Saturday, March 29, 2008

Trying to Figure Out What "Money" Is

Our Meeting is working through Seeds of Violence, Seeds of Hope, a very helpful document produced by the Friends Testimonies and Economics, a joint project of the Earthcare Working Group of Philadelphia Yearly Meeting and Quaker Earthcare Witness. It is a study-guide for those interested in environmental concerns to learn more about economic issues as they relate to issues of ecological sustainability (and to some extent social justice issues as well).

I was just reading the article, "Money, Banking, and Finance" (by Ed Dreby, assisted by Keith Helmuth and Gary Lapreziosa), and was astonished to learn what money is and how it is created.

What I didn't fully understand before is how the process of lending money at interest actually creates new money! If I am understanding correctly, here is how it works. Banks hold a lot of money that people have deposited that just sits there. So they lend it out at interest, so that it can go back out into the economy and do things. (This much I did know.) When people pay it back, with interest, then the interest is the creation of new money! What this system does is spur people to have to produce more than they might otherwise have produced. Ideally, what they have thereby produced in some sense now backs up the new money created through those interest payments.

If ideally new money is created at a healthy rate, that constitutes a healthy growing economy. There is this steady stream of new money being created and backed up by productivity.

This is thought to benefit everyone, because lenders make a profit (interest collected), and borrowers are able to do more and produce more than they otherwise would have been able to do.

Now, in the real world, it gets more complicated than this, mainly because there are lots of factors that play into the rate of growth, and if the economy either grows too fast or slows too much, then that has other effects that are problematic. Two such factors are (1) not everyone can repay their loans with interest, and (2) there are very likely ecological limits to production rates.

So, all of this gives rise to questions I have. If anyone knows enough about economics to be able to help me with these questions, I would appreciate it!

1. Is growth necessary for a healthy economy? It seems that this system ultimately depends upon a few having concentrations of more money than they really need, so that they can use the lending of this money as a spur to make large numbers of people have to work hard. It is very strange to me that our system is such that some people are making lots of money off of other people doing lots of work. (But maybe there is more justice to this than I realize, since bankers and investors are doing some work in keeping track of all of this, and do deserve to be paid for this work.)

2. Is the reason that growth (the creation of new money) is important ultimately because it is necessary to support an ever-growing population? If so, if population growth stabilized, would we no longer need a growing economy? Would there still be ways to continue to power the circulation of existing money in a steady-state economy?

3. Does ecological sustainability ultimately demand a steady-state economy instead of a growing one? Or is there some level of continuing economic growth that is consistent with ecological sustainability? That is, is there some natural pace of renewability of natural resources that correlates with a modest level of continued economic growth?


  1. I really appreciate your thoughtful questions. I wish more people wished to have this conversation. I'm working on a documentary that will address these questions. It's clear to me that economic growth, with or without population growth, is unustainable. You're correct to seek a level of balance - where we're living off the interest in our natural capital account rather than liquidating the principal.

    In the meantime, I would suggest you check out my website for links to a number of good books and other resources on the subject. Click on Economic Growth in the main menu. And continue seeking the truth!

    Dave Gardner
    Hooked on Growth: Our Misguided Quest for Prosperity

  2. Thank you so much! The resources look very helpful. Best wishes on your documentary!

  3. CS,

    I accidentally posted my comment to this under your previous post.


  4. Very thought provoking. thank you for posting.

  5. Thank you, Andrea. I am glad that you found this post interesting.

    I really like your blog! Great concept, wonderful photos, powerful poems and stories!

  6. Here is the comment from Richard M that he mentioned above:

    "Actually you are underestimating how fast lending creates money because banks are allowed to lend more money than they have which itself creates money. Say I have assets of $10 million. When a bank lends money it just writes a check, it doesn't actually hand out cash. So if they make $50 million in loans based on their $10 in assets they have just added $40 million to the economy. Isn't there risk, you may well be thinking, in making $50 million in loans when you've actually got only $10 million on hand? What if those people don't make their loan payments on time? Won't that bust the bank? Yes, it would but banks take on the risk because the Fed provides various levels of insurance to lenders to encourage them to make the loans.

    "As for the specific questions...

    "Is growth necessary for a healthy economy? Theoretically no. But people like growth because it is good considered in itself. Every technological innovation in principal grows the economy. To be able to make more pins with the same amount of labor means that our economy has thus grown and we either just have more pins or some of the people making pins can make something else we would like to have. Growth means that collectively we have more stuff we want. (Of course if we have distribution problems, that is, if only the rich are getting richer then we are not really better off, only the rich are.)

    "2. No, the reason is not just to support population growth. But supporting more people at even the same average we have now does require at least that much growth.

    "3. No, ecological sustainability does not ultimately demand a steady-state economy. This isn't a matter of pace at all. It is a matter of using technologies that place do not stress the environment. Suppose I invented a solar power collector which produced no pollution (I'm thinking something like solar collectors in space.) We could then grow the economy just as fast as we could build these collectors and put zero additional strain on the environment."

    Thanks, Richard, for the clarifications and for sharing your thoughts and perspectives!