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.
I get it.
A new official cadre of progressive green banksters will print the dud money instead of the current informal cadre of progressive green banksters.
Instead of underpaid spiralling debt we’ll have unpaid spiralling debt.
Instead of growth, every year will be 2007. There’ll be green jobs (whatever they are) and eco-tourism (whatever that is) to replace all the smelly stuff that merely made money.
The important things won’t change. We’ll still go to war to prop up the petrodollar. (Not sure how you invade and massacre BitCoin, but I’m sure there’s a drone for that.)
Government Control of All Bank Deposits is at least in the Netherlands reality. 1984 Big Brother. We now live in a smaller and smaller birdcage. We The people no longer have any power. Not with our money (ECB) not with our vote (unelected Eu commision)
We are now less than slaves because they at least had still the hope to become a free man.
Form 1040 tells you your less than a slave.
https://youtu.be/0J5XxFlWts0
When extremists demand something be accountable, transparent and democratic, they actually mean the opposite. From history we know that when kooks, like climateers in this case give the talk about reform, the actions are for it to be under their complete control, directly profiting themselves, and to never be accountable. Think of a global Venezuela.
whole lot of malthusians commenting there at source.
The article is a target-rich environment of nonsense, contradictions, and ideas that have never failed to fail. I’ll limit my observations to one.
“Democratic, accountable, and transparent….” Reads like a Hillary campaign speech (or that of any democrat politician), which is to say “lies.”
Every PROGRESSIVE politician , Democrat, Republican or whatever colour.
The Pentagon, in the 1970s, had some interesting posters on the walls of individual offices. One I liked was titled: “The Golden Rule”. The text was, “He who has the gold makes the rule”.
Still works that way.
Excellent post.
There is an urban legend that somehow spending money that we do not have will resolve economic stagnation which is caused by structural problems.
There is a reason why in the US, politicians ‘address’ the increasing accumulated US debt by kicking the can down the road.
How long is the dang road? Can the can kicking go on forever?
The Western countries have started to experience signs of economic stagnation due to structural problems. A structural problem is a problem that is not corrected by borrowing more money or by quantitive easing (printing more money).
High energy costs is a structural problem. The wage difference between China and the US is a structural problem.
We have exported millions and millions and millions of jobs to Asia (particularly China) and are now trying to accelerate the problem by increasing the cost of energy in our countries. China is playing the economic game to win (for China). We are playing the economic game with hidden agendas, ignoring economic reality.
The Western Countries are still borrowing money based on GDP growth of 3 to 5 percent. Unfortunately, due to shipping millions and millions of jobs to Asia, the Western Countries’ GDP growth, is around 1 to 2 percent. and shows signs of shrinking year by year.
https://www.amazon.com/When-Money-Runs-Out-Affluence/dp/0300205236
http://www.tradingeconomics.com/united-states/government-debt-to-gdp
The following table is a country by country list of the each countries accumulated debt as a percentage of their GDP. The old recommended maximum debt to GDP level was 70%.
Accumulated Debt by Country, for 2015 (In Percentage of GDP)
Japan 229.20
Greece 176.90
Lebanon 139.00
Italy 132.70
Portugal 129.00
Jamaica 128.40
Cape Verde 123.00
Cyprus 108.90
Belgium 106.00
Singapore 104.70
United States 104.17
Spain 99.20
Bhutan 98.90
France 96.10
Ireland 93.80
Canada 91.50
Euro Area 90.70
Egypt 90.50
United Kingdom 89.20
Jordan 89.00
Croatia 86.70
Austria 86.20
European Union 85.20
China 43.90
http://cdn1.pri.org/sites/default/files/styles/story_main/public/story/images/Zimbabwe%20Trillion_3_CROP.jpg?itok=plG2jxfv
That’s an interesting table. Please tell me – to which country or countries is it owed?
It’s owed to whoever bought the debt. Sometimes countries, sometimes companies, sometimes individuals.
I recall an episode of the Rocky and Bullwinkle Show that included a Fractured Fairy Tale concerning a greedy king who taxed his people increasingly until he had all the gold in the kingdom. He thought he was the richest man in the kingdom until he learned that because the people had no money, they adopted a new medium of exchange – the turnip. The king had no turnips, and could not buy anything because the people did not accept his gold. Suddenly he realized he was the poorest man in the kingdom.
Has anyone ever postulated an economic model which worked well forever? Not that I’ve been able to find. This is all about allowing competing forces to correct for inevitable imbalances. Handing control to politicians is the very worst possible remedy to naturally occurring flux.
Only the seedy low information types pecking on keyboards at a failing party rag beleive in the goodness of tax eaters.
Luckily ideas like this have no chance of ever being implemented in democracies or Representative Republics. But the idiot, fascist, progressive leftists will try anyways, to which I wish them nothing but ill will.
All your money are belong to us.
“democratic, accountable, and transparent,” is leftist-speak for “we would control it”.
We do not need to do a thing. The exponential growth that ‘The Guardian’ is so concerned about, will not be sustained. At present, the growth rate in the ‘Western’ world is around 1.3 children per couple. In another particular section of our world’s population, representing maybe 20% of the total population at present, and with a firm conviction that we all need to be dragged back to the 7th century, the growth rate is 3.6 children per couple. As they start reproducing in their teens, rather than late twenties/early thirties as in the ‘West’, it will not be long, certainly no more than two generations, before the concept of economic growth is purely academic.
“One way to relieve the pressure for endless growth might be to cancel some of the debt”
Now thats a glib statement if there ever was one.
Where there is a debtor, there is a creditor. So how do you go about cancelling a debt?
The debtor might be your superanuation fund. 🙂
“The responsibility for money creation would be placed with an independent agency that – unlike our banks – would be democratic, accountable, and transparent”
The author of this statement simply does not know what money actually is or represents.
Economic growth is acheived by innovation, hard work and entrepreneurship. Money is not the driver although in history it most certainly has been the limiter.
Suggest the author does some serious economic reading. Starting with Milton Friedman would be a good start.
Cheers
Roger
http://www.thedemiseofchristchurch.com
The elimination of uncontrolled debt-based money creation does not require an end to economic growth. The solution is very simple to state, but extraordinarily difficult to implement. If we define a bank as ANY lending institution, including quasi-banks such as venture capital companies, then the “control problem” arises uniquely from inter-bank transactions. The solution merely requires the clear definition of a distinct asset class for all banks (or quasi-banks). This asset class is defined as any “cash” deposited by one lending institution into another or loaned by one lending institution to another. This asset class is included on the balance sheet of (both of) the lending institutions as asset or liability, but needs to be specifically excluded from the calculation of reserves for fractional reserve accounting by BOTH institutions. This stops the same cash being used and reused by multiple lending organisations as (wholly imaginary) reserves.
Let us say that a bank is operating in a financial regulatory system of 10% fractional reserve. You deposit $1000 in the bank. The bank can lend out $900 of your cash to a business which is not a bank, (or quasi bank) supported by normal loan security. This is normal bank business and a good bank will ensure that it has adequate security for the business loan. If however it places $900 on deposit in another bank or loan institution or lends the cash to another bank, then its reserves (for the purpose of calculating lending limits) fall by the same amount, and in effect it can only lend out $90 of your cash to a (non-banking) business. The bank which has received the $900 on deposit is then not permitted to include this cash in its reserve calculation for the purpose of calculating its lending limit.
This system does not solve the problem of any one bank making toxic loans, but it would ensure that the fractional reserve calculation truly sets a limit on lending (which it does not do effectively at the moment). It would also actively discourage interbank lending other than for the purposes of managing short-term liquidity. This latter should prevent the development of a long interconected Ponzi chain of interbank lending ultimately supported by toxic assets which are invisible to the intermediate banks in the chain.
Be content with what you have. Buy only what you really need, do not run into debt.
That helps to stop the “need” for endless growth.
“Be content with what you have.” = No human progress.
I do have a car. Do I need a second one? Nope. I do have a house. Do I need a second one? Nope. I have enough to eat. Can I eat more? Yes, but I’d vomit pretty soon. I am content with what I have.
I do have knowledge and skills. Do I need more? Of course.
It isn’t difficult, is it?
This is the Leftist fantasy world view of economics whereby governments create economic wealth by debt fuelled spending. People in the real world call this bubble economics. All bubbles eventually deflate without any assistance from eco extremists.
As someone wrote recently.
AGW is just a cover for these socialists have always wanted to do.
PS: Now that they are rich, they want the economy to stop growing. How special.
Dear Mr. Worrall:
Here is a citation for the Chicago Plan as revised and presented in 1939 – A Program for Monetary Reform – https://www.scribd.com/document/154150356/1939-A-Program-for-Monetary-Reform.
An excerpted version of the 1933 version can be found in this article – http://www.dailykos.com/story/2011/3/16/957052/-.
Perhaps you can write the author and get the complete set of original memoranda.
Fractional-reserve banking is certainly a bad idea, in essence it gives the power to commercial banks to create money out of thin air. If anyone else does such a thing, it is called counterfeit money, a criminal offence. The net result is that the money supply grows like crazy. It can’t go on like this forever, obviously: the US dollar has lost 96% of its value in a century.
However, restricting this power to a government agency is even worse.
– democratic?
– accountable?
– transparent?
How?
The obvious solution is to let money alone and give the power to magically “create” it to no one, that is, to consider it a crime, no matter who does it. Instead, we can use things that need actual effort to create, like gold, silver, bitcoin, whatever. In that case the market would create as much money as needed and exchange rates would be set by the amount of effort needed to create it, while prices by the ratio of money and goods in circulation.
Of course, this system would not prevent economic growth, only create a sane economic environment. And limit government power tremendously.