In-debt to a destructive economy

Monetary system problems

Those involved in the debates around Green Economy are probably familiar with the topic of decoupling economic growth and environmental problems. A lot has been written about slowing down growth, steady state economics, and even degrowth. There are different views on the transition path but the issue is that there can’t be infinite growth in a finite world. What is not usually in focus, however, is the underlying reason which makes growth inevitable and necessary. Might it be that this underlying cause is the money and banking system? What this article tries to argue is that if we want to address ecological problems then we have to start by looking at money. Economics and finance have been obscured in complexity for so long that many people have given up trying to understand it. In reality, the essence of finance is not complicated at all. But to understand it we have to know what money actually is and how it comes into existence.

Perhaps the best explanation of the monetary system comes from Martin Wolf, the chief economics editor at the Financial Times. He says "the essence of the contemporary monetary system is the creation of money, out of nothing, by private banks' often foolish lending."

Although notes continue to be printed by the Bank of England, 97% of all money in circulation isn’t coins and notes, but digital money – numbers in your bank account. And this money is created by private commercial banks. Banks create new money (the numbers in your bank account) when they make loans.

In other words, almost every pound that we need in the economy - to run shops, businesses, factories, schools and hospitals, must first be borrowed by us from a bank. The crucial point is this - new money only enters the economy when a bank makes a loan. This means new money is actually new debt.

If we - as society as a whole – refused to go into debt, we wouldn’t have any money. And put it another way: less money in circulation means recession, so if we want to avoid recession than we have to take on more debts.

So what's the problem?

1. This debt-based monetary system drives economic growth, as the need to pay back an increasing amount of debt requires an increasing amount of economic activity.

97% of all money only exists because it has been borrowed into existence – created alongside an equivalent quantity of debt. If the private and commercial debts within the economy were repaid and settled, there would be no money in circulation. Obviously, this mass repayment doesn’t happen. But yet, in a very real sense, it is happening all the time – repayments are being made and money returned to the banks that created it. People repay mortgages and personal loans, companies repay business loans, council repay debts… This constant stream of repayments removes money from circulation. In order to have some money to trade, consumers and industry borrow new money back into circulation at an even faster rate.

But everyone would rather obtain enough money to be able to buy what they need without going into debt. Therefore everyone - from people to firms to governments - competes to obtain some of the money that is already in existence. This competition for money has negative consequences:

  • the ludicrous production of cheap goods of poor durability or with inbuilt obsolescence, so that jobs are "protected", and manufacturers can maintain or increase their profit. This has led to rapidly increasing consumption of raw materials as well as increasing levels of pollution and waste production;
  • the huge advertising ‘industry’ building the demand for new products and the latest fashions in order to keep people buying, resulting in increasing levels of borrowing and debt;
  • the ridiculous export drives by which every country simultaneously attacks the economies of every other nation, under the pretence that such global free trade improves the general wellbeing;
  • the burgeoning transport demands of escalating economic growth, with identical goods crisscrossing the globe, regardless of environmental cost.

And yet the battle cannot be won because debt is the very condition under which modern money is present in the economy.

2. The second biggest problem with current debt-based system is that the right to create money gives extraordinary power to the banking sector.

Do you have a bank account in one of the five biggest banks? You perhaps work hard every day and put lots of effort to minimizing your lifestyle's environmental impact. But, if you have a bank account you might be helping at the same time to fund activities that destroy the environment.

The biggest banks finance polluting activities such as the extraction of fossil fuels, causing major negative impacts on the environment and society. Banks are the ones who provide oil corporations with the cash to build and operate drilling rigs, pipelines and oil tankers. Their loans play a key role in forcing open the new carbon frontier, which contributes to environmental destruction, disruption of indigenous peoples and increased conflict across the planet. One example is RBS underwritting loans worth over $10bn in 2007 to companies exploiting tar sands in Canada.

Today banks decide where to invest your money – not you. When a citizen puts money in the bank in the present system it becomes the banks' legal property to do with it as they like. Regardless of one's ethics their money can be (and most likely will be) used to invest in ventures such as large scale oil and gas infrastructure, which give banks immediate results in the form of short-term profits.

Banks have the power to shape the economy through their monopoly on the supply of money to both the public and businesses.

The debt-based money system has brought on the crises of ‘peak oil’, other ‘peak resources’, serious pollution of soil, water and air, and potentially catastrophic climate change. It is even the root underlying cause of many more other problems we face today such as increasing social inequality.

The solution exists. It would remove the major flaw in our system. Let’s make some systemic changes rather than trying to regulate an inherently unstable and destructive system.