Monetary theory and policy are neglected areas within ecological economics. Post Keynesian monetary theory is a good starting point to understand the relationships between money and economic activity. Ecological economics is a good starting point to understand the relationships between economic activity and the environment. Insights from Post Keynesian economics and ecological economics complement each another to understand the roles of money in an ecologically sustainable economy and the policies necessary to support these roles.
An ecologically sustainable economy (ESE) is one whose material and energy throughputs are within critical natural capital thresholds at appropriate scales while also being great enough to meet human needs. A fiat money system is compatible with an ESE since it takes little material and energy throughput to create and sustain fiat money, in contrast to commodity or managed money systems. Proposals to control the money supply, in the hopes of targeting economic activity within some sustainable threshold, are problematic. The source, sink, and life-support functions of critical natural capital should be sustained using policy tools other than the money supply, which should remain broadly accommodative to demand.
Involuntary unemployment results within fiat money-using economies. Fiscal and monetary policies can help reduce unemployment, but these policies should be compatible with an ESE. This requires direct employment creation rather than general economic expansion to raise the demand for labour. A stable but positive rate of consumer price inflation must be directly targeted by means other than maintaining excess industrial capacity and unemployment. The overnight interest rate should be used to equalize the effective cost of credit over time, rather than being used to target capacity utilization. Currency areas could be adjusted to help manage human ecological impacts, by adjusting areas to cover significant bioregional scales or significant economic regions with shared dynamics and a sufficient internal market. A global ESE requires a global reserve currency to be used in a new financial architecture that generates stable but adjustable exchange rates between currency areas. Some principles of modelling monetary and fiscal policy in an ESE are proposed in contrast to unsuitable conventional models like the IS-LM family of models. Finally, the implications of this paper’s findings are contrasted to alternative reform proposals such as 100% (or less) reserves, negative interest rates (scrip), and community currencies like LETS. Overall, this paper suggests that radical reform of the nature of money is not needed to support an ESE. The existing fiat nature of money should be sustained but in a context of new fiscal and monetary policies that are more compatible with an ESE.