Is money inflating the climate crisis?

Invest in inflation. It’s the only thing going up.

That was a joke made around a century ago by actor and Mayor of Beverly Hills, Will Rogers. It seems just as appropriate now as everyone is feeling things getting more expensive. Food, energy, clothes, books, holidays, houses, cars, education. You name it and it’s going up in price.

We're told that prices are rising due to inflation being unusually high, and we’re told that inflation is high because of COVID related supply chain issues and the war in Ukraine. But is this really true, and what is inflation?

Even at a time like this when inflation is making headline news, there seems to be little discussion around what inflation really is, what causes it and how it affects our society. After all, inflation didn’t start in March 2020. We always have inflation to some extent and we usually seem to just accept that “things were a lot cheaper in the olden days”.

In 1937 you could buy a family car from Ford for £100. The cheapest new car currently listed on Ford’s UK website is £18,655.

I have my Dad to thank for explaining the basics of inflation to me and persuading me that if I kept trying to save up to buy a house without a mortgage, I would forever be chasing a mirage. The bit that got me really interested though, was when he said

Don’t worry that a mortgage sounds like a lot of debt, because inflation will mean that it shrinks over time any way.

That conversation changed my life and led to Vineeta and I buying our house soon after. Lucky for me it turned out to be solid advice, as inflation showed up every year just as my Dad said it would.

Since then I’ve been curious about what this mysterious force called inflation really is, how it affects our lives and more recently, whether or not it impacts our ability to create businesses that create a positive impact in the world. As Managing Director and co-owner of a small business, I am feeling the stress of knowing that costs are rising fast. I want to find a solution that doesn’t put extra pressure on our team or compromise our mission as a company, and I know that I am not alone.

In this week’s post I am sadly not going to provide you with a panacea to inflation. I don’t have one. What I am going to do is explore what inflation really is, what causes it and why it is a fundamental issue for those of us trying to use business as a force for good. Let’s dive in.

Money is a technology

Before we talk about inflation, we need to talk about money. We tend to think of money in terms of wealth and currencies but really, money is a technology. It's the technology that enables efficient trade between humans and it is the underlying technology that makes business possible.

When I say technology, I’m not talking about the high tech payment systems that allow online purchases, instant bank transfers or Apple Pay. I’m talking about the core technology of our money, regardless of our local currency.

For much of human civilization, monetary technology was relatively simple. Societies generally came to agree on a form of small physical tokens that were hard to reproduce and used them as a convenient way to exchange value with each other. Having these tokens meant that someone who had an extra couple of potatoes but wanted an apple, could buy an apple from a person who had a spare apple but who wanted a carrot. Money is the technology that solved the problem that the person who has what we want, often doesn’t want what we have.

From chia seeds to seashells to glass beads to gold, the form of these tokens gradually evolved to be ever harder to replicate. It was the fact that the tokens were limited and hard to replicate that made them trustworthy, and this trustworthiness peaked with gold. Gold is rare, impossible to manufacture and doesn’t corrode over time, allowing people to have faith in its value when exchanging it for goods and services. Perhaps more importantly though, it allowed them to retain this trust over a long period of time. Gold was not just of value today, it would still be of value tomorrow and years into the future. Gold could even be passed down through the generations.

This ability to carry the value of our labour into the future is a key feature of money as a technology. We could save up to build a house, or pay for our children’s education, or start a business, or put money aside when we are young to provide for our old age. Hard money was worth something not just in the present, but in the future.

20th Century Money

For nearly 200 years, the British pound sterling was the world's dominant and most trusted currency, being linked to a fixed amount of physical gold as determined by Sir Isaac Newton, Master of the Royal Mint, in 1717. This link with the value of gold meant that sterling was in effect “as good as gold“ in holding its value through geography and time.

But all good things come to an end. In 1915, the entire world's monetary technology began to radically change. Despite the impeccable reputation of sterling as being backed by gold, the British government had actually been quietly raiding the Bank of England’s gold reserves for some time and when the first world war reared its head, the reality of the missing gold suddenly become a serious and urgent problem. Instead of face the problem head on, they devised a series of elaborate and ingenious schemes to get themselves off the hook and in the process they changed the underlying technology of money not just for Britain, but eventually for the whole world.

They issued an announcement asking all public departments to use paper notes instead of physical gold to make payments and asked the public to pay their own gold in to their banks and use paper notes instead. While this move was meant to be a temporary arrangement to shore up the Bank of England's gold reserves for the First World War, it was actually the first step in a permanent change from the gold standard of money to a new technology known today as fiat money.

Fiat is not just an Italian car company. It’s a Latin word that means “let it be done” and in this context refers to the fact that the value of money in a fiat system was no longer based on trust in a physical medium like gold, but simply based on the fact that “the King said so”. Despite popular belief that you can take a bank note to the Bank of England and redeem it for physical gold, this has never since been the case. With people no longer being able to exchange their paper notes (and now digital money) for a fixed quantity of physical gold, the number of pounds sterling in the economy was no longer limited by the amount of gold in British banks.

This was a masterful sleight of hand played by the British government. With money no longer redeemable for physical gold, the government and its authorised banks could create extra money without anyone really noticing. This was a politician's dream. Contrary to the famous words of our recent Prime Minister Theresa May, that “There is no magic money tree”, the invention of fiat money gave politicians a magic money tree. In collusion with the banks, they could create money out of thin air to fund projects that would make them popular with the public, even if the government didn't have enough tax revenues to pay for them.

Of course, it was too good to be true. While those close to the magic money tree might have benefited financially, it came at a cost to the population as a whole. Every time new money was created, it didn't add to the total wealth of the economy, but transferred wealth from the population to the people closest to the creation of the new money. This transfer of wealth is what we today take for granted as inflation.

John Maynard Keynes, the Bank of England economist whose theories are taught in all modern universities to justify the existence of inflation, knew the truth of what they had created, stating that:

By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

Government’s use spurious concepts such as the Consumer Price Index to limit the “official“ rates of inflation and therefore limit the extent to which people worry about it, but the reality is that true inflation is always running at a much higher rate than they report. The only reliable way of understanding the true scale of inflation is to look at the increase in the supply of money, which in turn represents the degree to which your money has been diluted over time. Globally, the average annual increase in the money supply between 1960 and 2020 was 29%. That figure might be high because it includes developing countries that have experienced hyper inflation, but even the country with the lowest figure is Switzerland, whose money supply grew an average of 6.5% per year. To give some perspective, the pound and the US dollar have both lost more than 95% of their value relative to gold since 1914. Our money is losing value fast.

This is the truth of what we call inflation. Inflation is not the cost of things increasing. Inflation is the value of our money decreasing.

This is an important distinction because contrary to what we're told, things should not on average become more expensive over time. As technology becomes more efficient, the cost of most goods should decrease, not increase. This means that inflation is consistently outpacing the technological gains that we are making in production efficiency.

Endless debt

I'm going to come on to why this is important to the environment and our goals of creating sustainable businesses in a minute, but bear with me. There's one additional detail I need to mention about the new monetary technology introduced 100 years ago. Hold on, it might make you dizzy.

Fiat money is created out of debt.

While fiat money can be created out of thin air, the magic trick that helps conceal this is that they are not printing money but borrowing money. Contrary to the popular belief that banks take in money from savers and lend it out, in a fiat monetary system the banks actually create new money as credit every time they make a loan. They are lending money that they never even had. When I ask the bank to borrow £100,000 to buy a house, they simply add it to my account on the computer despite the fact that this money didn’t exist a few seconds earlier. The bank simply created it. Now I have a £100,000 with which to buy a house, and I give this money to the seller of the house who can then spend it on something else. I now owe the bank £100,000 plus interest.

All money is created this way and as such all modern money is debt. If the banks cancelled all debt, they would simultaneously eliminate all money. In actual fact, as virtually all loans are issued at interest, it is mathematically impossible for the debt of society to ever be repaid because the amount of debt owed will always be the total amount of money in existence plus interest. Therefore, the only way to pay back the world’s debt is to borrow more money (at interest) and therefore increase the debt even further. Fiat money is therefore the only monetary technology in history in which the total balance of society's money will always be negative.

I told you we’d get dizzy!

With money being created with every loan, the amount of money in society keeps growing, fuelling further inflation. It's not just governments who are doing this but every business and individual who borrows money from a bank. It turns out that a banking license is a license to print money and charge people interest on it.

What has this got to do with sustainability?

The implications of all this for the environment and for the wellbeing of the global population are profound. For decades the world was promised that new labour saving devices and production technologies would deliver more free time and relaxed lifestyles, and yet the reality is that people continue to be on a hamster wheel working harder and harder.

Fiat money, and the inflation and debt that come with it, are constantly eroding our real wealth. I have no doubt that many of you reading this are feeling the impacts of this on your own life and businesses at this time, as the value of our savings and our earnings erodes ever more rapidly.

We are subject to an invisible pressure to work harder and find ways to earn more money to keep pace with inflation. Employees feel it and then demand pay rises, but employers must then find ways to pay for these pay rises. This can mean raising the prices of their goods, making people redundant, finding ways to cut corners on quality or cutting back on “niceties” like social welfare and environmental protection. All of these things are bad for society.

We are all feeling this pain acutely at the moment, but even at the best of times inflation is a low level chronic stress that infects the whole of society, whether we realise it or not. This stress changes the way that we value the present versus the future, gradually driving us to an evermore short-term consumerist culture.

Economist Saifedean Ammous is one of the few modern economists who talks about this honestly, and while I don’t agree with his views on some broader social topics, his ability to analyse and explain the fundamental technology of money is second to none. In his book, The Fiat Standard, he says:

The more the money can be expected to hold its value over time, the more reliably an individual can use it to provide for their future self, the more reliably one can provide for their future self, the more they can reduce their uncertainty about the future, the less their uncertainty about the future, the less a person discounts the future, and the more they are likely to plan and provide for it.

In other words, hard money is itself a driver of lower time preference as our money becomes harder, our ability to save efficiently increases, allowing us to provide for our future more easily and encouraging us to become increasingly future oriented.

A sustainable future requires us to think, plan and invest for the long term benefit of society. It requires us as a culture to value the future. Fiat money erodes our sense of value in the future. It encourages politicians, businesses and individuals to binge on spending in the present because we get more for our money today than in the future.

Furthermore, by eroding the value of money over time, inflation makes it virtually impossible for people to save for their old age. Money in the bank (or under the bed) will be worthless by the time most young people retire, forcing them to look for ways to try to beat inflation. Money that would have historically been saved gets handed over to pension companies and money managers to gamble on financial markets. This not only adds a high level of risk to people’s own financial future’s, but exacerbates the problem of absentee shareholders demanding the maximum return on investment at the expense of social and environmental wellbeing.

As it stands, even those of us with a deep passion for building a positive long term future are operating within a monetary system that forces us to swim against the tide. Even if you or your business don't have any debt, you still need to run faster every year in order to keep up with rising costs and the declining value of your savings. That inevitably makes it harder to plan for and invest in positive outcomes for the long term. As a business owner who deeply cares about looking after my team and having a positive impact on society, I am acutely aware of this tension.

Time for change

The monetary system that our governments have created and perpetuate over the last century is inherently corrosive. Money is the underlying technology of all businesses and as we explore the feasibility of sustainable business together through this newsletter, it's important for us to be aware that the current monetary technology that we are all forced to use is not aligned with the social and environmental progress that we aim to achieve. How we change that, I don't know. But with the global economy teetering on the edge of its next crash, perhaps this is exactly the time in history that we need to be thinking and talking about alternatives. By changing from the gold standard to fiat money, our governments have proven that it’s possible to drastically change our monetary technology. It can be changed again.