Guest essay by Eric Worrall
The Guardian has promoted an idea for a new climate friendly financial system, to permanently halt economic growth.
To deal with climate change we need a new financial system
Abolishing debt-based currency isn’t a new idea, but it could hold the secret to ending our economies’ environmentally damaging addiction to growth.
When it comes to global warming, we know that the real problem is not just fossil fuels – it is the logic of endless growth that is built into our economic system. If we don’t keep the global economy growing by at least 3% per year, it plunges into crisis. That means we have to double the size of the economy every 20 years, just to stay afloat. It doesn’t take much to realise that this imperative for exponential growth makes little sense given the limits of our finite planet.
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 Stieglitz have been calling for such changes for years and it’s time we listened.
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.
The responsibility for money creation would be placed with an independent agency that – unlike our banks – would be democratic, accountable, and transparent, so money would become a truly public good. Commercial banks would still be able to lend money at interest, but they would have to back it dollar for dollar with their own reserves. In other words, there would be a 100% reserve requirement.
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.
I haven’t been able to locate the original text of the Chicago Plan memorandum, but the IMF revival of the Chicago plan is available here.
The main thrust of the plan appears to be to nationalise all personal retail bank deposits. When proponents of the plan talk about forcing banks holding a “100% reserve”, they don’t just mean physical cash – government bonds also count as cash. When you deposit cash into a bank under this scheme, you will effectively be buying government bonds, lending the money straight to the government. Other than holding physical cash, lending to the government would be the only option for earning an income from bank deposits.
Would this plan stop economic growth? It would certainly cause a lot of harm. Replacing private lending with government lending schemes has been tested to destruction on countless occasions. It turns out civil servants who don’t face personal consequences if the loan goes bad tend to do a poor job of checking the creditworthiness of applicants. Printing new cash to cover losses from poor centralised banking decisions is not a recipe for prosperity.
I suspect what this plan would do, if implemented, is accelerate the ongoing growth of the shadow banking sector.
Governments are rapidly losing control of the global currency system. Digital currencies like Bitcoin exist because their proponents want to liberate currency from the control of governments. While almost untraceable Bitcoin is undoubtably the currency of choice for scammers, terrorists, drug traffickers, and other assorted filth, it is also the currency of people who want to circumvent unfair restrictions on money.
Thanks to Bitcoin and similar digital currencies, even communist China can’t control currency movements anymore. One of the main reasons the value of Bitcoin has surged in recent years, is mainland businesses discovered they could use Bitcoin transactions to circumvent Chinese currency controls, to shift their profits out of China.
There is nothing new or mysterious about how Bitcoin and other digital currencies work. Bitcoins are simply the latest incarnation of the long history of informal value transfer systems, a tradition as old as tax collection.