Money and Sustainability

Understanding the monetary system

We live in world where systemic crisis seems to be ever more present, especially in the areas of ecology and finance. Understanding the instabilities in each system is important of course, but to have creative new ideas about potential solutions one also needs to understand the connections between different sectors. Since “finance rules the world” some basic facts and myths need to be understood by people wishing to see a more sustainable future society. This post will deal with the link between money (finance) and ecology (sustainability). 

Ecological creditors and debtors
Source: Footprint Network, 2011

What is money? how is it created? and who governs the money flow?

All economic textbooks defines money by what it does, not by what it is. Money is really just an agreement within a community to use something standardized as a medium of exchange. Most money, around 96%, is created through the checks and balances of banks when a new loan is made. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it typically credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created (Bank of England, 2014). This means that there is corresponding debt to the money in circulation, an important fact that most people seem to not understand of forget. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. Central banks normally control this by setting out interest rates, but lately they also do it directly through purchasing assets (quantitative easing).

Systemic Monetary Instabilities
Since the 1970s, the International Monetary Fund (IMF) have identified 145 banking crashes, 204 monetary collapses and 72 sovereign debt crises (Lietaer, 2012). This clearly points to structural instability in the financial system. Underlying this increased instability, building up over the last 30 years, is a regime change from productivity growth to consumptive growth fuelled by low interest rates, financial profits and explosive debt (Fig. 1). The result has been a succession of bubbles and crashes all leading up to the climax of 2008, which brought our financial system close to collapse (Fig. 2)

Fig. 1 Wages and  private consumption as % of GDP for the U.S., the EU and Japan.
debt increase due to lower wages and higher consumption
Fig. 2 The global bubble.
financial bubble 2008
Source: Sornette and Cauwels, 2012
Money and Sustainability
By now it should be obvious to most observers that there are many problems with our current monetary system, but how does it relate to sustainability? In the Club of Rome report Money and Sustainability the missing link (2012) Bernard Lietaer summarizes five elements that make the present monetary system incompatible with sustainability, including:
Global wealth inequality

- Amplifies boom and bust cycles
- Produces short-term thinking
- Requires unending growth
- Concentrates wealth
- Destroys social capital

The report is 200 pages long so I won’t go into all of the points above more than to give some short comments. For example, investment may be the single most important element of promoting a more "green" economy since it embodies the relationship between the present and the future. Today a large part of private investments are simply circling around in the financial system without contributing to any solid physical, social or environmental assets. Another large part of investments made by sovereign wealth funds and pension funds goes into fossil fuels and mineral extractions. But in order to avoid the worst scenarios of climate change massive investments are needed now. The international energy agency (IEA) said this June that the world needs 48 trillion dollar in investments just to meet 2035 energy needs. At the moment University students around the world are campaigning for divestment in fossil fuels and I think many people and small businesses around the world are desperately trying to find alternative financing due to the credit crunch.

Are there any alternatives?
To solve the systemic instabilities there are a couple of suggestions. Researchers at the IMF has suggested some form of the Chicago Plan, whereby money creation is moved from the hands of the banks to the state (Benes and Kumhof, 2012). This solution could perhaps go a long way but would not solve the issue of having a currency monopoly of bank-debt money (i.e. monetary collapses could still occur). Moreover, it seems unlikely that any government would adopt this type of policy since it requires a total restructuring of the financial system. Another suggestion is to promote complementary currencies as this could increase societal resilience to financial crisis and help match unmet needs with unused resources. With modern digital technology this would be perfectly feasible and would not require any major governmental intervention, only approval. The claim goes as follows. Monetary systems are a type of complex flow networks, and as such there needs to be a balance between optimization for efficiency and resilience (Fig. 3). A monopoly is very efficient but increases systemic risk over the long term. By increasing the diversity of currencies one could thus enhance resilience to systemic instabilities originating from bank-debt money creation. This is because complementary currencies behaves counter-cyclically with the mainstream economy.

Fig. 3 Today's monetary system is significantly overshooting the optimal balance for maintaining stability. 
Source: Lietaer, 2010
Examples of complementary currencies:
- Time banking: US community services, Japan elderly care, UK unemployment 
- WIR bank: business-to-business lending Switzerland
- SoNantes: promotes local business in France
- Torekes: community services in poor neighborhoods in the Netherlands 
- Bristol pound: promoting community businesses
- Tradecoin: business-to-business 
- Bitcoin: p2p global network
- E-portemonnee: promotes environmentally friendly behavior in Belgium 

There are many misconceptions about our current monetary system, for example that modern money is a neutral medium of exchange. And with such an awful track record we should at least start thinking about alternative ways of promoting mediums of exchange that does not only take into consideration maximization of profits, but also promotes societal beneficial activities such as education, elderly care, employment, energy efficiency, carbon reductions etc. With modern information technology, spread and use of complementary currencies is very feasible and to low costs. Complementary currencies could act as support systems, especially in times of crisis, enhancing system resilience. In cases where our current monetary system does not promote certain social behavior that would otherwise be beneficial to our communities, complementary currencies could act as enablers of such behavior. 

Benes, J., and Kumhof, M. (2012). The Chicago Plan Revisited. IMF working paper 12/202
Lietear, B (2012). Money and Sustainability - the missing link. Club of Rome report. 
Sornette, D. and Cauwels, P (2012). The Illusion of the Perpetual Money Machine. arXiv:1212.2833 


Out of the ashes into the fire

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