Rethinking Money: How Money Creation Shapes Our Future and Why We Need a Financial Revolution

The mantra of infinite growth has deeply influenced modern economic thought. This pursuit of endless expansion has brought about unsustainable debt levels and has had devastating impacts on both the planet and economic inequality. To understand these challenges, it is essential to understand the role of money creation in perpetuating these issues. Our monetary system (driven by fractional banking) has created a cycle of economic growth dependent on the overexploitation of resources, leading to recurrent financial crises, environmental degradation, and social inequality (Ryan-Collins et al., 2012).

Commercial and central banks generate money through fractional banking, issuing credit beyond their actual reserves. Every loan extended by a bank effectively creates new money from thin air, allowing banks to lend multiple times their actual reserves. Reserve requirements are the minimum percentage of deposits banks must hold in reserves, either in cash or as deposits at the central bank. In Europe, the minimum reserve ratio is generally 1% for most short-term deposits, while the U.S. Federal Reserve removed reserve requirements entirely in March 2020, previously set at 10% for checking accounts. This removal has enabled banks to significantly increase the money they lend, potentially stimulating economic activity while increasing systemic risk (Ryan-Collins et al., 2012; Mishkin, 2010).

Central banks also influence monetary policy through adjusting interest rates, stimulating economic activity by reducing rates and controlling inflation by raising them. This approach assumes a simplistic and linear economic response, often neglecting critical socioeconomic and political factors. The recent financial crises (such as the 2008 Global Financial Crisis) have revealed the limits of traditional interventions in preventing speculative bubbles and market crashes (Mishkin, 2010).

The monetary system has also contributed to widening inequality. Wealthier individuals and corporations benefit from more credit and lower interest rates, while those with limited credit face higher rates and restricted access. This exacerbates economic inequality, as the rich grow richer from capital gains, and the poor struggle to access financial resources (Piketty, 2014; Stiglitz, 2012). The focus on short-term profits has also led to financing projects with significant environmental impacts, such as fossil fuel-based energy projects (Clark, 2015).

To address these issues, it's imperative to rethink monetary systems that prioritize sustainable development. "Degrowth currencies" (that depreciate over time) could encourage the circulation of wealth toward community and environmental projects (Lietaer et al., 2009). Tax reforms should address disparities in the current policies. Taxing financial gains progressively, akin to labor gains, would be a step towards rectifying this imbalance and ensuring those with more financial resources contribute fairly to society (Piketty, 2014). Imposing a carbon tax on investments contributing to climate change would redirect capital toward sustainable initiatives, aligning economic activities with environmental goals (Stiglitz, 2012).

By developing investment criteria that prioritize projects with positive environmental impacts and implementing differentiated interest rates for sustainable projects, we can rebuild our economy on principles of equity, resilience, and well-being. Understanding the creation of money and the functioning of the banking system is essential for those concerned about the planet's future. This understanding challenges deeply ingrained beliefs, prompting us to reconsider economic activities within the constraints of finite resources .

Redefining the role of money and banking is not just about stabilizing economies or preventing future financial crises. It's about reimagining an economic system that operates within the boundaries of our planet while ensuring fair opportunities for all. A progressive vision calls for radical shifts in policy and practice, breaking away from unsustainable growth models that prioritize short-term profits over long-term sustainability. This transformation is not only a financial necessity but a moral imperative, challenging us to abandon deeply rooted practices in favor of a fairer and more inclusive future.

Embracing this change requires courage and a willingness to confront powerful interests that benefit from the status quo. Still, the alternative is to persist on a path that leads to growing inequality, environmental collapse, and financial instability. Now is the time to rethink our relationship with money, redefine the values that underpin our economies, and commit to a future where prosperity is measured not just by financial wealth but by the well-being of people and the planet.

References:

Ryan-Collins, J., Greenham, T., Werner, R., & Jackson, A. (2012). Where does money come from. London: New Economics Foundation. Pg, 7.

Mishkin, F. S. (2010). Monetary policy flexibility, risk management, and financial disruptions. Journal of Asian Economics, 21(3), 242-246.

Piketty, T. (2014). Capital in the Twenty-First Century. Harvard University Press.

Stiglitz, J. E. (2012). The Price of Inequality: How Today's Divided Society Endangers Our Future. W. W. Norton & Company.

Clark, V. V. R. (2015). An analysis of how climate policies and the threat of stranded fossil fuel assets incentivize CCS deployment (Doctoral dissertation, Massachusetts Institute of Technology).

Lietaer, B., Ulanowicz, R., & Goerner, S. (2009). Options for managing a systemic bank crisis. SAPI EN. S. Surveys and Perspectives Integrating Environment and Society, (2.1).