In ancient Egypt for example, beer sometimes played this role, while in earlymedieval Sweden, dried fish was functioning as a de-facto currency. These goods were soon treated as the default means of payment. Metal currencies arose partially to structure up trade and create uniform rules, and also so emerging states should be able to pay their armies and bureaucracies. They also served a role as a disseminator of approved information, so everyone would know the identity of the people in charge. The reason for the choice of gold and silver was often that there was a state monopoly on the extraction of these minerals, that they were scarce and that they were thought to have magical-spiritual properties.
There were a few weaknesses with currencies based on noble metals however. The foremost of them was that their durability meant that they could accumulate into the hands of those controlling the land and providing towns with much needed food. This accumulation withdrew money from circulation which led to deflation – meaning that the value of money increased. This created an incentive to hoard money, and led to stagnation in trade.
During the Renaissance, families in the wealthy citystates of North Italy established banks which originally were providing gold storage in the trade between Italy and the westernmost point of the Silk Route – the Queen City Constantinople. A merchant in Italy could leave his gold at a Medici bank and take out a receipt, which he later delivered to the Medici office in Constantinople where he would receive an equal amount of gold to conclude the import of silk and spices.
Soon, the banks started to offer another service – loans at interest. The clients were most often governments in need of resources to be able to defend themselves, or to expand at the expense of their neighbors. Gradually, the demand for loans in the war-torn Europe of the 15th century meant that banks started to lend out more money (in the form of receipts) than gold and silver contained in their vaults, creating the foundation for fractional reserve banking, where the reserves of a bank are just a fraction of what the bank possesses in terms of its role as creditor.
This system made possible the establishment of European colonial ventures, of empires and of the Industrial Revolution. Capitalism as we know it would not have been possible without fractional reserve banking.
In 1971, the last aspect of the old metalbased system was scrapped when the US Dollar was disconnected from being backed by gold reserves. From then on until today, money has globally been a unit created by and backed by debt and credit and created through loans issued by banks.
Usually, people associate money with physical cash. The truth is however that less than five percent of all money exists in the form of cash, and physical money is gradually being phased out in most developed nations.
The benefits of fractional reserve banking and fiat currencies is that it is easy to make available credit for investments and growth, which means that interest rates generally are low and that companies and governments can develop infrastructure and technology continuously.
There are a few problems however.
The first problem, which plagued fractional reserve banking as a system for generations, was the (quite so legitimate) issue of trust. Bank panics often began when it became clear that banks were insolvent, leading to financial crashes and recessions every few years. The establishment of Central Banks helped to alleviate the worst excesses of the system, and maintain the mountain of debt constantly being pushed forward.
The Central Banks act as lenders-of-last-resort, supplying the private banks and business banks with credit so their insolvency seldom risks threatening their existence (and the well- being of the general economy). There are of course ethical and societal concerns with this arrangement, as it serves to collectivize the risks undertaken by major private entities. That means that when the pile of debts are threatening banks with bankruptcy, the public is punished for the mismanagement of the economy by the banks by having to bear the brunt of the costs – through stimulus packages aimed for financial institutions, and later through austerity, tax increases and reductions in public expenditure aimed towards bettering the situation for those who are in most need of such remedies.
The system has however been exceptionally resilient, and since 1929, we have only experienced few crises on a global level. This seeming stability is however dependent on another factor – exponential economic growth.
Why we are destroying the Earth
Exponential economic growth is actually about more than improving human livelihood on Earth. It is an imperative and a necessity for the continued existence of the current debt-fueled monetary system.Reduced growth forecasts are not only a threat to the well-being of the employees and businesses, but also a long-term threat to the very viability of the financial system.
Economic growth means that the economic activity must rise during this year compared to the last year in terms of the monetary value that is flowing through the system.Much of policy- making in the developed world is about maximizing economic growth. This inevitably leads to an economic system where there is an incentive to try to increase consumer demand, produce things as cheaply as possible and get them out on the market as fast as possible.
That culture is very problematic.
Because the most economically sensible cost-cutting solutions prioritized by a system that emphasizes economic growth above everything else, are just the kind of policies that are ravaging our planet, homogenizing her environments to suit the needs for agro-industrial activities, destroying fresh-water reserves and are responsible for the transformation of her climate.
In short, a monetary system built on debt is dependent on exponential growth and will collapse without it, since the debt will accumulate over time and needs to be continuously repaid. The wealth needed to repay the debt and grow the economy is to a large degree taken from the Earth, to the point that we are now destroying the biosphere. Therefore, we need to move away from this current debt-based currency system, and move towards a system based on how our planet’s systems are operating.