Since reading Herman Daly’s “Nationalize Money, not Banks,” my head has been whirling with notions of how to help restructure the financial system to support a steady-state economy that respects ecological limits. The current system creates debt-based money by allowing banks to hold only a very small fraction of demand deposits while lending out the rest (with interest) to be re-deposited and then loaned out again (with interest), and on and on. Why is this so important? Besides according gratuitous profits to the private banks for producing money (a public resource that could just as easily be produced by a public institution), the fractional reserve system also creates a structural dependency on economic growth because, as Bill McKibben observes, “without the growth, you can’t pay off the interest.”
But the purpose here is not to repeat our dire situation. Instead, I want to share a plan that I’m using both to disentangle myself from the flawed financial system and to put pressure on the system to change. My plan consists of three steps.
Step 1: Get informed
“The process by which money is created is so simple the mind is repelled.” (John K. Galbraith)
Wow, did Daly say that the financial sector captures 40% of all profits in the United States? While I’m no authority on financial matters, I do have a master’s degree in economics and was even a teaching assistant for Macroeconomic Principles. Maybe I missed it, but I don’t ever recall hearing the term “seigniorage,” and we definitely didn’t focus students’ attention on the fact that “growing the money supply” is profitable. After reading “Nationalize Money, not Banks,” I was left with the familiar post-Daly feeling that I had been blind(ed) but was starting to see.
Fortunately, I received my copy of Enough is Enough in the mail shortly thereafter, and Chapter 8 (Enough Debt) provides more ideas on the issue of debt-based money creation and policies for reform. Also, issue no. 63 of the Real World Economics Review, a pluralist, open-access journal, offers excellent papers on the recent financial crises and money markets. So, having been acquainted with a number of alternatives to the current system, I was ready to roll on to the next step.
Step 2: Start worrying (more)
“Thus, our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess.” (Irving Fisher)
Cyprus recently joined Greece, Spain, Ireland and Portugal to become the 5th country in the Eurozone that has needed outside assistance to bail out its troubled financial sector. When the Cypriot authorities meet in early April to sign the agreement with representatives of the “Troika” (International Monetary Fund, European Commission and European Central Bank), every man, woman and child in Cyprus will effectively take out a €12,000 loan.
That sounds pretty bad, but actually, in the current system, the bailout should have been even bigger. In an unprecedented move that ought to shake the rotten foundations of the fractional reserve system, depositors holding more than €100,000 in Cyprus’ two largest banks have been subject to levies of 100% and 37.5%, respectively, in order to “recapitalize” their coffers. The original plan, voted down by the Cypriot parliament due in large part to public outrage, was to levy all depositors. This sends a very clear and ominous message to people (like me) holding deposits in the Eurozone: the governments of the Eurogroup — representing the world’s largest common market — have proven unwilling to fully guarantee demand deposits in this crisis. And if Europe can’t guarantee deposits, is there anywhere else that can really be considered safe?
Step 3: Take action
“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.” (Lord Acton)
There are two simple avenues for someone like me (or you) to take action against the banks.
First, I plan to continue using my voice as a citizen to spread the word concerning the inherent instability of the fractional reserve system and get involved with efforts to promote an alternative vision of a financial system — one that serves the needs of the economy and society, while respecting the limits of a finite planet.
Second, and more immediately, I wanted to get my deposits out of the system ASAP. If enough people stash their money under the proverbial mattress, then banks should get a warning message from their balance sheets that they need to finance more of their loans with real equity and long-term bonds rather than debt.
However, I found that I couldn’t easily abandon my checking account because that’s where my employer deposits my salary and where companies bill me for utilities. As a working compromise, my partner and I closed our accounts with Bankia — the giant Spanish conglomerate that has siphoned away more than half of the €40bn in bailout funds spent by Spain so far — and started banking with Triodos Bank.
Although Triodos still creates debt-based money from our deposits, they lend it to initiatives that benefit people and the environment, and what’s more, they publish each and every loan made. They are co-founders of the Global Alliance on Banking for Values, a network of 22 “values-based banks” that have recently issued a declaration calling for greater transparency, sustainability and diversity in banking. Consider the following excerpt:
Banks play a critical role in the transition towards a more sustainable economy. Therefore social and ecological criteria must play a critical role in the creation and use of financial products. […] Banks have to serve the real economy and include broader societal perspectives in their considerations.
Can you believe this is coming from a group of bankers managing more than $60 billion worth of assets?
My three-step plan isn’t exactly revolutionary, but it is helping to secure my own financial situation and putting pressure on the system at large. If enough of us take steps like these, the day will come when the Triodos perspective on banking is the norm.
Andrew Fanning grew up on the blustery east coast of Canada where he eventually earned a master’s in economics. His interests include lots of things, especially the capacity of the planet to support life.