit at scale, using existing FSOC/OFR coordination to define the perimeter.¹³

(2) Publish the scorecard: The Treasury Department, working through the Office of Financial Research and in coordination with the Federal Reserve and the prudential supervisors, can publish a quarterly Credit Composition Scorecard: a plain table showing where net new credit is entering the economy, by purpose category and intermediary type. Against a political and policy discourse saturated with GDP prints and inflation releases, a scorecard like this would do something quietly revolutionary: it would make credit drift legible to legislators, governors, and voters. A boom would no longer be a story about “growth” in the abstract; it would be a story about which balance sheets were being inflated and which financial objectives were being prioritized over others.¹⁴

(3) Move incentives at the margin: Supervisors can offer a narrow, performance-based safe harbor for product lines demonstrably tied to new equipment finance, purchase order finance, receivables lines, working capital linked to payroll and inventory, and modernization loans tied to verified investment. The safe harbor functions not as a gift but as an enforceable contract. Borrowing firms can qualify for product lines by pledging to meet ex post performance thresholds (e.g., default rates, verified output, and, where applicable, employment and wage metrics); should firms miss these thresholds, the privilege can be withdrawn in the next year.¹⁵

This is the “Monday morning test.” Under such a credit constitution regime, the banker’s incentive becomes clearer: if a loan finances output and performs, it is easier to hold, easier to fund, and less likely to trigger examiner anxiety; if a loan is merely a claim on an existing asset, it can still be made, but it no longer receives the quiet premium that has made real estate the default destination of marginal money creation.

Symmetry is the other half of the story. Capital rules, liquidity treatment, and tax policy should not quietly reward leverage against existing homes while penalizing the messier work of financing expansion and diffusion. The goal is not to punish mortgages or to crash housing. It is to stop underwriting a permanent bidding war for a fixed stock of shelter by making that bidding war the path of least resistance for money creation.

Public guarantees and procurement can be aligned with the same logic. When the state backstops credit, it should buy capacity rather than prices: housing finance that expands supply, not just bids; industrial and small-business guarantees that are tied to verified production and resilience outcomes; and, where coordination failures block bankable projects, limited first loss co-lending structures that let private lenders participate without pretending every socially valuable project has perfect collateral.

None of this is slow. It relies less on new institutions than on new accounting and calibration. A credit taxonomy and scorecard can be implemented under existing reporting authorities; a safe harbor can be rolled into supervisory guidance; and guarantee and procurement templates can be standardized by Treasury and relevant agencies.

Even with better plumbing, there will be moments (stress episodes, balance sheet recessions, etc.) when private banks retrench and productive credit tightens. In such moments, redundancy matters; purpose-specific complementary credit can stabilize production without inflating assets. The credit system should be able to keep purchase order finance, receivables, payroll, and inventory moving without reflexively reflating the real estate channels that made the system fragile in the first place. The rule should be simple: any extraordinary support should be narrowly scoped to production credit and tied to verifiable throughput, so that stabilization preserves output rather than collateral prices.

This is less monetary romanticism and more institutional redundancy: when one set of pipes clogs, America’s financial architecture should have another that keeps production moving without reigniting asset bubbles. An economy that directs new money into production tends to scale supply with demand. It raises productivity, wages, and the durability of income without relying on perpetual asset inflation; unfortunately, our notions of growth and recovery are still tied to the opposite view and practically necessitate asset inflation.

The Federal Reserve’s Financial Stability Report repeatedly flags vulnerabilities tied to asset valuations, leverage, and the migration of risk outside traditional banking. The Financial Stability Oversight Council likewise tracks the buildup of fragilities in nonbank finance and in the shadow intermediation that grows fastest when bank regulation tightens. Those documents are not ideological manifestos; rather, they are institutional attempts to name where the plumbing is brittle. But stability is not the same as prosperity. A system can be stable and still misallocate the franchise of money creation toward claims on the past.¹⁶

A Credit Constitution for the Public Interest

Demography is not destiny when the pipes are wrong. A credit system that privileges bidding wars over throughput goes against the middle-class and pro-family values that most American politicians and voters profess to hold dear. It turns shelter into a leveraged asset class, converts the cost of living into a financial variable, and pushes younger cohorts into either precarious renting or dangerous leverage.

If household formation is the worry, there can be nothing more pronatal than secure work, moderate housing costs, and a tax and credit structure that makes raising children feel feasible. Such a system also punishes small enterprises twice: first by raising land and rent costs, and then by starving them of the credit that could raise productivity enough to survive those costs. If underemployment and idle capacity coexist with weak productive investment, we are below potential by design.

Redesigning the credit constitution also has implications in debates about dollar dominance, which often treat monetary power as a question of network effects and payment rails. Those things matter. But the deeper source of global monetary power is a nation’s productive capacity and fiscal credibility: the belief that a society can actually deliver the goods and services its liabilities promise.

The post-2022 acceleration of alternative cross-border settlement experiments, especially multi-CBDC platforms, should therefore be read as both geopolitics and balance sheet economics. The Bank for International Settlements’ (BIS) Project mBridge, which has progressed through pilot phases toward an operational minimum viable product under participating central banks, is one emblem of this shift. The work undertaken by the BIS’s Committee on Payments and Market Infrastructures on cross-border payments, including the 2023–25 progress updates, underscores the same point: new rails are becoming plausible at scale. In plain English: payments rails are the plumbing of global trade. If countries can route transactions through networks that do not run on U.S.-controlled correspondent banking and messaging, then sanctions and export controls lose some of their bite—and Washington’s leverage becomes more contingent, more contested, and more costly to enforce.¹⁷

If the United States allows its domestic economy to hollow out, if it treats credit creation as a way to capitalize existing assets rather than to expand output, then the legal and network advantages of the dollar will rest on weaker real foundations. In other words, credit composition at home is reserve status abroad. These are some of the broad arguments that can be used to encourage the enactment of a functional credit constitution; to be sure, there will be many arguments against the needed reforms and it is worth briefly restating the rebuttals here.

To the objection that “this is industrial policy by stealth,” we might answer “it is industrial plumbing in the open.” The state already shapes credit through capital rules, guarantees, tax preferences, and legal standards. Today’s shape privileges land. The proposal offered here makes that shape visible, publishes it, and ties privileges to performance rather than to asset categories.

To the concern that “mortgages will be starved and housing will crash,” we can say that “symmetry is not starvation.” Mortgage channels remain. What fades is a structural preference that helped turn housing into the macro flywheel. Redirecting a share of new credit from bidding wars to capacity will cool froth and make ownership more attainable for the next cohort.

To the fear that “purpose reporting will be gamed,” we can confirm that any metric can be gamed unless it is public and tied to renewal. That is why purpose tagging must be standardized, the scorecard published quarterly, and safe harbor status renewed only if loans actually deliver throughput. If “productive” loans do not produce, they lose the designation.

To the assertion “the Fed shouldn’t pick winners and losers,” we can affirm that it need not move in that direction. Under the envisioned system, liquidity backstops remain at the Federal Reserve. Measurement, publication, and prudential and tax symmetry sit with Treasury, Congress, and the primary supervisors. The Fed’s role is narrower: acknowledge that money enters through credit; support purpose disclosure; and, in crises, backstop liquidity without reflexively reflating assets.¹⁸

The politics of a credit constitution are less exotic than they sound. A coalition for reweighting credit toward productive investment already exists in fragments: small and midsize firms that cannot finance expansion at reasonable terms; manufacturers and logistics firms living with brittle supply chains; younger households watching home equity become a closed club; state and local governments facing the rising price of basic infrastructure; and the national security community that has rediscovered—through munitions shortfalls and semiconductor chokepoints—that “capacity” has to be backed up by reliable capital if it is to mean anything. They do not need to agree on macroeconomic theory to agree on the lived fact: a political economy that consistently funds bidding wars for existing assets while starving new capacity will drift toward both structural inequality and strategic dependence.

The organized resistance is equally legible. The mortgage-finance complex benefits from the present hierarchy: realtors, servicers, and securitizers monetize volume; incumbent homeowners and local growth coalitions defend price appreciation; and large intermediaries prefer rules that are legible to models and collateral schedules, not to the messy human work of evaluating enterprise. In Washington, these interests show up as “neutrality” arguments (“do not pick winners”), even though today’s regime already picks winners by quietly subsidizing the safest-to-model collateral and externalizing the cost of busts onto taxpayers and the real economy.

The practical path is therefore incremental and civic, not punitive. Start with transparency—purpose tags and a public credit mix scorecard—so the argument moves from ideology to measurement. Pair modest, automatic incentives at the margin (countercyclical buffers that penalize speculative surges; lighter weights for verified new capacity; and safe harbors for genuine enterprise lending) with an explicit pro-supply housing agenda, so “redirecting credit” is not read as “denying families shelter.” A financial regime that uses invisible balance sheet levers to favor one form of wealth over another will eventually lose legitimacy; a regime that makes its priorities explicit—redundancy, repair, deep industry, and rules that ordinary citizens can name—can withstand near-term opposition because it offers a compelling exchange: less boom-and-bust asset inflation in return for higher wages, more resilient supply, and a sovereignty that is earned in factories, ports, and innovation in the real economy.

We have two futures. In one, banks continue creating most new money to trade existing assets. We get expensive houses, fragile banks, and a politics of resentment. The system periodically collapses under its own leverage, and the public pays to stabilize what the public never voted for. In the other, we deliberately redirect a large share of new bank credit into production and productivity. We get more capacity, better wages, and fewer crises. Finance becomes less glamorous but more legitimate: a utility that expands the supply side rather than a machine for capitalizing scarcity. Neither future is “natural.” Both are institutional choices. A commercial republic that wants to endure must choose the one that builds.

This article originally appeared in American Affairs Volume X, Number 1 (Spring 2026): 83–95.

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Notes