Money and Stuff

A great deal of discussion about the economy focuses on taking, making and consuming; on the using and inputs of energy and the flow of materials. There are other essentials and one of them is money.

Someone once said that we are about as aware of money as a fish is of water – it just surrounds us. We tend not to think about what money is, where it comes from and what it does – or for that matter why it matters (other than the struggle to earn some of course). But if we look back a few years the world’s banking system nearly destroyed itself. Governments across the world scrambled to try and save it. Here is a sense of the scale of that effort, from just the US.

Bernard Lietaer said: “The 4 trillion US dollars committed by November 2008 is about a trillion dollars ($979 billion dollars) greater than the entire cost of World War II borne by the United States. In short, governments, the world over, have just bled themselves dry to a totally unprecedented extent, just to save the banking system. ”

The value of the world’s financial sector is between seven and 10 times the value of the real economy, but no one knows for sure. This means there are not enough goods and services resources and energy to match the claims in the financial system based on these real assets. The financial system has been compared to a large hot air balloon dragging with it the basket which is the people and the products and those services which make up the ‘real’ economy. If the balloon deflated suddenly, we’d crash, figuratively and literally: there would be no banks, no money to pay wages, and no savings. Hence the bailout.

Money is supposed to be primarily a medium of exchange, mere tokens, or these days, numbers, which represent transactions in the real economy. In a crude way money = stuff. However, money is almost all created out of nothing, 97 percent of the money in the UK is debt, most of the rest is cash. Private banks create money when they make loans. Most people think banks just lend what their depositors leave on account with them but this is not so. As the economist Herman Daly puts it, banks are “able to live the alchemist’s dream of creating money out of nothing and lending it at interest.”

Since the money is created for the principal (the loan) but not the money to pay the interest then the economy has to produce more to create the wealth which enables more loans to be made. Debt requires that the economy grow just to service debt. The payment of interest drives the economy hard, unrelentingly so, pushing the exploitation of resources and labour, so it’s important that costs fall (through efficiency, usually meaning fewer workers per unit of output).

As noted, the growing economy in turn requires more money and so more debt to be created. This is a positive feedback cycle which periodically runs out of control leading to boom and bust. It seems we have a choice between keeping the financial hot air balloon in the air and consuming resources, damaging the environment and fragmenting society in the urgency of it, or crashing the balloon and with it the economy and leaving communities to their own meagre resources and the environment under pressure from poverty and want. The 2008 financial crash showed what the world chose. Neither makes a lot of sense in the long run.

There could be another choice. In short, money need not be created as debt by private banks and the amount of money would be kept in balance with the output of the economy. It would be supplied by the government as a public utility. Banks would lend only what money has been saved (a shift towards 100 percent reserve banking). In terms of the balloon metaphor the balloon should balance the basket so that it floats and neither falls nor rises very much.

Interest is also interesting. Why should just holding money be rewarded? Unless the money is invested productively in say buying a bakery or something which produced more real wealth, holding money means it is not acting as a medium of exchange and not doing its main job. To make sure that the flow is kept going, the idea of interest for merely holding money would be replaced by a maintenance charge. Impossible? These seemingly strange ideas all have a very long intellectual history (1).

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“The money system is the most powerful, and most overlooked, leverage point for large scale change in our global society. Any realistic approach to sustainability will require us to consider monetary issues,” says Bernard Lietaer.

The choice about how money is created and whether interest can be charged is one which, in a history stretching back 5,000 years, has been the cause of war, has exercised the minds of no less than five US presidents, has driven an influential social movement in the 20th century (2), and reaches way back to the great religions who, with rare unanimity, prohibited usury (lending money at interest).

Money and how it is created could be a lynchpin for a circular economy, one where money facilitates the exchange of resources but reinforces longer rather than shorter term planning and investment, for example, in rebuilding and servicing capital used to provide stocks of materials for use in technical cycles. It is also important because how money is created is a system condition in any economy.

(1) Debt: The First 5,000 Years by David Graeber

(2) CH Douglas and Social Credit Party of Canada in the mid 1930s.

See also Silvio Gesell, Irving Fisher, Frank Soddy and others on stamp scrip (also 1930s)