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Limits To Growth And Fractional Reserve Banking

By John Scales Avery

20 February, 2012

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 very suddenly?

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 transport.

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 unemployment.

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 all.

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). (Internet Archive Gutenberg)

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 Publishing, (1998).

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 (1994).

John Scales Avery is a theoretical chemist noted for his research publications in quantum chemistry, thermodynamics, evolution, and history of science. Since the early 1990s, Avery has been an active World peace activist. During these years, he was part of a group associated with the Pugwash Conferences on Science and World Affairs. In 1995, this group received the Nobel Peace Prize for their efforts. Presently, he is an Associate Professor in quantum chemistry at the University of Copenhagen


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