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 personís
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
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
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
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
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).
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 nationís 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
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
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.
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 on Call cannot be Loaned
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.
- Banks should not record Deposits on
their Balance Sheet
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
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
not belong to the bank, so it is not entitled to include it on its
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
Issuing notes and coins.
Loan broking, matching savings
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
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 supermarketís
account is credited. All these are electronic transactions. A cheque
is an instruction to the bank to debit my account and to credit
another personís 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
The money must maintain its
value as far is possible.
Money must be accepted
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
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
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 donít 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 personís 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
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
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 depositorís
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
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
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 peopleís lives, then the cause of instability in the economy
will have been removed. The supply of money will then take care of
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
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.