The current monetary regime is debt-based and interest-bearing, meaning that debt is greater than the money supply. The current creation and structure of money, consisting of positive interest rates, demands perpetual economic growth and the subsequent conversion of natural and social capital into financial capital. Evidently this is incongruent with a finite planet. In addition, it also contributes to income inequality and social disintegration. Understood as a medium of exchange, unit of account, and store of value, its validity is supported by its acceptance by the state for the payment of taxes and its acceptance for goods and services. It is therefore best perceived as a social agreement that is amendable and subject to change.
Money and the institutions surrounding it have evolved throughout history as conditions have required or demanded. Current issues of ecological degradation, biodiversity and species loss, climate change and burgeoning inequality necessitate consideration of an ecologically cognizant monetary regime. Silvio Gesell’s proposition of negative interest rates has garnered recent mainstream attention, albeit for its potential to stimulate economic activity. However, this demonstrates the feasibility of implementing decaying currency, partially remedying the aforementioned ills. This paper explores monetary creation and accompanying institutional and policy arrangements that would generate a form of money that is societally and ecologically beneficial.
In exploring potential policies and methods for transitioning economies away from extractive systems founded in perpetual growth to ones that realise their ecological dependence and embeddedness, it is essential to consider the role and form of money. The current money system and its creation is debt-based and interest-bearing; which results in market volatility and the continued conversion of natural and social capital into financial capital.1 It is becoming increasingly clear that this economic system is incongruent with a finite planet. In addition, Picketty identifies the rate of return on capital as one of the major factors that contributes to inequality.2 Silvio Gesell, who drew significant attention from Keynes, noted that interest rates are an occurrence that is unique to money and is a feature that explains why it is pursued and hoarded.3
Money plays a crucial and often defining role in social interactions as well as human interaction with the planet. However, money is not a universally-fixed reality but rather a human creation, and is therefore a form of social agreement subject to change.
Consequentially, it has evolved over time in response to different historical moments and crises. As humanity faces the challenges of climate breakdown, biodiversity and species loss, as well as extreme levels of inequality, it is inevitable that change to the current forms of money and monetary systems will occur. This paper explores propositions that would facilitate a transformation of money to a form that is more ecologically cognizant and socially constructive. It also outlines how these propositions might be implemented.
Implications of debt-based, interest-bearing money
How money is created, and who creates it, has significant implications for society and the activities that are favoured or overlooked. The notion that central banks create money is incorrect, as majority of money creation occurs through commercial banks via fractional reserve banking.1 With a requirement to only hold a small fraction of deposits, usually 10%, commercial banks essentially loan money into existence.1 This has resulted in a system where debt is greater than the money supply. To ameliorate this condition the continued conversion of natural and social capital into financial capital is required. The prominence of debt helps partly explain the increasing commodification and subsequent extraction of nature, as well as of human creativity, capacities and care. Further to this, a compound interest rate has meant debt has grown at a greater rate than this conversion has been able to satisfy, meaning the gap between debt and the money supply is increasing.4 In light of this system there is little surprise that the severity and frequency of financial crises, with accompanying social conflict, has increased over time.5 As noted by Farley et al.,1 not only does this system facilitate the relocation of wealth and resources to the financial sector but it also favours market goods over public goods, as these can create enough income to repay both the initial loan and the interest. As such, money, which is a social agreement for exchange, value, and accounting, is created in a way that is ignorant of human well-being and, as is becoming increasingly evident, indirectly detracts from human well-being by promoting activities that deteriorate natural and social capital.1
In light of these detrimental features of money and credit/debt dynamics, it is necessary to also consider what contributed to the emergence of this system. Historically the primary motivation for people to borrow was, and continues to be, the need to buy food and agricultural inputs; due to the inherent unpredictability of agriculture and consequences of seasons of low yields.6 In addition, the development of tax systems that demanded payment in currency, which were proliferated by colonial conquest, has also been a major reason people took on debt and incidentally also provides explanation of the emergence of markets and the use of money.6 This insight weakens the conventional origin story of money; that it simply came into being to overcome the inconveniences of barter.
Presumably, money solved the issue for the baker who wanted meat but the butcher who wanted a pair of shoes instead of bread. This has been referred to as the ‘myth of barter’, as there is no historical example of a village or community making the assumed transition from barter to money and then eventually to credit.7 Rather, Egyptian and Mesopotamian archaeological finds have shown that systems of credit existed thousands of years before the invention of coinage.7 The main problem with the myth of barter is that it projects the rational, self-interested and utility-maximizing vision of humanity throughout history, whilst ignoring how social ties, kinship, violence, and power have all influenced exchange and the emergence of money.7 Human exchange has always been deeply social and reveals the inter-dependency of people that is necessary for human survival and flourishing. A vision of humanity that emphasises sociality, generosity and adaptability is an essential component for a beneficial economy.8 It is evident that the current system of money creation and resulting levels of debt are not serving that reality.
Beyond being debt-based the current monetary regime is also interest-bearing. In examining the reasons for positive interest rates, or money’s liquidity premium, the neoclassical explanation suggests that humans prefer to consume in the present rather than in the future; so interest exists as a reward for those who delay consumption.9 However, other explanations suggest that interest is not the result of human preference but is rather a characteristic of money itself; due to the fact that it does not deteriorate and provides people with autonomy and vast choice it is therefore greater than goods, services and labour.9 Historically, positive interest, or usury, has been prohibited and condemned by Jewish, Christian, and Islamic faith traditions, as well as by Greek philosophers, as it was seen as an evil practice that often exploited the poor and caused social conflict.10
Following the Renaissance perspectives changed from interest being inherently evil to considerations of how much interest was usurious; with justifications for interest as a reward for delayed consumption and the risk of lending emerging from thinkers like John Locke soon afterwards.10 Interest has now become an accepted and unquestioned norm within current credit and debt relations. However, Picketty has observed that the relationship between preference for saving, slowed economic growth and the rate of interest on capital in recent history has been a primary contributor to the growing income inequality that now characterises contemporary economies.2
This dynamic is occurring on the macro and micro levels, as well as within and between countries. Developing countries have paid over $4.2 trillion in interest payments alone on foreign debt since 1980.11 Meaning many countries have already paid the initial loan several times over, yet are still servicing debt.11 Evidently, positive interest greatly hampers the capacity of both people and countries to develop as money that could be spent on food, health and education is consumed by debt payments. The current monetary system rewards those that simply possess or own money. Whilst the types of credit arrangements available to the poor often have the highest levels of interest attached to them.10
The debt-based and interest-bearing nature of the current monetary regime clearly facilitates the conversion of natural and social capital into financial capital and creates increasing income inequality. Even if infinite resources were available there would still be default on debt if economic growth was not greater than the interest rate on the existing debt.1 In light of this, we will not be able to transition to post-growth or steady-state economies whilst positive interest rates remain a feature of the monetary system.9
Solutions: The potential evolution of money
Money needs to be transformed so that it serves society and facilitates non-extractive interactions between humans and nature. The increasing sophistication of financial systems, the untranslatable terminology and language of banking and finance, and the fact that current discussion of money and banking is conducted by those with vested interests, are some of the main challenges facing the development and implementation of alternative monetary ideas and frameworks.4 Unfortunately, it has often required some form of crisis for new currency and monetary systems to emerge.1 In examining the destructive consequences of the current monetary regime, it is clear that who creates money and how, as well as the role of positive interest rates are two factors that require reconsideration.
The idea of full reserve banking (FRB) was popularised within ecological economics by Herman Daly, who built on the ideas of Frederick Soddy.12 The Federal Reserve in the US has the authority to alter reserve requirements for commercial banks, and could gradually raise the requirement to 100% in order to remove the capacity of commercial banks to create money.13 This would significantly influence the types of activities and goods that receive loans. This could work by central banks placing time deposits in commercial banks to cover all existing loans, with accompanying parameters in place as to the types of activities that the commercial banks fund for them to continue to receive further deposits once the initial deposit has matured.1 Alternatively, banking could become a public utility so that commercial banks simply become an extension of the central bank, which would also encourage localisation of finance to better assess risk.1 FRB would mean that every unit or dollar loaned would have to be one that has been saved and deposited, which would reduce growth by dis-incentivising borrowing and speculative investment.6 Whilst helping address the gap between debt and real wealth, and making money creation more of a public good, FRB is not a comprehensive solution.
FRB will still be subject to speculative bubbles and ensuing financial crises.4 The magnitude of the current ecological crises requires reforms and regulation that oversee the course of investment and comprehensively address the issues of distribution and power.4 In light of this, and to further ameliorate the divide between debt and real wealth, there is an argument for some form of debt cancellation.12 In periods where virtual money systems were dominant there were always institutions created within societies, such as debt cancellation or jubilees, to protect debtors, however, the contemporary period of virtual credit money ushered in by Nixon in 1971 has been accompanied by institutions, such as the IMF, that exist to protect creditors.7 Therefore, in the current context some form of debt cancellation would have the added effect of reorienting or re-designating the rights to real wealth.7 From the previous consideration of debt payments by developing countries, debt cancellation would also permit a renewed autonomy in determining allocation of their resources.
Whilst FRB and some form of debt cancellation would be greatly beneficial, it is critical that positive interest rates also be addressed. Money’s primary function is as a medium of exchange. Having it as a unit of account is useful, but how it operates as a store of value requires change. Positive interest rates encourage the hoarding and accumulation of money as it becomes an end in and of itself. Aristotle was critical of an object like money having the capacity to reproduce and insisted it best served society only as a medium of exchange.10
Zero or negative interest rates would mean money no longer functions as a store of value and becomes subject to decay as other materials are. In the early 1900s Silvio Gesell pioneered the idea of imposing an artificial carrying cost on money in order to prevent its accumulation and instead encourage its circulation in the economy.9 Majority of the interest in negative interest rates is in its capacity to stimulate economic activity through discouraging hoarding.
During the Great Depression, an estimated 405 municipalities in the US favoured the creation of decaying currency or ‘stamp scrip’.14 In addition, the Bankhead-Pettengill Bill in 1932 proposed the creation of one billion one dollar ($1) notes of stamp scrip but was rejected in favour of the New Deal and central bank sovereignty.14
In the same year a relatively successful experience of stamp scrip occurred in the township of Wörgl in Austria, that resulted in increasing employment and economic activity such as the building of infrastructure and housing during a time of economic depression.6 Following this success roughly 200 other towns also wanted to implement decaying currency but it was made illegal due to the risk it presented to the central bank.6 In each instance, the goal was to stimulate economic activity during times of stagnation or crisis. Gesell was a businessman and similarly had intentions of prompting growth through increasing the circulation and velocity of money.6
Interestingly, there has been renewed interest in negative interest rates following the 2007-8 financial crisis. Central banks in Sweden, Switzerland, Denmark, Hungary, Japan, and even the European Central Bank have all implemented negative interest rate policies post 2008.15
Negative interest rates or decaying currency are able to be implemented within the existing financial framework. As the idea is both possible and feasible, it is worth further exploring how it might facilitate a post-growth economy as well as other potential capacities. Though it may stimulate short term economic activity and growth through increasing the circulation of money, in the long run the effect would be a re-alignment of money with real wealth.16
The absence of interest would remove both the incentive and demand that natural and social capital be converted into money, as money would no longer be a commodity that grows indefinitely. This would need to be accompanied by policies that prevent other assets, such as land and gold, from also becoming stores of value.16 In addition, debt and the money supply would be decreasing rather than infinitely growing. Here some form of social dividend or credit would be needed to refresh the money supply. A universal basic income could be administered at the national level with decisions of further credit devolved to the local level in order to facilitate a more democratic economy.6
Negative interest and decaying currency would also likely have an effect on inequality through discouraging hoarding and removing the reward of positive interest rates to those who simply possess money.9 Progressive taxation that targets throughput and economic rent would also assist in reducing inequality and environmentally deleterious activities.1 Further, through money losing its pre-eminence over other goods, services and labour, it is likely that alternative mechanisms and means of exchange would emerge that form and strengthen social bonds. Money as a commodity currently obscures the reality that people are inherently connected and dependent upon one another.
The environmental, economic, social and political crises presently unfolding reveal the need for a new form of money that no longer perpetuates these issues.
In seeking to transition to a post-growth economy it is essential to examine the role of money and its current form and creation. Indeed, such a transition cannot occur with money remaining debt-based and interest-bearing. Whilst numerous actions and policies are required for a post-growth economy to function well, changing who creates money as well as removing positive interest rates are two fundamental components and catalysts of money’s much needed transformation. These changes can occur within existing institutional frameworks but would likely be pivotal reforms with revolutionary implications. It can also occur independently through complementary currencies as seen in Wörgl, Austria. Full reserve banking would mean that money creation becomes a public good and negative interest rates would remove the feature of money as a store of value and increase its function as a medium of exchange. It would also mean that money is no longer structured in a way that demands the perpetual conversion of natural and social capital into financial capital.
- Farley, J, Burke, M, Flomenhoft, G, Kelly, B, Murray, DF, Posner, S, Putnam, M, Scanlan, A, & Witham, A. Monetary and Fiscal Policies for a Finite Planet. Sustainability 5, 2802-2826 (2013).
- Kennedy, P. Review of Capital in the Twenty-First Century by Thomas Picketty. Critique 43(1), 117-130 (2015).
- Dow, S. Keynes and Gesell: Political and Social Philosophy, Epistemology and Monetary Reform Annals of the Fondazion Luigi Einaudi, 51, 77-92 (2017).
- Røpke, I. Sustainability and the Governance of the Financial System: What role for full reserve banking? Environmental Policy and Governance 27, 177-192 (2017).
- Zanalda, G. History of Financial Crises. International Encyclopaedia of the Social & Behavioural Sciences, 2nd ed. 9, 183-190 (2015).
- Gerber, JF. An overview of local credit systems and their implications for post-growth. Sustainability Science 10, 413-423 (2015).
- Graeber, D. Debt: the first 5,000 years (Melville House Publishing, Brooklyn, NY, 2014).
- Raworth, K. Doughnut Economics: Seven Ways to Think Like a 21st Century Economist (Random House Business Books, London, 2017).
- Loehr, D. The euthanasia of the rentier—A way toward a steady-state economy? Ecological Economics 84, 232-239 (2012).
- Lewison, M. Conflicts of Interest? The ethics of Usury. Journal of Business Ethics 22, 327-339 (1999).
- Hickel, J. The Divide: A Brief Guide to Global Inequality and its Solutions (William Heinemann, London, 2017).
- Daly, HE. The economic thought of Frederick Soddy. History of Political Economy 12(4), 469–488 (1980).
- Daly, H. Nationalize Money, Not Banks. Center for the Advancement of the Steady State Economy [online] (2013), https://steadystate.org/nationalize-money-not-banks/.
- Ilgmann, C, & Menner, M. Negative nominal interest rates: history and current proposals. International Economics and Economic Policy. 8(4), 383-405 (2011).
- Arteta, C, Kose, MA, Stocker, M, & Taskin, T. Implications of negative interest rate policies: An early assessment. Pacific Economic Review 23, 8-26 (2016).
- Kallis, G, Kerschner, C, & Martinez-Alier, J. The economics of degrowth. Ecological Economics 4, 172-180 (2012).