The current monetary system negatively impacts on the environment in several ways. First, it creates a business cycle where recessions are positively correlated with the removal of regulation protecting the environment. In addition the increase in government debt associated with large recessions and financial crises can eventually lead to cuts in government spending, which may include investments in technologies that may benefit the environment. Furthermore, banking is completely undemocratic, and this can lead to individuals helping to fund lending to industries they would otherwise not wish to. Finally the current monetary system may create a growth imperative which makes the steady state economy desired by environmentalists impossible.
Under a reformed system, a major cause of the boom bust cycle – the creation of money by banks when making loans – will be removed. Hence the economy should be far more stable, with fewer and smaller recessions. Consequently, there should be less pressure on government to remove regulations that protect the environment during downturns.
Smaller booms and busts will lower the need for the government to engage in countercyclical spending, or bail out banks in a financial crisis. This should free up money, which could be used to increase spending on the research and development of green technologies.
Another aspect of the reforms that would benefit the environment is the directed nature of the Investment Accounts. Individuals and organisations would have a choice over how the money that they save is to be used. For example, each bank would provide a range of Investment Accounts with different interest rates and risks attached to them. Each account would fund a different broad sector of the economy. So, a typical bank might offer a variety of Investment Accounts, one of which funds mortgage lending, another that funds small and medium sized businesses, a third that funds consumer lending, etc. Banks could even market accounts based on their ‘greenness’. For example, a bank could offer an account that funded only ‘green’ businesses, and excluded big energy companies, or companies with a history of pollution. In reality the possibilities are endless. Crucially, individuals would no longer be unwittingly funding activities that they disagreed with.
As a result, the investment decisions of banks would start to reflect the investment priorities of society.
In addition, the act of choosing not to put money in certain types of Investment Account (e.g. one that funds companies that damage the environment) will decrease the amount of funds that banks have available to lend to a particular sector. Other things being equal this should lower the quantity of lending and increase the interest rate on any loans to that sector. This will lead to an increase in costs for these companies, potentially making any new investments unprofitable. Alternatively, the increase in costs may be passed on to the consumer, which will lower demand for goods from companies that damage the environment.
Likewise, an increase in the money placed into Investment Accounts funding green companies will lower the cost of funding to these companies. Again, this benefit could be passed on to the consumer or reinvested. This will change relative prices, altering the demand for the products and creating a market mechanism that will lead people to favour products produced by environmentally responsible companies on price grounds.
A further aspect of the reforms that could benefit the environment is the removal of the growth imperative in capitalist economies. This would allow the kind of steady state economy favoured by many environmentalists. Indeed, one of CASSE’s (the Centre for the Advancement of Steady State Economics) fifteen policies for achieving a steady state economy is to “Overhaul banking regulations, starting with gradual elimination of fractional reserve banking, such that the monetary system moves away from a debt structure that requires continuous economic growth.”
Why does a reformed system lessen the growth imperative?
First, in a reformed system inequality should be lower as ‘rent’ is no longer being paid on the entire money supply. Lower inequality should lower borrowing and working hours by people previously attempting to ‘keep up with the Joneses’’.
Second, in a reformed system continuous borrowing is no longer required merely to maintain the money supply. Accordingly governments need not fear the deflationary effects of a credit contraction (although they will want to maintain a certain level of lending for other reasons) and so can remove any incentives that promote excessive indebtedness and as a result economic growth.
Third, as bank lending no longer increases the level of purchasing power in an economy, asset price bubbles in essentials should be less likely.
A low propensity for asset price inflation should lower the required levels of borrowing in order to purchase a house, which push people to work harder.
Fifth, any increase in a bank’s capital will not remove money from circulation, and loan repayments will not destroy money.
Consequently the growth imperative which applies to the current system (as postulated by Binswanger (2009)) will not apply. Even if some economic actors choose to hoard money in their accounts (effectively taking it out of circulation) the central bank can easily offset any negative effects by increasing the quantity of money spent into circulation.
This is an extract from the book Modernising Money which explains in detail how exactly can the monetary system be fixed.
Here you can read the Positive Money system explained in Plain English.