This paper explains why sustainability is not possible under the fractional reserve banking system, or within the framework of current economic theory. In short, this system — as with ponzi schemes — can persist only so long as there is continued growth to feed it (think cancer, tumors…) It provides one reason for adopting Complementary Currencies, LETS (Local Exchange Trading Systems), Time Banking, etc. Some excerpts:
“Soddy (1926) argued that the fatal flaw of economics was a confusion of wealth, which has a distinct physical dimension, with debt, a purely imaginary mathematical quantity with no physical dimension. Unlike wealth, debts can be created by a ‘wave of the hand’ or ‘a will of the mind’ because:
“Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age. On the contrary, they grow at so much per annum, by the well known mathematical laws of simple and compound interest (p. 70).”
Soddy believed this confusion led to the development of financial institutions that were divorced from the physical principles underlying the production of wealth. Banks create money arbitrarily through the fractional reserve requirement system, and then loan the ‘fictitious’ money at interest. Wealth, the physical quantity represented by money, cannot grow forever at a compound interest rate as the laws of thermodynamics clearly imply. Soddy postulated that at some point debts would outstrip wealth, causing the banking system to collapse.”
This paper explains in more rigorous detail the inherent problem with the ‘growth imperative’ (Lietaer’s & Greco’s term) built into the fractional reserve banking system.