Why a new system can address the economic spiral
From community exchanges to the Swiss WIR, can alternative monetary systems cure our unhealthy addiction to growth?
Earlier this month the founder of firm Patagonia Yvon Chouinard questioned the impact of greener business within an ever expanding economy. “The elephant in the room is growth,” he said. As an increase in gross domestic product (GDP) simply means more money changing hands, Chouinard is not alone in thinking it’s a fairly inadequate measure of human progress. Politicians of most countries now agree new measures would be useful, and there is a growing community of professionals who seek to audit various aspects of our happiness and wellbeing.
When colleagues enthuse about new measure of progress, I can’t help but wonder why for the past 20 years an alternative measure of progress has had such little impact on public policy or corporate strategy. The Human Development Index (HDI) is backed by the United Nations and measures life expectancy, education, and income. The country with the highest HDI in Africa was recently considered to need military intervention, which does little to build the case that alternative metrics influence policy.
While more politicians promote new measures of progress, they remain fixated on increasing economic growth. Why this obsession? Do they simply prefer it to other measures of progress? Clearly that can’t be the reason. The answer lies in our current monetary system, which requires economic growth, as otherwise our money supply disappears and we experience recession. To understand how that is the case, we must first understand the origin of the money we use. So let us take a couple of moments to recap on our monetary system.
In most countries, about 3% of our money originates from government-owned mints that make notes and coins. The rest is digital and created by private banks, out of nothing, when they issue loans. When we go to a bank to take out a loan, the bank does not lend its own money or that of its depositors. As a deputy governor at the Bank of England put it: “Banks extend credit by simply increasing the borrowing customer’s current account … That is, banks extend credit by creating money.” As banks create the amount borrowed, but not the interest to be paid on that loan, there is now more debt in the world than money. That means there must be an increasing amount of lending to pay off debts plus interest while maintaining the amount of money in circulation, which means economic activity must continually increase. Otherwise, as debts are paid off, so our money supply shrinks, which leads to defaults, foreclosures, bankruptcies, unemployment, depression, and, history shows us, then crime and extremism.
We certainly need to change something, because the current capitalist system is a failure.