Why is the banking system of the United States (and the whole world) on the verge of complete collapse? I heard one expert claim that it was a competency problem and if they diffused the centrality of banking away from New York City and spread it around the country and placed it into the hands of 'competent' people in all corners of the country, things would be better. Others claim it is a problem of corruption due to centralization and not competency that is the problem. Still others argue that it is an issue of intrinsic value and that we must return to a gold standard. While all of these explanations may play a role to varying degrees, none of them even come close to the core origin of the problem.
If we work our way backwards into the history of banking just in the United States, we can see where we once were on a gold standard in America and it served us somewhat well for about 100 years but eventually failed. If we go back further, we find that the nation once had a decentralized banking system where states often had their own banks and their own currencies and their own exchange rates for goods and services. This also was not functional. The problem goes back much further and is far more fundamental because it is rooted in ethics. Because economics is a human function, it cannot be conducted in a lawless vacuum but must be defined and regulated by the word of God. Economics and morality are inseparable and subject to the law of cause-and-effect when held up to the light of Truth.
Let us expose the core of the problem cloaked in a law in Exodus 22:26-27.
"If you ever take your neighbor's cloak as a pledge, you shall return it to him before the sun goes down. For that is his only covering, it is his cloak for his skin. What will he sleep in? And it will be that when he cries to Me, I will hear for I am gracious."
The protection for the poor in this law is obvious. It is not what I want to focus on. Instead, consider the fact that the poor man must put up his cloak as collateral. Why? The creditor surely doesn't need it and God doesn't allow the creditor to use it in the evening when it would be useful so it would seem it is useless to the lender. Or is it?
Actually, the cloak is a very valuable asset to the lender. Yes, it is one thing that the borrower must return every evening to get his cloak and then return it in the morning. This is a constant reminder and nuisance for the borrower and an incentive to pay the debt. But imagine this. What if the borrower were allowed to possess the collateral? And what if he then went around to twelve creditors, collecting twelve debts on one cloak? And suppose he took the money from twelve creditors and his cloak... and skipped town, never to be seen again. Or suppose he is captured after spending all the money. Which of the twelve creditors gets the cloak? Suppose they sell the cloak and each creditor gets 8.5% on his loan back. Is that fair?
The borrower committed fraud. Stealing, lying and coveting are all violations of God's Law. The purpose of collateral is to uphold the understood law that you cannot secure multiple loans with the same collateral. This is violating the law of unjust weights and measures (Leviticus 19: 35-36).
Believe it or not, this is a law that every bank in the world violates every day and has for a very long time. The banking system of this fallen world operates under what is called fractional reserve banking. This is how it works. A customer deposits $100 in the bank. The bank puts $10 of it in reserve (in the vault-in theory). The bank then loans out the other $90. Now in this small scale, one can plainly see that if the customer returns the next day and wants to withdraw his $100 (a run on the bank) the money is not there. The bank is essentially bankrupt and must close its doors. The customer has been robbed of his $100. The bank essentially did the very same thing that the borrower with the cloak did if the cloak was not taken as collateral. The bank secured multiple loans with the same collateral.
If this isn't bad enough, there is something far more insidious that occurs when this is done. Consider the fact that the $90 goes back out in loans and then returns as a deposit. $9 is put in reserve while $81 is put back into the money supply. Imagine this money goes back out three more times with 10% put in reserve each time. After just five transactions, the $100 has become $468.50 in deposits! It has become $368.50 in loans! Money has been created. Counterfeit money!
But you can't get something for nothing. A bogus increase in the money supply is called inflation. As people see their dollars becoming worth less and less, confidence is lost and fear increases. Suppose there is a run on this bank. Five people show up at the door with receipts for $468.50, not just $100. And guess how much is in reserve to pay off the customers... $41.00.
Now imagine this on a national scale. How many millions of transactions occur every day, counterfeiting more money on a multiplying scale? How many millions of bogus dollars are injected into the system every week?
Now imagine it on a global scale.
There have been brilliant economists who have warned against using fractional reserve banking for decades but they have been largely ignored. The moneychangers that run this world have essentially said, "liquidity should have no bearing on progress." This is what they believe... but I'm telling anyone with ears to hear, there are no free lunches.
Eric Daniel Brown