The Growth Imperative and Sustainability by Hans Christoph Binswanger, November 12, 1988

Growth imperative and sustainability − recognizing the conflict as a prerequisite for its resolution
Lecture as part of the lecture series on post-growth economics at Carl von Ossietzky University Oldenburg on November 12, 2008
by Hans Christoph Binswanger, St. Gallen[This lecture posted in November 2008 is translated from the German on the Internet, http://www.postwachstumsoekonomie.org/Binswanger-Vortrag-OL.pdf.]

Our entire economy is geared towards growth. It is fundamentally subject to a compulsion to grow and, in addition, a drive to grow. Compulsion to grow means that the alternative to growth – or, more precisely, to minimal growth – is contraction. I explained this in my book “Die Wachstumsspirale” (The Growth Spiral). In the meantime, the growth spiral has, so to speak, overturned. It has gotten out of hand and degenerated into a financial bubble that has led to a financial crisis.

Based on plausible assumptions about the relevant variables, I estimate in my book that the global—I emphasize: the global—minimum growth rate is 1.8%. The effective global growth rate over the last decade was approximately 5%. However, it is likely to fall below zero in 2009.

However, if, as is more likely, the many support measures taken by central banks and governments help to overcome the crisis, this will lead to a new revival of growth, but also soon to new signs of crisis, the formation of new bubbles, and/or inflation. This will also be caused by rising prices for natural resources, especially oil and food. The signs of such an inflationary rise in resource prices have receded due to the financial crisis, but will certainly become virulent again when the drivers of growth reassert themselves. The International Energy Agency in Vienna expects oil prices to reach $200 per barrel in the foreseeable future. The idea that we are automatically striving for qualitative, i.e., resource-conserving growth is, in any case, an illusion. A clear indication of this is the steady increase in sea freight in tons. Over the last 10 years, this has increased by approximately 60%, outpacing gross domestic product. The increase in carbon dioxide emissions, which is currently at the forefront of the discussion, is also continuing unabated.

In 2007, humans emitted more carbon dioxide than ever before. Over the past 10 years, emissions have risen by 22% despite the Kyoto Protocol. This means that we will no longer have it as comfortable as we have had it in recent decades. Rather, we will have to deal with crisis situations in one way or another, or with crises that could threaten our very existence.

It is therefore worthwhile to think more fundamentally about our economic system than has been done so far. The most important conclusion is that if we want to understand the modern economy and its inherent tendency toward constant growth, we must include money and the endless creation of money in our explanation of how it works.

Money matters! In money—both in its origin and in its effects—there is, in a sense, a hidden magic that enables and drives constant growth, a magic that can be described quite rationally, but which nevertheless remains magic.

Without taking into account this magic that prevails in the realm of money, the modern economy cannot be explained and cannot be reformed in the spirit of sustainability. First, we need to know what money is, what money is today. Money is anything that can be used to pay. Today, you can pay with banknotes, i.e. paper money, as well as with demand deposits at banks, i.e. with credit balances that are booked to current accounts at banks. This is why we also refer to bank or book money.

Bank or book money can be redeemed in banknotes, but banknotes can no longer be exchanged for gold coins as they used to be. The last remnants of such an exchange obligation disappeared at the beginning of the 1970s.

Since then, the central bank has been able to make deposits available to banks in central bank accounts without regard to any gold reserves, which can be converted into banknotes. In this way, the amount of money – central bank money and bank or book money – can always be increased. This is referred to as money creation. This can continue indefinitely without reaching the limits that used to be set by limited gold reserves. Today, approximately 95% of the money supply is book money, and only 5% is banknotes and coins.

The trick of money creation is that it both provokes real GDP growth and, if growth continues, enables a constant increase in profits – monetary profits – which make growth attractive. Money creation is therefore worthwhile both in terms of real and monetary values.

This gives economic growth a magical appeal. How does this reward, this magical appeal, come about? This is the crucial question that conventional economics avoids, but which must be asked if one really wants to understand the growth process, which continues to develop in a spiral form. I will proceed in four steps to explain this development.

First step: The principle of money creation: Debts are transformed into money. The starting point for our considerations is the observation that banks do not simply transfer money saved by someone to those who need money, i.e., they do not borrow money from one person to lend it to another.

They are not just intermediaries. Rather, as already mentioned, together with the central bank, they create money. They are producers of money. They constantly create new money. How does this happen? Money is created through credit creation, i.e. by banks crediting the loan amount to borrowers – mainly businesses – in a checking account.

This loan amount is a deposit with the bank, which is referred to as a demand deposit because it can be accessed without prior notice, i.e., on demand. The bank’s loan to the company is a debt owed by the company to the bank. However, the company’s credit balance with the bank, the demand deposit, is also a debt, namely a debt owed by the bank to the company. It is recorded on the liabilities side of the bank’s balance sheet. Why?

Because the bank is obliged to redeem this credit balance on demand in banknotes from the central bank. At the same time, however, this debt is money, namely bank or book money. Because bank or book money can be used just as easily or even more conveniently – through transfer orders or with the help of credit cards – only a small portion of it is redeemed in banknotes. It therefore remains as demand deposits of the borrowers at the bank and thus as a debt of the bank.

Bank or book money therefore constantly increases with the debts of companies and the debts of banks, i.e., through mutual indebtedness between companies and banks. This can be illustrated by showing the credit transaction, e.g., of 100 monetary units, on a bank balance sheet and a corresponding company balance sheet.=

Bank debt
= Money (book money)
+100
Bank loan =
Company debt

However, it is important to note that the bank’s debt and the company’s debt are asymmetrical. The borrower, i.e. the company, must repay the debt and pay interest for as long as it remains in debt. The bank, on the other hand, only has to repay a small portion of the debt, namely the (small) portion that is redeemed in banknotes. It does not have to pay any interest on this debt, or only a very small amount. Why not? Because its debt is money!

But what about the central bank’s banknotes? To a (small) extent that book money is redeemed in banknotes, their quantity increases—albeit to a much lesser extent—in parallel with the expansion of the amount of book money, as the central bank makes central bank money available to the banks by way of credit—more precisely, by taking over part of the loans that the banks have granted. The banks thus incur debts with the central bank. They pay interest on these debts. However, central bank money, i.e., the central bank deposits of the banks or the banknotes, is also a debt—a debt of the central bank. It is recorded on the liabilities side of the central bank’s balance sheet because the central bank originally had to redeem it in gold. Here, too, we are dealing with a mutual debt, namely a debt owed by the banks to the central bank and by the central bank to the banks. Since the obligation to redeem central bank money in gold or silver coins was abolished, central bank money is a “perpetual” debt that the central bank never has to redeem. The central bank also does not (as a rule) pay interest, because the central bank debt represents money for the banks – and, if it is redeemed in banknotes, also for the public.The result is that since the only barrier to the issuance of book money by banks is its redeemability in central bank money or banknotes, but these no longer have to be redeemed in be redeemed in gold, and central banks can therefore provide banks with unlimited central bank money or banknotes, our entire monetary system today is based on the multiplication of “perpetual” debts. “Perpetual” debts, i.e., debts that never have to be paid, can be multiplied infinitely! In this way, debt becomes money, i.e., assets that accumulate indefinitely. This is the essence of the magic that reigns in the monetary system: a minus (-) equal to debt becomes a plus (+) equal to (monetary) assets.

Second step: The metamorphosis of money: The growth of the money supply is transformed into real growth

The decisive factor in the metamorphosis of money into real goods is that the loans granted by banks are essentially used by the borrowers, i.e. the companies, to invest, i.e. to purchase additional raw materials, energy, and labor, and to use them to increase production, because they want to earn money by producing goods that they can sell. Thus, even if only retrospectively, the newly created money becomes redeemable – not in gold, but in additionally produced goods. Although this is normally associated with a slight increase in the price level – referred to as creeping inflation – the volume of production increases more strongly.

Money creation does not simply evaporate into inflation. Rather, money creation leads to real value creation, i.e., to real GDP growth. This is the modern metamorphosis of money, i.e., the transformation of money into real goods. In this way, money, which is (monetary) wealth, also becomes real wealth.

Third step: The perpetual motion machine: Money creation leads to an increase in profits via value creation – and the increase in profits enables further money and value creation

The crucial point now is that in order for the transformation of money creation into real value creation to succeed, the companies that take out loans in order to invest must be able to generate a profit from which the interest on the loans can be paid and which also includes a net profit that covers the risk associated with every investment. The investment risk arises from the fact that the investments will only mature in the future, as the goods produced as a result of the investments cannot be sold until tomorrow, because they can only be sold once they have been produced. However, labor and other production costs must be paid today. The future is always uncertain. Without the prospect of a profit, i.e. without the expected value of the profit being positive, companies will not invest, i.e. they will not take the risk.

This must apply on average to all companies if the economy is to function. This means that the chance of a profit must always be greater than the chance of a loss. The expected value of profit in the overall economy must therefore be positive. However, this is only the case if the frequency of profit has always been greater and continues to be greater than the frequency of loss, i.e. if, on average, i.e. on balance, companies have always made and continue to make profits. How is this possible? That is the question!

The profits of the enterprises are basically equal to the difference between the enterprises’ income and expenditure – more precisely: between the income and the expenditure of the companies for the manufacture of the products from which the companies generate their income, i.e. equal to the difference between revenue and costs. In order for the companies together to make a profit on balance, the combined income of the companies must always be greater than the combined expenditure of the companies.

How is this supposed to happen? It is obviously not possible if the money that the companies pay to households for their production services, which becomes their income, is simply used again by the households to buy the products that the companies have manufactured with their help, i.e. if the money just goes round in circles. Because then the income and expenditure of the companies would always just balance each other out. There would therefore be no positive profit balance in the sum of profits and losses.

It would then be impossible to pay interest or generate net profits that cover the risk of capital investment. A positive profit balance and thus the possibility of paying interest on borrowed capital and generating net profits on equity that cover the risk can therefore only arise in the economy as a whole if money flows in.

But how does money flow in the modern economy? We already know: by companies taking out loans from banks, which the banks provide at least in part through money creation, i.e., by increasing the money supply through credit. Companies need the loans—I repeat—to invest, to use the borrowed money, together with the reinvested net profit, to purchase additional labor and other production services. In this way, the incomes of households as providers of these labor and production services rise with the growth of the national product, and the revenues of companies rise with the incomes of households, which they spend on purchasing the products that the companies have manufactured.

It should be noted here that Households immediately spend their income that is not saved on the purchase of the products manufactured by the companies, because households have to survive. They therefore immediately become revenues for the companies, resulting from the sale of products to households.

At this point, however, companies can only sell products that have already been produced, i.e., that they manufactured before the new investment and for whose manufacture they therefore spent less money than the amount of the new investment.
The income effect of the investments thus occurs before the capacity or production effect. However, this also means that the enterprises’ revenues increase before the expenses for the products they sell.

This results in a constant profit in the economy as a whole, i.e., in the balance of all profits and losses. These are the first three steps in explaining the growth spiral and the magic behind it. The economic cycle expands into a growth spiral. In this way, the growth process keeps itself going with the help of new debt, which turns into money. It becomes a perpetuum mobile. It generates the profits necessary for this spiral to continue expanding, while the expansion of the spiral enables further profits — always in connection with steady growth in real production and real income.

But now to the fourth step: GDP growth leads to a compulsion to grow. The compulsion to grow is complemented by a constant urge to grow.

The growth process must—and this is the flip side of the coin—continue indefinitely, because if there is not a constant expansion of the money supply due to new investments that generate additional demand, the increase in supply resulting from the last investment falls on deaf ears, so to speak.

Then there is no corresponding increase in demand to match the increase in supply that has already taken place. The capacity or production effect of investments made in the past period occurs without being absorbed or justified by the income effect of a new investment. Accordingly, the profit rate declines.

If further investments fail to materialize in the future, the profit rate will eventually fall below the minimum level that companies and investors expect in return for taking the investment risk. The risk is no longer covered. Companies will then no longer make replacement investments and will gradually phase out production.

Ultimately, interest payments can no longer be made. An ever-increasing proportion of companies will make losses and therefore go bankrupt and exit the production process. Economic growth is then replaced by continuous economic contraction. The growth spiral reverses and leads to a “contraction spiral.”

This results in a growth constraint in the sense that if a minimum growth rate is not achieved, the alternative to growth is contraction. In other words, stability and zero growth are not possible in today’s modern economy. Under the given conditions of our monetary system, there can be no end to growth. This compulsion is, so to speak, the price we have to pay for the magic that characterizes our monetary system with its inherent economic growth.

The compulsion to grow is accompanied by a drive for growth. This arises from the fact that companies and equity investors, i.e., above all, shareholders, i.e., the equity investors in stock corporations, want to achieve not only a minimal but the largest possible net profit when they take the risk of investing. This pursuit of profit maximization is reinforced by the fact that the value of equity or shares is equal to the present value of the sum of the expected future profits discounted at the interest rate future profits discounted at the interest rate, and because the profit expectation and thus also the dividend expectation is higher the greater the investments are, i.e. the greater the growth in production is. This applies to all companies and therefore to the entire economy.

However, the drive for growth does not stop at promoting real growth. Rather, in the dynamics of money multiplication, bank loans are also taken out that do not serve to finance productive investments, but rather to purchase financial assets that represent assets, namely those that can be expected to rise in price if demand continues to increase due to the constant expansion of money. If you buy them now, you can therefore achieve a capital gain for free, so to speak. This applies in particular to shares. It is therefore worthwhile to go into debt, i.e., take out loans and pay interest on them, if the interest rate is low and the price increase is higher than the interest rate. However, this is of course speculation. It is particularly risky because the interest rates on the loans taken out for speculative purposes may rise. This is the case when the central bank only grants loans for the provision of central bank money, which the banks need because of the expansion of their loans, at higher interest rates. Then the interest rates that the banks charge for their loans also rise. Central banks raise interest rates when they– precisely because of the expansion of the money supply due to speculation – fear inflationary developments. In this case, the bubbles burst.

But what if there were no financial crises? Would everything then be in order? No, because the pressure and urge for growth can only be satisfied if there are sufficient natural resources from which to obtain the raw materials and energy that form the basis of production. The rule here is that raw materials and energy sources can be extracted from nature and the soil sterilized without the owner having to pay anything for it. The consumption of nature is free. This is equivalent to a debt to nature that does not have to be repaid. This makes it lucrative to acquire as many of nature’s resources as possible and use them productively, because the greatest profits are naturally generated where you can sell something that you did not have to buy, that you could simply take possession of without paying for it.

However, economic growth is increasingly confronted with the long-term scarcity of nature, because the world, and thus nature, is not infinitely large. Its use cannot therefore be expanded at will. In contrast to paper and bank money, which humans are able to produce themselves, the world –nature – is given to humans and is therefore limited. Humankind should therefore use it sparingly, i.e., manage nature sustainably. However, this imperative is countered by the pressure and urge for growth. The ecological conflict is inevitable, or rather, we are already in the midst of this conflict.

When viewed in the light of day, the economic growth spiral is a so-called snowball system based on the fact that profit payments to earlier investors are fed from the payments of new investors. Old debts with new debts. However, unlike a pyramid scheme, which is repeatedly launched through fraudulent chain letter campaigns, the macroeconomic pyramid scheme of the growth spiral generates real profits and income growth because nature is forced to play along. As I said, the debts to nature do not have to be repaid. But if nature no longer plays along, i.e., if natural resources and our living space become scarce because we do not manage nature and its services sustainably and thus waste them, this will also have an economic impact. Resource prices will tend to rise, either further fueling inflation or reducing corporate profits and household incomes.

At the same time, the costs of repairing nature will increase, insofar as repairs are even possible. Or we will lose the direct benefits of nature, such as good air, clean water, beautiful landscapes, biodiversity, and a climate that is compatible with human life. This also threatens to undermine the foundations of our existence.

What can be done in view of this multiple vulnerability of our economy to crises? As I have already said, the pressure to grow cannot be eliminated as long as we want to maintain, for good reasons, an economy based on independent enterprises that invest in the market on their own initiative but are also exposed to risk. No one will provide money as capital, i.e., as an advance, if they can only expect to get back the same amount they put in. They would rather keep the money in their hands than expose it to risk!
Once we have recognized the pressure to grow and, above all, the urge to grow, we can significantly reduce and qualify it. The goal can and must be a sustainable economy.

I don’t have a ready-made recipe for such reforms. But there are at least some pointers. I would like to highlight just one here: it is about reforming the monetary system to reduce the pressure to grow.

There are currently three ideas for such a reform on the table:
• the idea of so-called full reserve banking by Joseph Huber and James Robertson, which is based on Irving Fisher’s proposal for 100% money,
• the idea of a basic income by Goetz Werner,
• the idea of demurrage money by Silvio Gesell.

One can imagine a further development of our monetary system that incorporates all three ideas in a certain way. The starting point could be the idea of full reserve banking reform. According to this proposal, the central bank is granted the exclusive right to create money by requiring banks to cover demand deposits, i.e., book money, in full, i.e., 100%, with central bank deposits or banknotes. This is intended to and can prevent an endless increase in the money supply, whether in the form of speculative bubbles and/or inflationary price increases. While the central bank today has little choice in a crisis but to act as a “lender of last resort” and take over even bad loans from banks in order to prevent the collapse of the monetary system, it should be able to prevent such a collapse by taking responsibility for the entire money supply, it should be able to prevent such a collapse and keep it within ecologically acceptable limits.

The question is, however, who receives the additional money? There are three answers to this question. Irving Fisher’s answer is: the banks. In this way, they can grant loans to the extent of the increase in central bank money supply – but only to that extent. The central bank charges the banks interest, which the banks use as a guide for their own lending. The state continues to borrow from the banks and pays interest.

Another possibility is to grant additional central bank money exclusively to the state without interest. This is the proposal put forward by Joseph Huber and James Robertson. The state could reduce taxes by the same amount, thereby increasing the disposable income of households and businesses, or it could use the money for expenditures for which it previously had to borrow at interest. This would reduce the government’s interest burden and thus also relieve the taxpayer. The interest rate on the credit market would then be determined solely by the supply of savings. However, demand would also decrease because the government would take out no or only small loans from the banks.

A third option is to distribute the additional central bank money to all households. This would be an approach to a basic income or a supplementary income in the sense of Götz Werner. It could be designed as demurrage money, according to the idea of Silvio Gesell. This means that if it is not used immediately, it loses a certain percentage of its value each year. However, it retains its value if households lend it to banks for a longer period of time. Households would not receive any interest, but the money lent would retain its full value, including inflation compensation.

When the loan expires, households could dispose of it again. Due to such interest-free loans received by banks, the interest rates that banks charge companies could be kept below the level they would have to charge if only the saved money were available.
With such a system, households as lenders—which makes this system particularly attractive—could have a say in where and for what purpose they want to invest, including in environmentally sound ways, without different interest rates or profit prospects influencing their decision. This would indirectly contribute to strengthening consumer sovereignty.

Whichever solution is chosen, the intention must remain, on the one hand, to enable companies to generate a profit that at least offsets the risk they take with each investment through the the possibility of a certain amount of money creation, enable companies to make a profit that at least offsets the risk that companies take on with every investment, but on the other hand to keep the increase in money within certain limits in order to avoid speculative excesses and ecologically intolerable consumption of natural resources with corresponding environmental pollution from waste and emissions.

Further starting points for reducing the compulsion and urge for growth are:
¾ Restructuring the legal form of companies, in particular stock corporations, to reduce the urge for growth.
¾ Enhancing the value of personal work and, in some cases, compulsory social service, which opens up space for non-monetary services, thereby reducing the pressure to grow.

¾ In addition, incorporating property obligations into property rights, i.e. obligations to treat nature with care.
Building on these structural reforms, the aim is to supplement the reduced growth with measures for a permanent increase in resource efficiency and environmental protection, so that the use of resources and the environment meets the strict sustainability criteria.

I would like to leave it at that. In any case, it is important to understand the complex mechanisms on which the modern economy is based. You have to understand magic if you want to master it. This was already learned by Goethe’s sorcerer’s apprentice, who knew how to harness magical powers enabling constant overproduction, but not how to tame it when the damage it causes gets out of hand. The wise old master who comes to the aid of the sorcerer’s apprentice in Goethe’s poem is sadly missing.
We must therefore learn the necessary wisdom ourselves. We should at least try!

References
– Binswanger, Hans Christoph (2006), Die Wachstumsspirale (The Growth Spiral), Marburg.
– Binswanger, Hans Christoph; Geissberger Werner; Ginsburg, Theo (1981): Wege aus der
Wohlstandsfalle – Der NAWU-Report, 3rd ed. Frankfurt/M., pp. 261-273 (on patrimony instead of dominium) and pp. 242-260 and 273-277 (on the repersonalization of the economy).
– Fisher, Irving (2007): 100% Money, Kiel.
– Gesell, Silvio (1920/1991): The Natural Economic Order, in: Collected Works Volume 11, Lütjenburg.
– Huber, Joseph & Robertson, James (2008): Money Creation in Public Hands – Paths to a Fair Monetary System in the Information Age, Kiel.
– Werner, Götz (2006): A Reason for the Future: Basic Income – Interviews and Reactions, Stuttgart.