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Do trees grow on money? Photo: Tax Credits via Flickr (CC BY).
Do trees grow on money? Photo: Tax Credits via Flickr (CC BY).
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Reinventing money for a green and flourishing future

Duncan McCann

4th April 2015

Our system of money created by banks for their own profit is no longer fit for purpose, writes Duncan McCann. We need new money systems designed for sustainability and wellbeing that allow us all to achieve financial security and freedom from debt - not just the super-rich1%!

Money's power is in many ways rooted in its narrative: a culturally accepted narrative that says that those in credit are 'good', while those in debt are 'bad' - even though they are both opposite sides of the same coin.

To live a good life is more than merely to survive. It is to flourish: to have the possibility to exercise the capacities that make us fully human - like the capacity to love and enjoy romantic or family life, the capacity to take part in a culture through music, or the arts.

To have the time to relax, engage in leisure and if one so chooses, think about all the things that leading a good life truly entails.

But what of the role that money plays in generating wellbeing and happiness? It gives us the freedom to engage in activities we value for both materialistic and non-materialistic reasons.

What I am not suggesting is the idea that one cannot flourish without money. I think that the famous quote from Bobby Kennedy describing the limitations of GDP, which is basically the record of all monetized transactions in the economy, demonstrates quite clearly the importance and value we attribute to things that our money system or economy do not. GDP, he wrote,

"does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.

"It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile." 

Money as a 'social technology'

Money is neither predetermined in form, nor neutral in effect. It is, rather, a social technology that need not be fixed to any specific design features or rules. Of course, laws do prohibit certain activities and define money in certain ways, but these are themselves merely human constructs.

And the way that we conceive of and construct money empowers and enriches some, while disempowering and impoverishing others.

Money is one of human kind's greatest inventions and has been one of the enablers of our modern society. However the dominant monetary paradigm that we live in severely limits the availability of money - dictating that money should remain scarce in order to maintain its value.

The now discarded gold standard, abandoned in 1971, where notes could be exchanged for gold, is the best-known example of this philosophy of scarcity - an idea that has recently been revived by the bitcoin phenomenon.

Both of these money systems seek to artificially limit the amount of money in circulation, one based on the amount of gold on earth and the other limited by a computer algorithm unable to ever create more than 21 million units.

Scarcity plays an important role in relationships of power.  People who have money have more power than those who have to work for it, often selling their labour cheaply. Those who own and manage the money supply have even greater power.

Why should a lack of money be an impediment to needed activity when resources and labour are available? Michael Linton, founder of the Local Exchange Trading alternative currency systems in the 1970's stated: 

"There is no good reason for a community to be without money. To be short of money when there's work to get done is like not having enough inches to build a house. We have the materials, the tools, the space, the time, the skills and the intent to build ... but we have no inches today? Why be short of inches? Why be short of money?"

Or, as Milton Friedman put it: "It need cost society essentially nothing in real resources to provide the individual with the current services of an additional dollar in cash balances."

Daddy, where does money come from?

Since the 1980's the world has seen a huge expansion in money systems, driven by increased de-regulation of the banking sector and the advance of modern technology. However the money that was created in the great expansion was of a very particular kind, notably bank credit money.

Most money, over 95% in most economies, is created by commercial banks when they make loans, not by central banks or other state actors. This is a new - or, more accurately, rediscovered - understanding of  money.

It has exposed the fact that the governments, through their central banks, do not decide where and for what purposes new money should be allocated. Rather, 95-97% of money is created by banks at the point of making loans. The UK's Bank of England finally made this clear in 2014, making it one of the first central banks in the world to explicitly state that: 

"In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower's bank account, thereby creating new money.

"Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money."

It is worth re-reading these statements because, as Galbraith stated, "the process of money creation is so simple that the mind is repelled." To put it bluntly: banks create money in the act of issuing loans.

Banks make money for their own profit - not the greater good

The money 'lent' in this way does not exist prior to the loans being made. And the way that money is distributed throughout the economy is dictated not by social need, but by the commercial interests of private financial institutions.

However this huge expansion has not freed everybody to flourish and pursue the activities they most value. So what reasons could explain why we have not created money that enables the key goal of human flourishing?

The money created by the banks has been one of the key factors fuelling our unsustainable consumption, leading to both environmental degradation and ‘affluenza', an obsessive, envious, keeping-up-with-the-Joneses, as the psychologist Oliver James puts it, that has resulted in huge increases in depression and anxiety among many millions of people.

Worse still, through their lending practices banks have directed credit into assets like property, thereby inflating their value. This has enriched the rich, and impoverished those who do not own assets. The revolution in easy credit has also been at the core of the dramatic increase in the levels of inequality in western societies.

Another major impact of the fact that society basically has to ‘rent' the majority of the money supply from the banks is the significant effect of interest payments on prices of all goods and services. Although the impact will vary according to the specific goods or service, at a macro-economic level the burden that society has to meet is considerable.

Mainstream economists are mysteriously ignorant about money

Few economists and progressive thinkers have sought to address money systems as a way of changing society and enabling the flourishing of the people within it.

This is due mainly to the misconception of money as a neutral veil, which merely acts to lubricate the system without directly impacting on or altering it.  This has led to the current situation where money and the banking system more generally are not even included in the models created by economists to understand the economy.

This is perfectly exemplified by a recent article written by renowned Nobel prize winning economist Paul Krugman when he wanted to make clear to his readers that "money is neutral in the long run."

However a new cohort of thinkers are re-examining the nature and role of money, coming up with some interesting findings and designing alternatives. Money is indeed the opposite of neutral, it gives a huge amount of power to the banks that are able to create and allocate new money.

Money also tells us what we should value. This is one of the reasons why society seems incapable of acknowledging the fundamental importance of the core economy (the non-monetary economy of families and community members doing things for each other as non-reciprocal gifts). And it's also why our economy seems to value the services of a banker more than a nurse, more than a stay at home parent.

Money and debt are two sides of a single coin - but one is 'good', and the other 'bad'

Money's power is in many ways rooted in its narrative: a culturally accepted narrative that says that those in credit are 'good', while those in debt are 'bad' - even though they are both opposite sides of the same coin.

Money also has a strong psychological effect on people. Studies have shown that just touching money makes us more tolerant of inequality and that seeing a picture of money makes us more so. On a more serious note, a study showed that lack of money actually impedes cognitive functions, with the effect being as much as 10 IQ points.

Flourishing requires systems to be stable because severe crashes, recessions and depressions are one of the biggest factors limiting human achievement - this is because the availability of money and many of the core support structures are eroded in these times of crisis.

However, as with all systems designed for maximum efficiency, our monetary monocultures are inherently at risk of crashing because of their lack of resilience. Systems thinking shows us that there must be diversity in order to achieve resilience.

A good analogy is the modern agricultural system that is optimised for efficiency by growing single crops over very large areas. Although in the short term, this has produced the desired results  - these crop systems remain very vulnerable and only survive by ever increasing inputs into the land, like fertilisers, pesticides and herbicides.

Is our money fit for purpose?

Similarly, our money system requires constant growth. Thomas Greco puts it very eloquently when he states that it is "the compounding of interest and increasing indebtedness in both the private and the public sectors that is the primary driver of economic growth. But this growth misallocates resources and prevents the emergence of a sustainable and equitable economy."

There is an ever-growing community of people working on reforming a money system that has become dysfunctional and no longer fit for purpose. These reforms range from a root and branch redesign of national money systems,  advocated by the likes of Positive Money and the New Economics Foundation, to those who would prefer to see better regulation of the existing system by controlling the worst excesses of the system.

Although this is a vitally important area, the most interesting innovations in money systems are not occurring at the national level but in communities around the world. Although impossible to accurately estimate, there is good evidence that there many thousand such systems in operation around the world.

I now want to highlight some of the most interesting experiments and see how they have contributed to a flourishing society rather than impede it. The examples that we are going to look at come from Kenya, Brazil, Italy and US. A book due out in May, People Powered Money, will explore some of these innovations and ideas in more detail.

There are alternatives - lots of them!

In Brazil there has been a revolution in community banking with the creation of the Banco Palmas in Fortaleza that has been issuing interest free microloans in a local currency call the Palmas since 2000. The objective of these loans was to enable more local production, through the creation and expansion of small and family owned businesses as well as to encourage people to spend their money with local businesses.

Because the currency was only accepted in local shops the money circulates solely within the community, thereby promoting local commerce, increasing the circulation of wealth within the community, and generating both employment and income.

In Sardinia, Italy, there is a new currency, the Sardex, which is helping to regenerate local small and medium sized businesses in the region, without needing to go into more debt. is a business to business clearing system.

Launched in 2009, it uses the Sardex as a complementary currency for transactions. This is an example of trade, or barter, exchange, where businesses within the network can trade with each other without using the Euro. In this system every enrolled business determines, on a yearly basis, the amount of goods or services they want to make available to the exchange network.

When they need goods or services, firms can contact each other directly via the online marketplace or discuss the trade opportunities with a broker. After a transaction has taken place, the online account of the seller receives the Sardex corresponding to whatever was agreed with the buyer for the good or service exchanged.

The main aim of the currency system is to revitalise the local economy during the financial crisis. was introduced as a means to facilitate economic transactions and create new economic opportunities between local enterprises that were heavily affected by the financial crisis. In practice it offers new ways to increase a business turnover as well as save Euros.

Whilst this may seem alien to the idea of flourishing, a vibrant local business sector is vital, because without it comes a stagnant economy, unemployment and a lack a disposable income to spend. This is especially true of small and medium businesses as they account for the majority of employment and economic activity in most countries and regions.

Time banks and phone cash

The Dane County TimeBank is a network of individuals and organisations in Dane County, Wisconsin, USA, working to increase efficiency, opportunity and resource sharing through mutually beneficial exchange as well as building community ties and community self-sufficiency.

TimeBank members are a caring and interconnected community of people who help each other by sharing their abilities, talents, and experiences. By both giving and receiving, people learn to appreciate the value of each and every member and also come to believe in the value of their own contribution.

This time bank was launched in 2006 and has been very positively received by the community - it has the highest number of participants of any timebank in the world with over 1900 members, and a turnover of 60,000 hours since 2006

Finally in March 2007, the leading mobile phone company in Kenya, Safaricom, launched M‐PESA, an SMS-based payment system for e-money that allows individuals and businesses to deposit, transfer, and withdraw funds using their cell phone, to anyone with another phone.

Between 2007 and 2013, Safaricom has rolled out more than 78,000 mobile payment agents nationwide. It is now the world's most successful mobile payments platform with over 18 million registered users. In July 2013 M-Pesa transactions accounted for a significant portion of Kenyan GDP.

One of the main impacts of M-Pesa has been to provide the un-banked with access to secure and affordable financial services. The use of mobile phone financial services, which was at a rate near 0% in 2005 rose to 28% to in 2009 and then to 68% in 2013, with 40% of those users not having access to a bank account otherwise.

As well as facilitating remittance payments within Kenya from the urban working to the rural poor, Safaricom M-PESA's customers can now receive international money transfers.

Making money work for us

Therefore, as we have seen, money is not a homogenous thing that we can directly link to flourishing. What in fact needs to happen is the development of a deeper understanding of the nature of money and the huge range of possible features and goals that it can have.

Society needs to urgently reform the national money system in order to mitigate against the destructive effect of the bank debt money that currently forms the majority of our money supply.

At the same time, we need to embrace and create new money systems that focus on enabling us to achieve our goals and maximize our potential.



Duncan McCann is a researcher at the New Economics Foundation working on rethinking money and finance so that it meets the needs of people and the planet.

This article is published under a Creative Commons Attribution-NonCommercial 3.0 licence.

Creative Commons License


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