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Reforming Seigniorage the Key to a Sustainable Economy
By Eric Zencey
Eric Zencey is a novelist, essayist, and Visiting Associate Professor of Historical and Political Studies for Empire State College in Europe and New York. His writing in environmental history and political theory has been supported by grants from the Rockefeller, Guggenheim, and Bogliasco Foundations. This essay is from the forthcoming The Other Road to Serfdom: Essays in Sustainable Democracy (University Press of New England, Fall 2011).
Here is an excerpt..
Money that is created and spent into existence by the government does not create this equal-and-opposite burden of debt. At bottom, fractional reserve banking is a routinized, publicly funded machine for inflating speculative bubbles, based on the bizarre supposition that $100 of wealth can be made to support $1000 worth of claims upon it. It takes a lot of economic growth to produce $1000 worth of wealth in the future for every $100 worth that exists today.
One reason that economic growth can’t match the rate of debt creation is the ongoing decline in the energy-return-on-energy-invested, or EROI, of oil, our economy’s primary fuel. In 1920, one barrel of oil invested in drilling and production yielded 100 barrels of usable product—an astounding 10,000% return, large enough to disguise quite a few structural flaws in our system. But by the close of the twentieth century the EROI of oil had fallen, worldwide, to 20:1 (For newly discovered oil, it is even lower: 5:1, by some estimates). This decline is both an underappreciated root of our current economic downturn and a warning that we have to change our institutions–and the thinking that underlies them.
The decline in EROI is a portent that austerity in public spending is not a temporary passage from which recovery is possible, but something like the permanent condition of governance in the post-petroleum era. Oil’s 10,000% rate of return was magic. It created fortunes (think Rockefeller and Getty), fuelled philanthropy, and ultimately paid for a lot of public works: schools and bridges and roads, Medicare and Social Security, moon missions and foreign wars. Today, governments at every level are struggling to sustain their revenues and provide essential services, even as their tax bases decline as a result of the recession. Meanwhile, the disposable incomes of many Americans have tumbled, and Tea Partiers shout that they’ve been “Taxed Enough Already”—taxes being one sizable household expense which citizens of a democracy feel they ought to have some say over.
There’s room for hope in the fact that the best renewable energy technologies come close to matching today’s world-wide average EROI of oil. But no energy technology will ever again offer the heady returns of the early days of oil. As we enter a crowded, ecologically straitened, post-petroleum era, the need for sound, far-sighted public expenditure on infrastructure, including renewable energy infrastructure, has never been greater, while the resources to pay for it have never been more constrained. Capturing seigniorage is one way out of this conundrum, and phasing out fractional reserve banking is the best way to do that.
Think back to that unnamed goldsmith who first had the idea of making loans against money that belonged to someone else. Through one conceptual lens, the man was an innovator, a banking genius: the gold was just lying there, not being used, so why not issue additional notes against it? Through another lens, though, the man committed fraud: he treated as his own something that was not his to lend. The fact that we’ve had centuries of routine acceptance of that basic fraud doesn’t change the essential character of the act. And aside from the moral considerations that call into question the foundation of fractional reserve banking, there are also large practical reasons for changing our practice. The pyramiding of debt through fractional reserve banking is one strong driver of heedless economic growth, “growth for growth’s sake,” which has expanded our economy’s ecological footprint beyond sustainable limits. Returning seigniorage to its rightful owner is a strong step toward ecological, and civic, sanity. (link to article)
