The problem with debt-based money

Can our broken monetary system be fixed?

Debt-based money
Credit: Pixabay

The global economy operates on a debt-based monetary system which allows banks to create most of the money in circulation through loans (debt), following the ‘fractional-reserve banking’ practice.

The problem with this money system is that it requires constant economic growth, which is practically impossible. Furthermore, the average growth rate it requires is unsustainable. This results in booms and busts, and man-made climate change.

Banks print most of the money in circulation in the world today (also referred to as broad money). Every time a bank lends money to somebody, it credits the client’s account with a deposit of the size of the loan. It enters numbers in its computer system. It “prints” digital money.

However, the lending capacity of banks is constrained by capital requirements. The way regulators control the fraction of “non-debt based money” reserves banks must hold. This, in theory, ensures that the overall amount of money in the economy is right for the expected growth.

Debt and growth

Debt (Credit) theories of money try to explain the relationship between debt and money. Some argue that money and debt are the same thing when money is not backed by gold or another commodity. Some argue that the two are the same, even when money is not backed by anything. The latter view is the one supporting the current debt-based money system.

Debt means somebody owes money to somebody else. It usually carries interest. People, businesses, or countries who borrow money need to use the money in a productive way so that they can pay back capital and interest, within agreed timelines.

This translates into a system where overall economic activity must keep growing so that debt can be serviced. Otherwise, an economic crisis is triggered.

Most economists seem to believe that developed countries can expect an average growth of 3% to be sustainable (developing countries can expect more). However, they seem to use mathematical models which do not factor in the finite planet resources.

(Meanwhile, some scientists consider a growth rate sustainable for the planet to be around 1%.)

The rates set by central banks, banks and others, based on such expectations, are never right. At times too high, so debtors cannot keep up with payments, and go busts. At times too low, so people, businesses, and governments borrow too much in boom times and then end up in trouble when inevitable busts follow.


We can hope that the stringent capital requirements enforced by regulators around the world after the Credit Crunch (2007/2008) will work, and that in the future there will be more lending for green infrastructure projects. Alternatively, we can explore new and better monetary systems.

Fintech companies are coming up with innovative ideas to improve the system – Cryptocurrencies, Distributed Ledgers, Initial Coin Offerings (ICOs), etc. Some of these ideas may sound crazy, but who knows?

The key might be to adopt a ‘portfolio management’ approach, implementing a series of alternative monetary systems alongside the current debt-based one. This approach allows us to assess which systems perform better over time and prevents us from depending solely on a single system.

Everybody has a role to play here, including governments, regulators, financial services companies, businesses, non-profits and people.


For more on the debt-based money system, see the Bank of England’s paper (BOE website):

Money creation in the modern economy

See also Positive Money’s blog articles for interesting views with good visuals on the topic.


Mauro Tortone

View posts by Mauro Tortone
Mauro helps financial services, technology and mobility businesses manage change and leads the Strategy & Finance practice. His expertise is in strategic change, capital markets and more. Mauro has over 25 years of experience working with banks such as UBS and Deutsche Bank, smaller financials, fintechs and others across Europe, the US and Asia. He sat on the CISI Corporate Finance Forum Committee for ten years and is passionate about sustainability.
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