A major problem of the modern economy is inflation, but inflation is not the problem. The real problem is money. Achieving a system of stable and reliable of money is one of the most serious economic problems. To understand the problems of the system currently used and to perceive the advantages of a biblical system of money, something of the history of money must be understood (You will need to be familiar with this to understand what follows.)
A better system of money is urgently needed. Despite the considerable efforts of many economists, the the problem of money has not been solved. We need a system of money that is based on God's word and complies with his law.
The Need for Money
The need for money originates with the concept of private property. A key biblical principle is that a person is entitled to control the goods produced by their own labour, or with equipment that they own, or on land that they own, or using ideas that they have thought of, or techniques that they have developed. This means that if someone wants something that has been produced by another person, they must obtain that person's consent before they can take it. That consent will usually be given in exchange for something else that the purchaser owns. If the goods are taken without that consent being given, then person taking them is guilty of theft. The sixth commandment states that theft is a crime punishable by civil courts (Ex 20:15).
If there is no concept or convention of private property, there is no need for money. If someone wants something they can just take it, regardless of who has produced it. If everything is in abundance, this might work. However, as scarcity is a fact of life in a fallen world, this is not practical. The outcome would be determined by force. The strong would have plenty and the weak would get nothing. This would result in a different concept of property; one where everything is controlled by the strongest, regardless of who produced it.
A concept of property is really inescapable. The important issue is whose property the law will protect. Biblical property laws protect those who have produced goods and services.
If a system of private property is to function efficiently, there must be a process for the exchange for goods and services. It is not practical for each person to produce everything that they need. Most people will produce more than they need of what they are best at and exchange it for other things that they need. This division of labour allows people to be more productive and the economy to be more efficient. For this to work, there must be a way for people to freely and confidently exchange the goods and services which they produce and own.
Money allows the people of a society to exchange goods and services easily. I can accept money from the person who wants what I have, knowing that I can use the money to get what I want from other people in my society. People will always accept money, because they know it will enable them to obtain the goods or services they want from others (see Trade). On the other hand, the fact that the person who buys from me has money proves that he has given up some goods and services to someone else and is entitled to mine. People who have not produced and sold anything will have no money. They will not be entitled to any goods and services. They will only be able to buy something if someone gives them money for nothing, which is charity.
Money is a Record of a Claim to Goods or Services that other People Recognise
We can now start to see the function of money. Money enables me to obtain goods and services. This is an important and basic principle. People accept money, because they know that other people will accept it in exchange for goods or services.
When I want goods or services, I can obtain them by working for someone else or by selling goods that I own. However, the people that I sell to will not generally have what I want. I will need to get what I want from someone else. This means that I cannot buy and sell simultaneously. Buying and selling will usually occur in different places, with different people, at different times. There will be a time gap between selling and buying. I will have to sell first and buy later, but once I have sold what I had, I need some other proof that I made the sale and am entitled to buy. Money is the solution.
Money is proof that I have given up goods and services to someone in my society and am entitled to complete the exchange by getting goods and services from someone else in society.
Money is a record of a half-completed transaction. It is a record of a claim to goods and services that is recognised by the rest of society. The usefulness of money depends on it being accepted by other people.
Money is a legal way of controlling exchange beyond barter. Barter provides the security of swapping goods at the same time. With the introduction of money, the timing of exchange can be dispersed. I cannot just give up my goods in the hope that someone will give something to me. There is a risk that a fraud will take the goods that I am entitled to and I will miss out. I need to be certain that someone, who has no entitlement, does not get the goods to which I am entitled, by making a false claim. To avoid this risk, I will only give up my goods in return form money. Then I have proof of a valid entitlement to goods from someone else.
A legal method of enforcing such claims is essential for the expansion of trade. Money is a legally enforceable and widely accepted way of recording and proving such claims. Cash is just a portable, acceptable and enforceable proof of a claim to goods and services at a price to be agreed.
The Risk of Holding Money
Money is a socially accepted claim to some goods or services at a price agreed between buyer and seller. It is a form of entitlement that is recognised everywhere in society. Money is a way of proving that I have completed half of a transaction. I have given up goods and services to someone in my society, and that I have not yet received any back from any other member of my society.
However, holding money does not guarantee that I will receive back the same value that I gave up. I bear the risk of the money devaluing between the time when I give up my goods or services in exchange for money and the time when I use the money to purchase other goods or services. If prices have risen I may not be able to obtain goods or services of the same value to me as those I have given up. Of course, if prices have changed in my favour, I may gain additional value. My only risk is the effects of changing relative prices between the time of selling and the time of buying. However, I can be certain that if I sell my goods or services, I can buy some goods and services from some other people (provided I can find someone willing to sell at a price agreeable to me).
Trade will only expand in a society if this risk is relatively low. This is why reliable money is so critical for economic development. If the risks associated with holding money are too high, then people will tend to make do with what they have, rather than attempt to sell it and buy something better. This will have a limiting effect on economic activity.
Money is a social phenomenon. No one has their own personal money. Money only functions if it is recognised and accepted throughout society. If it loses this property, because the owners are no longer unwilling to exchange it for their goods and services, it has ceased to be money.
The problem with any form of money is that people will only accept it if they are sure it is reliable. In a fallen world, there will always be some people who try to obtain money without working to produce goods or services, which can be exchanged for it.
The Volume of Claims
The volume of valid claims available is not something that the government should control. Nor should it be kept constant, or only allowed to increase at a constant rate. People generally sell things (including their labour), so that they can buy other things that they want. Therefore, the volume of claims, which exist at any time, will depend on how many people have completed both their buying and selling. The number and value of half completed transactions will fluctuate dramatically.
It is possible in theory, say at the end of the financial year, that all people will have completed all their transactions. There might be no outstanding claims to goods and services. The total volume of claims could be zero. In practice this is unlikely to occur, as in the modern economy the flow of transactions from producers to retailers is continuous. However the fact that it is theoretically possible for all legitimate claims to be extinguished at a particular point in time, shows the stupidity of trying to control the volume of outstanding claims. It can be very small at one point in time and quite large a few days later, depending on how people stream their transactions.
Problems with Modern Banking
The practice of loaning money deposited on call is unacceptable. Money is a legally enforceable claim to goods and services and two people cannot hold the same claim at the same time. If I entrust my claim to a bank to look after, and they loan it to someone else, that person will be able to obtain and use the goods and services to which I am entitled. The bank cannot be certain that when I come to take up my claim, goods and services will be available for me. They have allowed those to which I am entitled to be stolen. The bank is an accessory to theft. It has allowed someone to buy the goods that are mine. They have breached their duty to me (Exodus 22:7-9).
This can be seen more clearly from an example. Suppose that I give my gold jewellery to a friend to look after, saying that I will come and get it when I next need it. If that person then lends that jewellery to someone else, hoping that it will be some time before I want it, or that he will be able to get it back or buy some similar jewellery when I come to ask for it, he has breached his duty to me. He has put goods entrusted to him at risk. If the friend is unable to get them back when I want them, I would be justified in accusing him of theft.
Economics textbooks describing the origins of money, give the example of a gold broker, who finds that only a fraction of people come back for their gold held in his store at any one time. Therefore, he can lend most of it out to other people, keeping a fraction for those who do come back for it. The textbooks describe this as clever use of gold. Actually, it is nothing more than theft (as is shown when there is a run on a bank).
For a detailed analysis of this problem see Bank Deposits and Loans.
Borrowing Short and Lending Long
The modern banking system is based on borrowing short term and lending long term. This is lending money deposited for a few months on loans that have a term of many years. For example, New Zealand banks use 90 day bills to finance most of the money lent for 15 or 20 year house mortgages. Although this has become an acceptable practice, it is also wrong.(For a fuller description of this problem see Bank Deposits and Loans).
Borrowing money short term for lending long term is wrong because banks are lending money for periods in the future for which they do not currently have the money. They hope that they will be able to obtain it in the future, but as they do not know the future, they cannot be certain. They are selling a claim to goods and services in the future, which they do not know, will even be available. Selling something which you do not own is fraud even, if you hope to be able to buy it. If it cannot be bought a theft has been committed. Thus modern banking is based on fraud.
You shall not steal, nor deal falsely, nor lie to one another (Lev 19:11).
A market where people buy and sell entities, which they do not own, is called a futures market. Futures markets exist for a number of commodities and for a variety of financial instruments. Such a market is legitimate for people who want to speculate on or hedge against future changes in price. All participants in the market understand that the person who is promising to sell at a future date does not currently own what they are promising to sell. There is a risk that when they try to buy what they have agreed to sell; the price may have risen so high, that they cannot afford to buy so that they have to default on their agreement. Everyone in the market understands this risk.
Futures markets are inherently unstable, as prices can fluctuate rapidly and players default if unexpected events occur. This is fine, provided all participants understand the type of market they are operating in and a prepared to take these risks. However, this type of arrangement is not appropriate for a nation's banking system, where stability is essential. The modern banking system is essentially a futures market, where banks borrow short and lend long. Monetary regulators attempt to add stability to the market, but its nature is essentially unchanged. It is still a futures market.
A Biblical Approach to Money
A sound system of money will be based on the biblical principle that theft is a crime. The penalty for theft is that the thief must make two fold restitution to his victim. Judges will enforce this restitution.
At the time when God gave the law, gold or silver was used as commodity money. It was measured by weight on scales. A simple way of obtaining money falsely was to have false scales. If something were being purchased in exchange for silver, the purchaser would use weights on their scales, which were lighter than they were claimed to be. This would allow them to give an amount of silver, which was less than they said they were giving. In effect they would be keeping back some of the silver they had agreed to give for the goods they were purchasing. This is a form of theft by false representation or fraud. The law prohibited this kind of theft.
Do not have two differing weights in your bag- one heavy, one light. Do not have two differing measures in your house- one large, one small. You must have honest weights and measures, so they you may live long in the land the Lord your God is giving you. For the Lord detests anyone who does these things, anyone who deals dishonestly (Deut 25:15,16).
This is an important principle. Any action that undermines the value of money is a theft. The person who does so is keeping something that belongs to another.
For an honest money system to function, those who create false money should be treated as thieves.
Most modern money systems give the civil government responsibility for issuing currency. However, they have not been any more responsible in this activity than the private banks. There is no biblical principle that assigns the responsibility for issuing money to the civil government is to punish theft. In a sound money system, judges will punish all theft by demanding restitution.
All attempts to debase the currency are theft. This is true, whether it is done using false scales, clipping the edges of coins, mixing cheap metals with gold, or by loaning out money, which belongs to someone else. All these forms of theft should be penalised by judges.
The key to honest money is honest banking. This can be achieved, if banks modify their practices in three ways.
- All bank loans must be matched with a deposit for the same term.
- Money on Call cannot be Loaned
- Banks should not record Deposits on their Balance Sheet
If this principle is followed, then no theft will be possible. Every term loan issued by a bank will be matched by a deposit or group of deposits with the same term. All bank loans will be for a fixed term, so a loan could only be made, if the bank has already received a deposit or deposits with the same term. Banks will only lend money that has been assigned to them for lending to others. This principle is incredibly simple, but it is the key to sound money. It means that whenever someone borrows a valid claim, there is someone else who is willing to give up an equivalent claim to goods and services at the same time (at a price). This will have the effect of raising the interest rates on longer term deposits. This is reasonable, as the longer the term of the loan, the greater is the risk of loss.
Money deposited on call is money that can be withdrawn at any time that the depositor chooses, ie whenever they call. The deposits in all cheque accounts and many savings accounts are on call. Modern banking practice is based on the fact that in general only a proportion of money deposited on call is withdrawn at any time. The rest is used to finance overdrafts and other short term loans or loans on call. Honest banks will not make loans against money on call.
This will eliminate the practice of paying interest on deposits that are on call. Banks can only pay interest, if they can earn interest by making a loan. Banks that do not loan money deposited on call would not be able to pay interest on it.
This change to banking practice would make depositing money on call less attractive, as there may be bank charges, but no interest. Therefore, people will only deposit money on call if they expect to use it fairly immediately. If they do not want to use it immediately, they will be better to deposit it for a fixed term (even if only a few weeks) so the bank can lend it and they can be paid interest.
Modern banks record deposits as assets on their balance sheet. This is wrong. A bank is just a warehouse. A storage company does not record the furniture it stores for people who have gone overseas as an asset. If the owner transfers the furniture to another storage company, its business has declined, but it has not affected its balance sheet. It would want as much business as possible, but the value of the furniture stored would be largely irrelevant.
Similarly, a share registry is not concerned about the value of the shares for which it registers ownership. It is only interested in the number of companies that it has as clients. A bank would want to have as many as clients as possible. However, the size of the claims recorded would not matter to the bank.
A bank is recording an entitlement that belongs to someone else. The claim does not belong to the bank, so it is not entitled to include it on its balance sheet.
Modern money is just digits on a computer file. These digits are records of wealth that belong to other people, so they are not the banks assets at all. Digital records should not be recorded as assets.
The Role of Banks
If banks changed their practices in these ways, their role would change slightly. Banks would have three main functions:
Recording money accounts and transactions
Issuing notes and coins.
Loan broking, matching savings and loans
Banks may specialise in any of these functions. Any bank engaging in the second function would also have to be fulfilling the first function. For security and clarity, depositors will generally prefer to deal with banks that separate the first and the third functions.
Each of these functions will be described in full below. The first and third functions are already carried out by banks, even though they may not be obvious.
1. Money Records
A legal method of recording claims is essential for the functioning of the economy. The most efficient monetary system is for those claims to be recorded by an organisation like a bank. A major function of banks will be to record money valid claims and to execute transactions between clients. It will not really matter whether this is done by paper records or computer records, as long as they are recorded correctly.
Bank accounts are records of those claims. Provided bank records are accepted as legitimate proof of these claims by everyone in society, then records on bank ledgers are a satisfactory way of recording them. Provided they have good back-up systems in place, computer records will be as secure as written records. As they make transactions between people easier and cheaper they are probably better than paper money.
In the modern world most money is a bookkeeping entry in the ledger of a bank. Mostly that ledger entry is a digital record on a computer file. When I am paid my wages, my account is credited and my employers account is debited. When I buy groceries on EFTPOS my account is debited and the supermarket's account is credited. All these are electronic transactions. A cheque is an instruction to the bank to debit my account and to credit another person's account. When the cheque is lodged with my bank, it issues an electronic instruction to debit my account. Most money that I hold at any point of time is just an electronic record in a banks computer. This is quite acceptable to me provided it can be used for the purposes which I need money.
The only risk with this electronic bank money is the bank is dishonest: making transactions that are not legitimate or have not been authorised by the owner of the funds. However, this will be largely self-policing. If a bank starts making illegitimate transactions, its accounts will become less acceptable for settling debts or buying goods and services. People will very quickly transfer their money to another bank, and the dishonest bank will go out of business. Dishonest banks will disappear, as they will lose their clients.
Banks will have to remain honest to maintain their business. They will need to subject their accounts and accounting systems to the scrutiny of gatekeeping individuals or organisations to demonstrate that they are honest. The more they can demonstrate their reliability, the more their business is likely to grow.
There are two requirements of a sound money
The money must maintain its value as far is possible.
Money must be accepted throughout society.
The first requirement will depend on the honesty of the bank. The second requirement will depend on the first. Provided money maintains its value, it will be accepted by everyone.
Governments have not role in the maintenance money records. If a bank transfers money that belongs to one person to another without permission, the victim should charge it with theft. Making an illegal transaction is theft, so the judges would force the bank to make double restitution to those whom it had defrauded. This would be a double punishment, as the negative publicity would most likely destroy the banks business.
Some commentators have suggested that for a stable money system all currency should be backed by 100 percent gold reserves. I do not believe that this is necessary. In the modern world most money is a bookkeeping entry in the ledger of a bank. Mostly that entry is a digital record on a computer file. There is no direct connection to gold. I am not worried whether the bank has reserves of gold. My only concern is that the bank is honest, and does not make transactions between accounts that are not legal or have not been authorised by the owner of the account. I want to be sure that the bank is not giving the money that I own to someone else.
It should be remembered that money is proof of a valid claim to goods or services. In the gold-money economy, holding gold was a way of recording my claim to those goods and services that I had earned by selling goods or services (including my labour). Holding gold is a way of proving that I have sold some goods or services to someone and am entitled to obtain goods and services to the same value from some other person in the same society. Holding gold proved to be an inefficient way of recording or proving that claim. Gold is unnecessary, if there are better honest ways of recording these claims.
The money represented by bank records would all be on call (unless otherwise specified), so it would not be possible for it to earn interest. The money is a legal entitlement to goods or services. The banks cannot lend these claims, because they do not own them. They simply record them in the same way that a share registry records the ownership of shares. Therefore banks would need to charge a fee for this service. This is not a problem; they are providing a service so it is reasonable to charge for it.
The banks bookkeeping charges would be based on the length of time that money was in the bank. This would encourage depositors to put money that was not being used into savings accounts where it would earn interest and not be subject to charge.
Not all transactions will be between clients of the same bank. Therefore banks will also need to put in place a process for transactions between clients of different banks. This can be done efficiently with computer records. The modern banking system has a complex inter-bank settlement process. This is because deposits and loans are recorded as assets and liabilities. If money flows from one bank to another, their solvency can be effected. This is wrong. Banks are simply recording claims. If a record transfers from one bank to another, the bank simply has fewer records on its books. It does not have less assets. The claims recorded are not the assets of the bank. They are a record of assets owned by the bank's clients. Therefore it does not matter that transfers between banks do not balance.
2. Issuing Notes and Coins
There is no reason why the state has to issue notes and coins. Banks could do this just as efficiently. Most people don't realise that bank-issued notes and coins were quite common until early in this century. These notes and coins would function in the same way as book, record, and garden tokens or telephone cards that are issued by many businesses. The record company takes my money and gives me a music voucher in return. That voucher is an entitlement or claim to music from a particular company. I can exchange that for a CD or music cassette. A telephone card is a record of the fact that I have paid some money and am entitled to make telephone calls up to a specified value. Cash is a more general entitlement that can be used anywhere.
If a bank decides to take up this business, it will issue notes and coins in return for electronic money. If I withdraw currency from a bank, it will debit my account by the same amount as the notes and coins issued to me. I will have swapped a claim recorded electronically by the bank for a portable claim (notes or coin).
The main concern will be that all issues of notes and coins are legitimate, and give a realisable entitlement to goods and services that are available. This will be accomplished by requiring banks that issue notes or coins to complete the correct transactions. When a person withdraws notes (or coins) the bank will reduce that person's cash account by the amount withdrawn. The bank will keep a record of the value of notes and coins issued. However, they will not be able to count these as assets on their balance sheet. They are not an asset of the bank, the are just a record of electronic claims which have been neutralised, while they are replaced by notes or coin.
When the notes or coins are deposited back in the bank, the person who deposits them will have their electronic account credited. The record of notes and coins issued will be reduced by the same amount. For the system to operate honestly, the bank must not allow the electronic claims recorded as being neutralised to be used for other purposes. Banks issuing notes and coins would need to subject their accounts to the scrutiny of auditors to prove the value of notes and coins issued equalled the value of electronic claims neutralised. The total value of claims would still net to zero, provided the value of neutralised electronic claims were included in the calculation.
If several different banks issued notes and coins, they would exchange freely with each other. People would not worry which bank their notes or coins came from. (Just as people are not concerned about which bank a bank cheque is drawn on or which branch of a record store has issued a music voucher). If there is evidence that one bank was cheating, then people would quickly return all their currency to that bank. This would drive the bank out of the currency business. To be successful in issuing currency, banks would have to work hard to convince the public of the reliability of their notes and coins.
Printing notes and minting coins is quite costly, so there would probably be a charge for the issue of notes and coins. This charge would be made to each person withdrawing notes or coins. As notes and coins have quite a long life the charge should be very small.
3. Loan Brokerage
An important role of banks will be to match the savings of their depositors who want to lend with those who want to borrow. Each loan would be matched with a deposit or group of deposits with the same term. Every loan and every deposit will a timestamp on it. Each loan with a particular timestamp will have to matched by a deposit or group of deposits with same date/timestamp on it.
Interest rates for various terms will adjust, so that the supply of deposits matches the demand for loans for each term, ie to clear the market. The bank will charge a margin on the interest rate to cover the cost of this service. Banks would take responsibility for assessing the credit-worthiness of potential borrowers and the viability of the projects for which they are borrowing. The bank could also agree to take responsibility for bad debt. The cost of this service would be built into the bank's charge. Sometimes the bank may need to combine a number of deposits together to supply a large loan. This would be part of the brokerage service.
Part of this brokerage function will be organising the re-financing of loans. Sometimes a person will have placed money in a bank for fixed term. It will have been lent out to another person for the same time. If the depositor's situation changes and they need the money, they may want to withdraw it early. This would be possible but there may be a cost. The bank would have to be able to replace the money with a deposit from a new lender. The bank would have a charge to cover the work involved in refinancing the loan. If the market interest rate had fallen, the first lender may also have to cover the differential for the rest of the term. The cost should be small, as in a sound financial system interest rates would be very stable.
Loaned money on fixed term cannot be paid back early unless another lender has been found to take over the loan. Therefore there is no need for banks to hold cash reserves.
A serious problem with notes, coin, gold and deposits and loans on call is that there is no time stamp attached to them. People who hold them do not have to indicate how long they will hold them. The economy will function more efficiently if all money has a timestamp on it.Information will be more effectively transferred between consumers, investors and producers.
A major problem of the modern economy is the boom and bust cycle, which cannot be escaped. It begins with a speculative demand for a particular commodity, property or shares. Prices increase and people start to buy just to obtain the capital gain. Prices increase further as everyone tries to get in on the action. The often frantic buying is largely motivated by greed, as people get in because they are scared they will miss out. The price of these commodities soon gets out of touch with their intrinsic value and eventually the market collapses. Many people lose their money, and the economy goes into recession. Other parts of the economy are damaged and it takes a long time to recover. But eventually another boom will occur and the cycle will be repeated.
It should be noted that an increase in demand, which increases the price of a commodity (like land or shares), does not increase the money supply. It simply shifts purchasing power to those who have the desired commodity from those who produce those that have decreased in popularity; ie the beginning of a share boom does not increase the money supply. Therefore a boom could not expand further, unless the banking system allowed an increase in the money supply in some other way to finance additional purchases at higher prices. Thus the modern money system, with its multiplier effects, exaggerates the effects of greed by fuelling the demand for speculative goods.
Money exansion is the curse that judges the greed and frivolity of a boom, by expanding it further so that it crashes. Thus the modern economy has judgement against greed built into it. Modern governments aim to eliminate the cycle by controlling the money supply. However, trying to control the cycle by government policy is really an attempt to remove the curse of sin. God will not allow this to happen. When people try to escape it in one way, he ensures that it pops up in another way. This is why economics has been unsuccessful in finding a solution to the business cycle.
Money is the symptom of the problem not the cause. The cause is greed and the easy money that fuels the boom. There is no need to try to control the money supply. If greed is eliminated by the spread of the gospel and the work of the spirit in people's lives, then the cause of instability in the economy will have been removed. The supply of money will then take care of itself.
In a Christian society where love and sharing are more important than covetousness and greed, instability will not be a major problem. There will be times when the economy will expand due to a new technology, an increase in confidence, the discovery of mineral resources or good weather conditions. However, if the money system I have described has been implemented, the growth will not be exaggerated by growth in the money supply. The volume of money will just expand in line with the growth of the economy. This simply means that the value of claims will match the value of goods and services being produced. This is not a problem. The value of claims held (money) at any time will match the supply of goods and services available. There will be no need to measure or control the value of money.
There will be times when producers make mistakes and get the mix of investment and consumer goods wrong. However, the resulting temporary surpluses and shortages should be quickly cleared by changes in prices. Again, the recession will not be exaggerated by a rapid contraction of the money supply as would happen in the modern economic.
To understand how this money system would work read the attached money parable.