We Need a new Financial System
The question is what to do about it. How can we redesign the global economy to bring it in line with the principles of ecology? The most obvious answer is to stop using GDP to measure economic progress and replace it with a more thoughtful measure – one that accounts for the ecological and social impact of economic activity. Prominent economists like Nobel Prize winner Joseph Stiglitz have been calling for such changes for years and it’s time we listened.
But replacing GDP is only a first step. While it might help refocus economic policies on what really matters, it doesn’t address the main driver of growth: debt. Debt is the reason the economy has to grow in the first place. Because debt always comes with interest, it grows exponentially – so if a person, a business, or a country wants to pay down debt over the long term, they have to grow enough to at least match the growth of their debt. Without growth, debt piles up and eventually triggers an economic crisis.
One way to relieve the pressure for endless growth might be to cancel some of the debt – a kind of debt jubilee. But this would only provide a short-term fix; it wouldn’t get to the real root of the problem: that the global economic system runs on money that is itself debt.
This might sound a bit odd, but it’s quite simple. When you walk into a bank to take out a loan, you assume that the bank is lending you money it has in reserve – money that it stores somewhere in a vault, for example, collected from other people’s deposits. But that’s not how it works. Banks only hold reserves worth about 10% of the money they lend out. In other words, banks lend out 10 times more money than they actually have.
Once we realise this, the solution comes into view: we need banks to keep a bigger fraction of reserves behind the loans they make. This would go a long way toward diminishing the amount of debt sloshing around in our economy, helping reduce the pressure for economic growth.
But there’s an even more exciting solution we might consider. We could abolish debt-based currency altogether and invent a new money system completely free of intrinsic debt. Instead of letting commercial banks create money by lending it into existence, we could have the state create the money and then spend it into existence. New money would get pumped into the real economy instead of just going straight into financial speculation where it inflates huge asset bubbles that only benefit the mega-rich.
This is not a fringe proposal. It has been around since at least the 1930s, when a group of economists in Chicago proposed it as a way of curbing the reckless lending that led to the Great Depression. The Chicago Plan, as it was called, made headlines again in 2012 when progressive IMF economists put it forward as a strategy for preventing the global financial crisis from recurring. They pointed out that such a system would dramatically reduce both public and private debt and make the world economy more stable.
What they didn’t notice is that abolishing debt-based currency also holds the secret to getting our system off its addiction to growth, and therefore to arresting climate change. As it turns out, reinventing our money system is crucial to our survival in the Anthropocene – at least as important as getting off fossil fuels. And this idea is already beginning to gain traction: in the UK, the campaigning group Positive Money has generated momentum around it, building on a series of excellent explanatory videos.