WHERE DOES MONEY COME FROM?

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It sounds like the kind of question a primary school child would ask, almost too simple to be of any importance: “The government creates it, probably the central bank, quantitative easing, isn’t it called?”

Money, as ubiquitous as water, seeps into just about every part of our lives and yet most of us don’t know the first thing about how it actually works.

If you’re hazy on the details, don’t worry. A recent poll found that 85% of British politicians were factually wrong when asked where money comes from.[1]

The simple truth is that nearly all the money in the economy is created in the form of bank deposits when private banks make loans.[2] That’s right. When you go to a private bank to take out a loan to buy a house, say, the bank will review your application and, with a few strokes of a keyboard, create money out of nothing, deposit it in your account and charge you interest for doing so. Sounds impossible? Well don’t take it from me, take it from the central bankers themselves:

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” - Bank of England Bulletin 2014[3]

Let’s say a bank creates £100,000 out of thin air and deposits it in your bank account. That money comes with a corresponding debt PLUS interest: you now owe the bank £100,000 PLUS interest. But the money to cover the interest was never created.

Because 97%[4] of our money is created this way, there is never enough money to cover the interest on these debts. And so although the natural world is abundant, the money we use to exchange this abundance is always in short supply. This is known as artificial scarcity – it casts a mood of desperation, competition and greed onto all economic interactions, as money becomes an end rather than a means of exchange.

No-one alive today has ever lived under any other system, and so we naturally mistake these characteristics for fundamental parts of human nature rather than evolved responses to a context that we ourselves have created. It’s not that humans are all selfish, it’s that we have created a money system which necessitates selfishness.

And because of compound interest, the debt keeps getting bigger; there is now three times more debt in the world than money.[5] Although individually we might pay off our debts, collectively we are in debt to the banks forever, paying interest forever.

This has disastrous economic and social consequences: spiralling house prices, rising inequality, and endless boom and bust cycles. The environmental consequences are even worse.

Because it means the entire global economy is running on a treadmill. The only way to keep up with rising debt is for banks to lend more money into existence, and in order to justify these loans the economy has to grow and grow.

I’m sure you’ve heard the line of thinking that we need to stop obsessing about GDP and economic growth. But try telling a man who is struggling to pay his mortgage that he needs to calm down and work less.

A debt and interest based monetary system places the entire global economy in that man’s position. Taking our foot off the accelerator means that we won’t be able to keep up with interest rates. That means defaults, foreclosures, bankruptcies, unemployment, and as history shows us, eventually crime, extremism and even war.

The Jilets Jaunes are a case in point: Macron tries to hike fuel duty to tackle climate change and the resulting economic hardship inflicted on his countrymen causes all hell to break loose. When responsible climate change policy means losing the peace, not to mention power, don’t be surprised that only a tiny minority of governments are doing enough. The sad truth is that within the current monetary paradigm, the degrowth our ecosystems badly need simply isn’t an option.

Climate activists need to get their heads around this. As Dennis Meadows wrote in Money and Sustainability: ‘I did not think about the money system at all. I took it for granted as a neutral aspect of human society. . . I now understand . . . that the prevailing financial system is incompatible with sustainability.’[6]

Consider two contrasting examples.

Person no. 1 walks into a bank and says “I’d like to take out a £1M loan to buy a tract of pristine rainforest and conserve it. The rainforest won’t go anywhere so if you ever need your £1M back I can sell it and you’ll have your money back.” But the banker asks: “how will you pay the interest?”

Person no. 2 walks in and says “I’d like to take out a loan of £1M to buy the rainforest and an extra £200,000 to hire chainsaws and a workforce to log it. From the profits I can pay you 3% interest a year.”

Which man do you think gets the loan?

By the simple mechanism of interest rates, No. 1’s ambition to preserve the rainforest is virtually impossible, and No 2’s ambition to log it is actively encouraged.

Money based on debt and interest is entirely out of whack with the natural world. Nature goes in cycles: birth, growth, death, decay, and rebirth. But our money system demands the exact opposite: it demands endless growth.

Growth for the sake of growth is the ideology of a cancer cell. The mechanism of debt and interest is a cancer, and our planet is slowly dying.

Luckily there are other ways of creating money. And I’m not talking about bitcoin.

Around the world community currencies have been launched to address some of these problems. Much attention has been drawn to the Bristol and Brixton pound, but these work much like high street vouchers and are merely proxies for debt-and-interest based money.

More effective are mutual credit systems like Sarafu Credit in Kenya, WIR in Switzerland or Sardex in Sardinia allow businesses to trade with each other on credit, free of interest.[7][8][9] The soon-to-be-launched UK mutual credit system is accepting businesses as we speak.[10]

Or time banks like Tempo in which a human hour of time is valued equally no matter who provides it, and volunteers can earn time bank hours in exchange for volunteering in the local community and spend them on activities such as going to the gym or the cinema.[11]

More ambitious still, an NGO called Positive Money is gaining traction with a campaign to promote a national sovereign money system, where all money would be created debt-and-interest-free by the government and spent directly into the real economy in the form of hospitals, schools and motorways, and taxed out again at the right speed to avoid inflation.

Whatever your preferred route, monetary system reform is the most important environmental cause out there bar none because our monetary system is the source of the unsustainable growth imperative.

Until we change the way money is created, solving climate change is mathematically impossible.

A version of this article was printed in issue 3 of It’s Freezing in LA!, an independent magazine about climate change.  


[1] https://positivemoney.org/2017/10/mp-poll/

[2] https://positivemoney.org/how-money-%20works/how-banks-%20create-money/

[3] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy

[4] https://positivemoney.org/how-money-%20works/how-banks-%20create-money/

[5] https://www.bitguru.co.uk/crypto-news/there-is-now-officially/

[6] https://www.triarchypress.net/foreword.html

[7] https://www.grassrootseconomics.org/community-currencies

[8] http://community-currency.info/en/currencies/wir-bank/

[9] https://www.ft.com/content/cf875d9a-5be6-11e5-a28b-50226830d644

[10] https://open.coop/collaborate/mutual-credit/

[11] http://www.wearetempo.org/

Robert Cobbold