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Thursday, November 11, 2004

Debt-based money

Food for thought: In Richard Heinberg's latest book, Powerdown, he explains how an economy based on borrowing money requires constant growth to survive, and why this trap is hard to escape:
Many environmentalists have argued that the constant push for economic growth within industrial societies is one of the engines continually straining global resource limits (this point is brilliantly discussed by Richard Douthwaite in his The Growth Illusion). However, it would be difficult to remove the growth imperative from modern economies without also changing national monetary systems. That is because currently most money is loaned into existence by banks and is thus based on debt, and implies a commitment on someone's part to pay interest on that debt. If the economy does not grow, new money will not be created to pay interest on existing loans; many of those loans will thus be defaulted upon, and a crash will occur. Thus it is essentially impossible to achieve a static or controllably contracting economy with a debt-based currency.

Therefore, if we are to achieve a reduced-scale, steady-state society, we will need to change our monetary system to one that is not based on debt and interest. In principle, this would be quite easy: nations or locales could issue their own interest- and debt-free money instead of giving banking cartels (such as the Federal Reserve, the Bank of England, Deutsche Bank, etc.) legal monopolies on money creation. This is what the framers of the US Constitution envisioned, and debt-free national currencies have existed at various points in American history (e.g., Lincoln's "greenbacks" and Kennedy's "United States Notes"). But in the US (and the situation is similar in most other countries), a permanent shift to debt-free money will require action by Congress, which will itself be problematic as long as senators and representatives are dependent upon campaign contributions for re-election. The banks will likely seek to destroy the career of any politician who attempts to change the monetary system in this way. Thus, the needed reform of our monetary system will first require reform of the political system--itself no easy task.
(pp. 100-101)