How Banking Harms the Environment

 Money Creation and Economic Growth

One of the greatest pressures being placed on the environment today is due to the need to sustain the required economic growth that ensures the stable functioning of our current economic system. Since the beginning of the industrial revolution, economic growth has been accompanied by increased resource use and pollution as well as more general environmental destruction.

One of the fundamental system drivers that force economic growth on us is the debt-based money system. Under this system debt is not a choice – for there to be money, there has to be debt. The system is based on ensuring access to credit (i.e. debt) for government, businesses, and individuals, who all borrow money from the banks. Currently, the total debt owed to banks stands at £2.1 trillion. In order for a business or an individual to borrow they are required to present either collateral or evidence of future earnings.

To then service that debt requires future earnings over and above what is required merely to continue the existing level of economic activity. So economic growth, often in the form of more debt, must accompany debt service. In addition in order to ensure growth, anytime that the money supply contracts or declines, more borrowing is needed to create the additional money required to service the debt and enable economic growth.

Herman Daly, the eminent economist, and environmentalist, expressed this perfectly when he said:

We are accumulating more and more debt to finance economic growth, and we need more future growth to repay the debt

Herman Daly

GDP and the Environment

So what exactly should be growing, how big should it get and what does this mean for the environment?

The standard response is the growth is measured by a change in Gross Domestic Product (GDP) and that it should become as big as possible through steady and sustainable growth, usually considered about 2-3%. There are 4 main components of GDP: consumption, investment, government spending, and net exports.

However, what lurks behind the mask of these small and steady increases is in fact exponential growth.

The greatest shortcoming of the human race is our inability to understand the exponential function

Albert Bartlett, 2004, The Essential Exponential: For the Future of our Planet

Exponential economic growth has huge implications for resource use, pollution, and environmental destruction. It has been remarked that anyone ‘who believes that you can have exponential growth on a finite planet is either a madman or an economist

It is vital to remember however that GDP is a quantitative measure and not a qualitative one meaning that it tells you nothing about the distribution, ethics, or societal value of the activity performed.

A telling example of how GDP growth does nothing to restrain environmental destruction is that even something as undesirable as the Deep Water Horizon disaster of 2011 contributed positively to GDP growth because additional goods and services were required to clean up the mess. In the same way, the extraction, use, and disposal of finite natural resources register as an addition to GDP rather than being recorded as a negative depletion of humanities resources. This led environmentalist Paul Hawken to comment that:

At present we are stealing from the future, selling it in the present, and calling it GDP

Paul Hawken

Economic Growth resource use and pollution

As stated earlier economic growth has always correlated directly with increased consumption of resources and pollution generation. A clear example can be provided by the graph below which looks at CO2 output over time against growth.

The only way around this dilemma is to focus on the principle that economic growth can be decoupled from resource use and emissions. This decoupling can be either relative, more efficient per unit of activity, or absolute, reducing the overall usage or emissions of a substance. Only absolute decoupling can offer us any hope of accommodating constant growth since relative decoupling still leads to an overall increase in the volume of material or emissions used and produced.

There is plenty of evidence of relative decoupling and the data shows that we are using fewer resources, less energy, and generating less pollution per unit of activity than we were 25 years ago. There is however scant evidence of any absolute decoupling at a system level. Indeed the overall trend is that of increased use of most of our resources.

This was predicted by William Stanley Jevons who in 1865 observed that technological improvements that increased the efficiency of coal use led to the increased consumption of coal in a wide range of industries. He argued that contrary to common intuition, technological improvements could not be relied upon to reduce consumption. This is clearly illustrated in the graph below which shows that over time the world has been consuming more and more of certain resources despite our achievements in efficiency.

Economic growth, therefore, has historically always meant an increase in pollution and resource use. It is vital that we question the current demand for growth and recognize that a sub-system, the economy, of a finite system, the earth, cannot grow, in physical terms, indefinitely.

Bank lending and the environment

Over the last decade, commercial banks have created over £100 billion per year, which is the equivalent of everything that we spend on the NHS in 1 year. How do they decide who to lend to and that has a positive effect on the global environment?

The very short answer is that they decide based on the economic returns of the project, the risk to the lender, and the profile of the borrower. The concept that this money creation should produce long-term positive social and environmental benefits is never considered relevant to whether to make the loan. This results in the debt-based money created not only having an adverse impact on the monetary system but also, in many cases, either actively harming the future prospects of the human ecosystem or, at best, having very little discernible impact.

Another travesty that has been identified is that banks in fact lend only a tiny percentage, 8%, to the productive economy, ie entities that contribute to GDP. The rest of the 92% fuels asset bubbles, like property, and encourages speculation by making the necessary resources available.

But growth in GDP is good for society (and by extension the environment)

All this being said surely we just need to accept that there are some negative impacts to growth but overall it benefits society and ensures prosperity. Although this was the case in the past it has now been shown that

Economic growth for so long the great engine of progress – has, in the rich countries, largely finished its work

Wilkinson & Pickett, 2009, The Spirit Level, p.5

In the charts below you will see how, in developed countries, increases in GDP alone have very little impact on many quality-of-life measures. In fact, the research shows that once a society has reached a certain GDP per capita further increases in it do little to affect these measures. The key is instead income inequality. 

We should consider ourselves fortunate that just as we learn that the earth can no longer sustain further increases in resource use and emission, we also learn that additional GDP growth does not deliver improvements in measures of health, happiness, or well-being.

We, therefore, need to move away from a debt-based money system to allow us to move towards economic systems that do not require growth. This will enable us to focus on the activities that will really benefit both humanity and the environment.