Economists, politicians and media personalities are frequently citing economic growth as a desirable characteristic of modern day society. One year we are able to produce a certain amount of goods and services and the next year we are expected to produce more goods and services or markets go into turmoil. One would think that a functional economy may be able to contract somewhat without causing hardship and there are several situations where economic contraction might even be a desirable trait.
This need to grow is related to how our money supply is created. The paper currency and coins we are familiar with as money accounts for only 3% of the total supply of money, the other 97% is created by central banks when they loan money to government and other banking institutions, being essentially created out of thin air by a few keystrokes on a computer. Despite being created out of nothing, these loans have to be paid back with interest, therefore every year more money has to be created to cover the interest payments on the original loans.
As an example, assume that there is no money at all and a central bank creates the first $100 of money by loaning it to a bank at interest. The following year, the loan becomes due and the original amount plus $2 worth of interest must be paid back to the central bank. Where does this $2 come from? The answer is that the next year, the bank must borrow $102 dollars. $100 to maintain it's original capital, plus $2 to pay back the interest on the previous loan.
Every year, the amount of money in circulation has to increase to cover interest payments on the money that had been previously created. This is why we need continuous economic growth.
If our economy grows by the same amount as the rate of interest every year then all is well, but if the economy doesn't grow then it causes inflation: where the amount of money in circulation increases relative to the amount of economic productivity. The end result is that the price of goods appear to be going up, when in reality its the purchasing power of each individual dollar that is going down.
Having no growth in a given year is not inherently a bad thing, it simply means that we produced the same amount of stuff that we did last year. When we have to produce more goods and services to sustain the needs of a growing population then growth is a necessary and healthy part of the economy. The difficulty arises when population stabilizes at a certain level, like it has in most of North America, and we continue to use a monetary system like our current one. A future sustainable society will require a better monetary system to be developed that can survive zero and even negative growth without these sorts of difficulties.
Transition Initiatives believe that a better idea is to create multiple competing regional currencies and let them co-exist in an open market. Its actually an historical oddity to have only one currency in circulation; for much of our history each bank had it's own 'bank notes' and these were sometimes traded in competition with naturally evolving money like gold and silver. Similar forms of money have existed in the past, and while they existed worked much better than our current form of money.
The concept of natural money relates to the observation that human beings naturally create money to help facilitate trade. Usually objects chosen to form money have certain characteristics: long lasting, divisible, and valued as a useful commodity. Barley, gold and silver are examples of commodities that have been commonly used as money. Like any other naturally occuring system, the more we try to manipulate it, the worse our problems get.
Under competitive or natural monetary systems, money tends to increase in value over time as the amount of goods and services increase while the supply of money remains relatively constant. This eliminates the need to pay interest on savings as the purchasing power of money naturally increases the longer it is saved. In some religions and cultures, the charging of interest was actually considered a sin and people engaged in the practice were severely reprimanded.
Local currency initiatives investigate and promote alternative forms of money, which we hope will build local resiliency and provide a means of maintaining local wealth as our national monetary system continues to unravel in the face of resource shortages. A system of multiple competing regional currencies would help contain the results of bad fiscal policies, like the ones that caused the current economic crisis, to the region where those bad fiscal policies originated.