How I’ve Responded to the Financial Crisis

by Andrew Fanning

Since reading Herman Daly’s “Nationalize Money, not Banks,” my head has been whirling with notions of how to help restructure the financial system to support a steady-state economy that respects ecological limits. The current system creates debt-based money by allowing banks to hold only a very small fraction of demand deposits while lending out the rest (with interest) to be re-deposited and then loaned out again (with interest), and on and on. Why is this so important? Besides according gratuitous profits to the private banks for producing money (a public resource that could just as easily be produced by a public institution), the fractional reserve system also creates a structural dependency on economic growth because, as Bill McKibben observes, “without the growth, you can’t pay off the interest.”

But the purpose here is not to repeat our dire situation. Instead, I want to share a plan that I’m using both to disentangle myself from the flawed financial system and to put pressure on the system to change. My plan consists of three steps.

Step 1: Get informed

“The process by which money is created is so simple the mind is repelled.” (John K. Galbraith)

Wow, did Daly say that the financial sector captures 40% of all profits in the United States? While I’m no authority on financial matters, I do have a master’s degree in economics and was even a teaching assistant for Macroeconomic Principles. Maybe I missed it, but I don’t ever recall hearing the term “seigniorage,” and we definitely didn’t focus students’ attention on the fact that “growing the money supply” is profitable. After reading “Nationalize Money, not Banks,” I was left with the familiar post-Daly feeling that I had been blind(ed) but was starting to see.

Fortunately, I received my copy of Enough is Enough in the mail shortly thereafter, and Chapter 8 (Enough Debt) provides more ideas on the issue of debt-based money creation and policies for reform. Also, issue no. 63 of the Real World Economics Review, a pluralist, open-access journal, offers excellent papers on the recent financial crises and money markets. So, having been acquainted with a number of alternatives to the current system, I was ready to roll on to the next step.

Step 2: Start worrying (more)

“Thus, our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess.” (Irving Fisher)

Cyprus recently joined Greece, Spain, Ireland and Portugal to become the 5th country in the Eurozone that has needed outside assistance to bail out its troubled financial sector. When the Cypriot authorities meet in early April to sign the agreement with representatives of the “Troika” (International Monetary Fund, European Commission and European Central Bank), every man, woman and child in Cyprus will effectively take out a €12,000 loan.

That sounds pretty bad, but actually, in the current system, the bailout should have been even bigger. In an unprecedented move that ought to shake the rotten foundations of the fractional reserve system, depositors holding more than €100,000 in Cyprus’ two largest banks have been subject to levies of 100% and 37.5%, respectively, in order to “recapitalize” their coffers. The original plan, voted down by the Cypriot parliament due in large part to public outrage, was to levy all depositors. This sends a very clear and ominous message to people (like me) holding deposits in the Eurozone: the governments of the Eurogroup — representing the world’s largest common market — have proven unwilling to fully guarantee demand deposits in this crisis. And if Europe can’t guarantee deposits, is there anywhere else that can really be considered safe?

Step 3: Take action

“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.” (Lord Acton)

There are two simple avenues for someone like me (or you) to take action against the banks.

First, I plan to continue using my voice as a citizen to spread the word concerning the inherent instability of the fractional reserve system and get involved with efforts to promote an alternative vision of a financial system — one that serves the needs of the economy and society, while respecting the limits of a finite planet.

Second, and more immediately, I wanted to get my deposits out of the system ASAP. If enough people stash their money under the proverbial mattress, then banks should get a warning message from their balance sheets that they need to finance more of their loans with real equity and long-term bonds rather than debt.

However, I found that I couldn’t easily abandon my checking account because that’s where my employer deposits my salary and where companies bill me for utilities. As a working compromise, my partner and I closed our accounts with Bankia — the giant Spanish conglomerate that has siphoned away more than half of the €40bn in bailout funds spent by Spain so far — and started banking with Triodos Bank.

Although Triodos still creates debt-based money from our deposits, they lend it to initiatives that benefit people and the environment, and what’s more, they publish each and every loan made. They are co-founders of the Global Alliance on Banking for Values, a network of 22 “values-based banks” that have recently issued a declaration calling for greater transparency, sustainability and diversity in banking. Consider the following excerpt:

Banks play a critical role in the transition towards a more sustainable economy. Therefore social and ecological criteria must play a critical role in the creation and use of financial products. […] Banks have to serve the real economy and include broader societal perspectives in their considerations.

Can you believe this is coming from a group of bankers managing more than $60 billion worth of assets?

My three-step plan isn’t exactly revolutionary, but it is helping to secure my own financial situation and putting pressure on the system at large. If enough of us take steps like these, the day will come when the Triodos perspective on banking is the norm.

Andrew Fanning grew up on the blustery east coast of Canada where he eventually earned a master’s in economics. His interests include lots of things, especially the capacity of the planet to support life.

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8 replies
  1. Pat.w
    Pat.w says:

    Excellent article! Hopefully co-op lending comes back in a big way and stays true to its values when big money is invovled. Why do we make entities rich\ bail them out insted of each other?
    As for bailouts which cleary do not work, why not take the icelantic approach and give the bailout money to the citizens to clear their own debts ( rather than give them new debts) and be re-invested. Can work for everyone with a few peramiters. Better than the alternative of funding the institution once as a consumer, again as a bailout, and then borrowing your own bailout money. Terming the “inverse investment”.

    ….. Blustery eastcoast?

  2. Andrew Fanning
    Andrew Fanning says:

    I think you’re, forgive the pun, right on the money. The idea of a citizen’s bailout is certainly attractive — but even if we avoid your aptly named inverse investment, the next fundamental step should be to reform the system so that the banks can’t bury the citizenry in debt again as soon as they get back to ‘business-as-usual’.

  3. Franzi Poldy
    Franzi Poldy says:

    I agree that a great deal is wrong with our monetary and banking systems and that, for the most part, there is no justification for the interest charged on bank loans. But, I want to comment on your claim, quoting Bill McKibben, that “without the growth, you can’t pay off the interest.”

    This very common claim is not true. It neglects the fact that money is a circular flow. Lenders do not just accumulate the interest they receive. Eventually they spend it – in return for goods and services – that is what money is for, otherwise it is on no use.

    Consider a steady state economy with a constant level of production and consumption of goods and services facilitated by a fixed stock of money which flows continually from consumers to producers (who are, of course, also consumers of other things). The money that producers receive is their income, and that is what allows them to pay for their sustenance as consumers. So, everybody contributes to the production of the goods and services consumed by the whole society.

    But, suppose one person saves some of his income (of course, while he is saving the economy is not in a steady state). If he can then lend his accumulated savings for interest (thereby returning them to circulation), he can obtain an income (which he spends on his sustenance) simply by virtue of being the lender. If his loan was large enough, his income from interest will cover his sustenance and he need do no other work. This continues as long as the loan is not repaid.

    Note that all this happens with a fixed stock of money. The economy is out of steady state while the would-be banker is saving but, once the loan is established, it returns to the steady state and interest is paid from then on. It is not an accumulating quantity; it is a diversion of part of the money flow through the lender’s account – but for no productive contribution to the economy.

    I think this example of interest in the steady-state is important because it illustrates very clearly the parasitic nature of finance, and why it should be paid for on a fee for service basis (filling in forms, connecting with sources, etc.) and not as a recurring percentage (interest) of the size of the transaction.

    Kalecki was a Polish engineer turned economist who once defined economics as “the science of confusing stocks with flows.” We’re still doing it.

  4. Andrew Fanning
    Andrew Fanning says:

    Franzi, thanks a lot for your insightful comment. You got me thinking about a few points in response.

    First, the quote from McKibben refers to debt-based money whereby a bank that lends me $10,000 creates that money by simply typing into their balance sheet the amount loaned as a liability and the amount deposited into my account as an asset. In real terms, nothing has changed until I actually go out and engage in $10,000 (plus interest) worth of economic activity in the real world to pay the loan. As I pay back the loaned amount, it’s really up to the bank to decide whether to make another loan or to hold the money at the central bank as reserves (out of circulation). In this sense, the vast majority of money is not a circular flow, but rather created and destroyed by commercial banks as they see fit.

    Second, I have to think more about the following, but my intuition questions why your steady state economy requires a fixed stock of money? Herman Daly suggests that the primary target variables of the monetary authority in a 100% reserve system would be the money supply and the price index. If the public voluntarily wants to hold more money and inflation is under control, then I think the government should provide that money (debt-free).

    Finally, with regards to saving. Some investment would be required in order to keep depreciating stocks of physical and human capital constant in a steady state economy. Investment could also be directed at shifting the composition (e.g. sectors) of a steady-state economy as long as total material throughput remains fairly constant. In both cases, there would likely be demand for credit and so, the way I see it, there would be a legitimate need for both savers and financial intermediaries in a steady state economy.

  5. Franzi Poldy
    Franzi Poldy says:


    I was commenting on the claim that growth is necessary to pay interest – not on the rights and wrongs of money creation. My example was intended to demonstrate that growth is not necssary. To strengthen my argument, I used the most restrictive possible situation – a strictly steady state economy with a fixed stock of money. Even in that case, the example showed that interest can be paid – indefinitely. Do you agree?

    The important point in the example is that it focuses on the flow of money. It is true that money is created and destroyed and, in that sense, is not in continual circular flow. But, at any particular time, it is the flow of the stock of money then in circulation that supports economic activity. Interest payments divert a part of that flow through creditors’ accounts. And, while it is true that banks may decide to “destroy” principal repayments, they do not destroy the interest payments they receive. Those are their profits, paid out as shareholder dividends, and they continue to circulate.

    The origin of the money loaned is irrevelevant to the ability to pay interest. Once an entitlement to interest is established, the interest can be paid – indefinitely – from the circuar flow of a fixed stock of money. This may not be just, or good policy, but it is not impossible.

    I did not say that a steady state economy requires a fixed stock of money. My example used a fixed stock of money in order to cover the most extreme case. Obviously, if interest can be paid from fixed stock of money, there will be no problem if the stock is growing.

    But, this does raise questions about what we understand by steady state. Obviously, there will be fluctuations. Economic activity may be lumpy (e.g. large infrastructure projects) and need financial support. But, smoothed over time, that does not introduce anything new. Nor is maintenance or the restoration of depreciating assets inherently different from other economic activity. The important point is whether there is systematic growth. Can an economy in which physical resource flows are capped have a systematically growing money supply? If this is not to be a recipe for inflation it implies that innovation can be a 100% substitute for resources. Perhaps, but I am skeptical. It also implies that we can measure inflation, which will be very difficult when price changes are due only to reorganisation of a fixed physical endowment.

    These are interesting and difficult questions, but they have nothing to do with whether growth is necessary for the payment of interest,

  6. Andrew Fanning
    Andrew Fanning says:

    Hi Franzi,

    I’m not very good at abstract thinking so thanks for helping me get past the details in order to see the larger point of your example. I think you’re right so maybe McKibben should have said “without the growth, you can’t pay off the loans [in a fractional reserve system]”?


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