Saturday, August 20, 2016

An inconvenient truth about money and growth

Have you ever wondered how money is created? This blog tries to explain in a simplified way the financial system that creates money, and also why this system pushes us to destroy the earth and ourselves.

Money is created out of nothing

You may think that money is created by the government. This is not the case: it is created by private companies called banks. It always starts with a loan.

Imagine a person who goes to the bank to borrow €100. The bank says “Okay I’ll lend you €100”. You may think that those €100 euros are euros that the bank already had received from other clients who deposited it on their account with that bank. This is not the case: the bank creates the €100 out of nothing! It does this by writing the number 100 on the person’s bank account in exchange for the promise that the person will pay everything back. This is a serious promise: if the person doesn’t pay back, the bank gets the things the person needs to live, like his car or even his house. Now the person can go and spend €100 in society.

To summarize: money is created by private banks out of nothing, just like a crook would create false money and lend it to people as if it were real money. The difference is that in the 17th century our governments gave banks the right to create money out of nothing (not backed up by gold) so it became legal.

Now let’s take a close look at these €100 that were just created. They look like a positive value in the pocket of the person, don’t they? But in reality these €100 are a negative value, a hole in the person’s pocket. They are a loan, a debt the person owes to the bank. Money, in other words, is debt circulating in society. So whenever you see a banknote of €100, it only means that somewhere in society a person or a company has a debt of €100 with a private bank. 

The bank destroys money

Now what happens when the person pays back the loan? When the person goes to the bank to pay back a part of the loan, €20 for example, the bank destroys the €20! Yes, the €20 cease to exist! Let me explain this. 

When the bank receives the €20 it strikes out €20 on the person's €100 debt account. Consequently the loan is reduced to €80. As the money available in society always corresponds to a real loan, there is no longer €100 but only €80 euros available. This is very difficult to understand, but this is how it works.

To make the example more extreme: if the whole society would reimburse all its loans to all the banks, all money would be stricken out and cease to exist. This would be a disaster, because our economy would “go dry” and collapse. This is one of the reasons why we keep borrowing money from banks, so that they can keep creating money to keep our economy running (on the money they create). 

Money is debt that can never be paid back

But there’s a more important reason why we continue to borrow money. I explained that banks create money in exchange for a promise that the person will pay back the loan. But the banks also want interest. They need this "little extra" to pay their building, their staff and their shareholders. So they want not only the €100 euros to come back but also, let’s say, €5 interest on top of that.

And this is where we run into a serious problem. Because the interest on all the loans in the world can never be paid back because the only money that exists and circulates in society is the money created from the loans! There is exactly enough money to pay back the loans, but no extra money to pay the interest! In our example: the €100 loan can be paid back because the bank created €100, but the bank did not create the necessary €5 to pay the interest. The interest is just a bill from the banker that the borrower has to pay on top of the loan money, which is technically impossible.

Money calls for growth and depletion

To keep the economy going and to reimburse the loans and the interest, society needs to borrow more money. And these growing loans of course come with more interest bills, so society has to take out even bigger loans. As a consequence the debts keep growing and growing.

To pay back these growing loans and interest bills, society has to produce and sell more and more cars, houses, energy, etc. This process is called growth and it is tragic for two reasons. Firstly because society is not producing more to fill a growing need of our society, but rather to fill a growing greed of bankers who want their interest bills to be paid. And secondly because this growing production will have to come out of the planet, but the planet is limited.

The point I want to make is this: we deplete the planet not because of a capitalist market system, but as a direct consequence of way money functions. It’s because of the way money functions that we don’t see our planet as a place to live, but as a resource that needs to be plundered to produce more money to pay back our growing debts to bankers.

Change the rules and protect our heritage

What to do? First we need to change some financial rules. For example: why is it that when governments authorize banks to create money, only banks receive the profit (interest payments)? If at least a part of the interest payments went to the government it could be spent to produce human and environmental wealth (education, wind energy, cleaner oceans) rather than financial wealth (money flowing into the pockets of bankers and their shareholders).

This brilliant documentary (in English and French) shows the example of Totnes (UK), where a local currency was created that produces no interest (financial wealth) but only facilitates local production.

Secondly the United Nations needs to protect our natural heritage, our earth, our forests, our seeds and our water from the financial and speculative logic which will eventually destroy everything. Because, and I quote the French philosopher Pierre Rabhi, "only once we’ve cut the last tree, once the last river has been poisoned, once the last fish has been captured, only then we’ll discover that we cannot eat money".

Please think of this when people say that growth is what we need. 


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