The Beginnings of Christian Reform (18)

Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not a real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth

Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later, it must become apparent that this economic situation is built on sand. (Ludwig von Mises, writing in the 1930s.)

Since the Fall, the human heart has had a remarkable tendency to believe in things that are not true, to believe that you really can get something from nothing. But only God can accomplish that.

The terrible things that happened in the twentieth century with governments bore this out, on a grand scale. But being who we are, we keep coming back, thinking we can change the outcome, without significant structural change. We can’t.

This is what happens with fractional reserve banking. Unquestionably, more money has become available for the consumer, through banks making multiple loans available to people and institutions. But do the banks truly have the money to lend in the form of deposits, or have they simply “generated” it?

Modern banking is based on the flagrant flouting of the prohibition against multiple indebtedness. For every asset a bank owns, there are many legal claims against that asset at any point in time. The bank keeps fewer reserves on hand to meet demands of lenders to the bank –depositors–than the bank has promised to deliver on demand. This
is called fractional reserve banking. It is the universal form of banking and has been since the early modern period. It was an invention of the Renaissance…

Without the protection of state and federal government agencies, fractional reserve banking would face the prospect of bank runs, as lenders (depositors) would lose faith in overextended (multipally indebted) banks…

Fractional reserve banking is inflationary, for it creates credit money-money that is backed only by faith. Non-fractional reserve banking and the taking of interest are both biblically legitimate. (Gary North).

In a free country, governments are not supposed to “guarantee” banks, or any other private institutions. Rather, if they lend excessively, they can and should go bust; this is what their management is supposed to prevent, through only engaging in prudent lending.

But governments like it when banks are lending vigorously, because this stimulates the economy, creating the impression of national prosperity. Then, voters are likely to return that government, because (as the phrase was popularised in the Clinton era), “it’s the economy, stupid.”

But for governments to “guarantee” a bank means that the responsibility for the bank’s management has passed from the bank, to the taxpayer. When governments guarantee banks, it means banks have a special, “sweetheart” deal going with the government of the day. The banks are now “too big to fail,” in the eyes of the government.

This should be intolerable for voters. If they become indirectly responsible for the banks, what about every other business in society? Can they claim a “sweetheart” relationship, too? If they can’t, it means society has degenerated into a kind of Fascist society, where certain “favoured” businesses or industries now are “entitled” to a measure of government protection. For that bank, nothing now can go wrong!

In every way, beginning with morally and economically, this is a monstrosity in a free society. Every institution has to stand or fall on its own merits, and compete in a free market against others. The notion of “too big to fail,” means that some get the tick of approval from some government instrumentality, and some don’t. This is a form of partiality, and the Bible forbids such notions:

Do not rob the poor because he is poor, or crush the afflicted at the gate; for the Lord will plead their case and take the life of those who rob them (Prov.22:22).


A proper understanding of Biblical economics within the Christian community will lead to a change of attitude towards fractional reserve banking. We will no longer be prepared to put up with this economic immorality, so we will begin to challenge political leaders to require that the banking system stands on as firm foundation, so that for every loan a bank makes, it always has the cash in the coffers to cover it.

Furthermore, we will also require that if a bank is in danger of going under through foolish lending practices and other forms of bad management, no government agency will be prepared to step in to prevent this, through an injection of tax-payers’ monies, or any other illicit mechanism.

This is not the role of government in a free society. Institutions come and go as markets will require, and their poor management has painful consequences; that’s life.

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