Det danske Fredsakademi
Kronologi over fredssagen og international politik 20. februar
2012 / Time Line February 20, 2012
19. Februar 2012, 21. Februar 2012
Limits To Growth And Fractional Reserve Banking
By John Scales Avery
Economists (with a few notable exceptions) have long behaved as
though growth were synonymous with economic health. If the gross
national product of a country increases steadily by 4 percent per
year, most economists express approval and say that the economy is
healthy. If the economy could be made to grow still faster (they
maintain), it would be still more healthy. If the growth rate
should fall, economic illness would be diagnosed. However, it is
obvious that on a finite Earth, neither population growth nor
economic growth can continue indefinitely.
A “healthy” economic growth rate of 4 percent per year
corresponds to an increase by a factor of 50 in a century, by a
factor of 2500 in two centuries, and by a factor of 125,000 in
three centuries. No one can maintain that this type of growth is
sustainable except by refusing to look more than a short distance
into the future.
Of course, it is necessary to distinguish between industrial
growth, and growth of culture and knowledge, which can and should
continue to grow. Qualitative improvements in human society are
possible and desirable, but resource-using and pollution-producing
industrial growth is reaching its limits, both because of
ecological constraints and because of the exhaustion of petroleum,
natural gas and other non-renewable resources, such as metals.
Today, as economic growth falters, the defects and injustices of
our banking system have come sharply into focus, and light has also
been thrown onto the much-too-cozy relationship between banking and
government. The collapse of banks during the subprime mortgage
crisis of 2008 and their subsequent bailout by means of the
taxpayer's money can give us an insight into both phenomena - the
faults of our banking system and its infiltration into the halls of
government. The same can be said of the present national debt
crisis in the Euro zone and elsewhere.
One feature of banking that cries out for reform is
“fractional reserve banking", i.e. the practice whereby
private banks keep only a tiny fraction of the money entrusted to
them by their depositors, and lend out all the remaining amount. By
doing so, the banks are in effect coining their own money and
putting it into circulation, a prerogative that ought to be
reserved for governments. Under the system of fractional reserve
banking, profits from any expansion of the money supply go to
private banks rather than being used by the government to provide
social services. This is basically fraudulent and unjust; the banks
are in effect issuing their own counterfeit money.
When the economy contracts instead of expanding, the effect of
fractional reserve banking is still worse. In that case the
depositors ask the banks for their money, which it is their right
to do. But the banks do not have the money - they have lent it out,
and thus they fail. However, the bankers have insured themselves
against this eventuality by buying the votes of government
officials. Thus the banks are bailed out and the taxpayers are left
with the bill, as in the recent example in which the US Federal
Reserve secretly gave 7.7 trillion of the taxpayers' dollars to
bail out various banks.
We live in special times: Like a speeding bus headed for a brick
wall, the earth's rapidly-growing population of humans and its
rapidly-growing economic activity are headed for a collision with a
very solid barrier - the carrying capacity of the global
environment. As in the case of the bus and the wall, the correct
response to the situation is to apply the brakes in good time, but
fear prevents us from doing this. What will happen if we slow down
The memory of the great depression of 1929 makes us fear the
consequences of an economic slowdown, especially since unemployment
is already a serious problem. Although the history of the 1929
depression is frightening, it may nevertheless be useful to look at
the measures which were used then to bring the global economy back
to its feet. A similar level of governmental responsibility may
help us during the next few decades to avoid some of the more
painful consequences of the necessary transition from the economics
of growth to the economics of equilibrium.
In much the same way that Keynes urged Roosevelt to use
governmental fiscal and financial policy to achieve social goals,
we can now urge our governments to use their control of taxation to
promote sustainability. For example, a slight increase in the taxes
on fossil fuels could make a number of renewable energy
technologies economically competitive; and higher taxes on motor
fuels would be especially useful in promoting the necessary
transition from private automobiles to bicycles and public
The economic recession that began with the US subprime mortgage
crisis of 2008 can be seen as an opportunity. It is thought to be
temporary, but it is a valuable warning of irreversible long-term
changes that will come later, when the absolute limits of
industrial growth are reached. Already today we are faced with the
problems of preventing unemployment and simultaneously building the
infrastructure of an ecologically sustainable society. What is
needed today is not the deregulation called for by the 1 percent.
Instead we need truly democratic governments that accept their
social and ecological responsibilities. One of the most important
responsibilities of reformed governments and reformed economics
must be to ensure full employment.
The Worldwatch Institute, Washington D.C., lists the following
steps as necessary for the transition to sustainability: 1)
Stabilizing population; 2) Shifting to renewable energy; 3)
Increasing energy efficiency; 4) Recycling resources; 5)
Reforestation and 6) Soil Conservation. All of these steps are
labor-intensive; and thus, wholehearted governmental commitment to
the transition to sustainability can help to solve the problem of
We are approaching the moment in history where industrial growth
will no longer be possible. If no changes have been made in our
economic system when this happens, we will be faced with massive
unemployment. Three changes are needed to prevent this:
1. Labor must be moved to tasks related to ecological
sustainability. These include development of renewable energy,
reforestation, soil and water conservation, replacement of private
transportation by public transport, and agricultural development.
Health and family planning services must also be made available to
2. Opportunities for employment must be shared among those in need
of work, even if this means reducing the number of hours that each
person works each week and simultaneously reducing the use of
luxury goods, unnecessary travel, and all forms of conspicuous
consumption. It will be necessary for governments to introduce laws
reducing the length of the working week, thus ensuring that
opportunities for employment are shared equally.
3. The world's fractional reserve banking system urgently needs to
be reformed. An index system could be introduced to regulate the
amount of money in circulation in such a way as to stabilize the
average price of a list of necessary household items, such as
flour, milk and eggs. National banks would either print more money
or else re-absorb it according to the value of the index.
To carry out these reforms will require the dedicated and
courageous efforts of civil society - the 99 percent. If we leave
things in the hands of the politicians, bankers and corporations,
we will continue on the road to ruin, following in the footsteps of
Greece. Perhaps we should remember the words that Shelly wrote in
response to the Peterloo Massacre:
“Rise like lions after slumbers
In unvanquishable numbers.
Shake your chains to Earth like dew,
Which in sleep had fallen on you.
You are many; they are few.”
1. F. Soddy, “Wealth, virtual wealth and debt: The solution
of the economic paradox”, Allen and Unwin, (1926).
2. F. Soddy, “The Role of Money”, George Routledge and
Sons Ltd, (1934). -
3. N. Georgescu-Roegen, “The Entropy Law and the Economic
Process”, Harvard University Press, (1971).
4. Rowbotham, M., “The Grip of Death: A Study of Modern
Money, Debt Slavery and Destructive Economics”, Jon Carpenter
5. H.E. Daly and J. Farley, “Ecological Economics: Principles
and Applications”, Island Press, (2004).
6. H.E. Daly, “Beyond Growth: The Economics of Sustainable
Development”, Beacon Press, (1997).
7. H.E. Daly, “Valuing the Earth: Economics, Ecology,
Ethics”, The MIT Press; 2nd edition, (1993).
8. H.E. Daly and J.B. Cobb, Jr., “For The Common Good:
Redirecting the Economy toward Community, the Environment, and a
Sustainable Future”, Beacon Press; 2nd, Updated edition
eller søg i Fredsakademiet.dk