Chapter 6: Money and Banking
6.3 How to return to honest money
What would it take to return society to biblical, honest money and banking? In all possible cases, the necessary ingredient will be a commitment to adhere to biblical ethics. Without a willingness to sacrifice up front and to stay disciplined throughout the process, no scenario will end in success. These conditions are the basic conditions whether the catalyzing event is a massive revival, a crisis or failure of the federal government, a successful state or local alternative or even resistance movement, the legal advent of competing currencies, or some political miracle by which society commits to a gradual change of the system (the least likely scenario). Let us first discuss the larger goals, and then move on to steps an average person can take to prepare for a biblical system personally.
What is the overarching goal in regard to money and banking? In the big sweep of things, it should be to return to biblical standards of just weights and measures, and the enforcement of contracts. This means the enforcement of the eighth and ninth commandments within the sphere of money and banking (as within the rest of society).
First, this means an end to fractional-reserve banking as well as all other forms of artificial monetary inflation.1 Any bank or other institution that lends so much as a fraction of a percent more money than it has in hard assets in reserve should be liable to prosecution for fraud. Stated more practically, the moment a bank shows the slightest inability to redeem its checks or paper currency for gold or silver, then it should be considered in breach of contract.
Second, this means also that anyone would be able to withdraw up to the total of their deposits in the form of hard assets (“redeem” currency for gold or silver coin). They should be able to do this at any time (unless, of course, there is a contractually agreed-upon maturity period).
Third, there should be no legal tender laws. No one should be forced to use or to accept any particular form of money. Forms of payment for debts, rents, and other contractual obligations should be agreed upon freely and stipulated in contracts up front as part of the contract. For standard business exchanges, the free market will determine what acts as money, and while a business owner should be free to decline payment even in these terms, he would be unwise to do so. These are the basics: only hard money or money backed 1-to-1 by hard assets in reserve, redemption of any bank paper for hard money upon notice, and the abolition of compulsion in forms of money (no legal tender laws).
Could such a society be reestablished? Yes, but not without lots of commitment and personal fortitude during the transition.2 What would this look like? First, if we automatically switched to honest money and banking overnight, without wise planning, the economic system would collapse for most people and a period of chaos would ensue. People would starve, crime would explode, martial law would ascertain, and the public crisis would be used by unscrupulous politicians to nix any future attempts at reform for generations to come. Societies are simply not designed for abrupt structural changes. Instead, we need to turn the boat slowly, and to work out the implications for many contracts, relationships, and related investments in the interim.
Here are the steps of abolishing fractional reserve banking each of which poses unique challenges: 1) Audit the Fed and the U.S. Treasury and determine the true inflation ratio of “paper” against hard assets, 2) for all existing institutions and legal agreements as far as possible, anticipate the ramifications and implications of deflating the money supply in correlation to the amount of the gold and silver that exists, 3) readjust all prices and financial figures according to the calculated ratio (this would create the deflation), and 4) move all Treasury- and Fed-owned silver and gold from government vaults into circulation.
If we immediately required honest money and banking, then the money supply would probably contract massively overnight. I say “probably” because we may not actually know how currently much gold and silver actually exists at Ft. Knox or with the Federal Reserve—or indeed if there even is any. So we have no sure idea what the initial monetary base would be, against which we would have to begin in calculating the current measure of inflation. However, since the current monetary base is actually built largely upon government debt instruments (promises to tax the people in the future for repayment) in addition to the gold we assume exists, we know that a return to honest money would immediately contract the supply to a great degree.
If so, this means prices would fall drastically across the board—on goods, services, and labor. Consumer prices would fall, but consequently so would wages by the same proportion. This would be a wash in many areas. For example, a grocer would be able to demand less money for his wares, but his overhead costs would all fall accordingly as well. In the simple view of standard business and exchange, nothing would change. These changes would be apparent to all. The shock that comes with such a drastic reduction, however, could be easily offset with a small amount of preparatory education.
What would not apparently fall in proportion would be any previous obligations, debts, mortgages, etc., which were written in dollars. So while incomes would fall drastically—say by 90%—people would still be stuck with $1,000 house payments monthly, car payments, etc. Under normal conditions, deflation hurts debtors. Of course, this would not be normal conditions. This is a problem that should be addressed with wisdom and a little forethought—before honest money could be fully enforced. It probably could be addressed by maintaining something like a “last call” dollar-to-gold ratio for the duration of those previous obligations which would be grandfathered in. This ratio would be made especially and only for such preexisting contracts. At the time of the legislation ending all future use of the Fed paper, whatever gold was worth in dollars at the “last call” so to speak would become the fixed reference point by which a dollar-equivalent could be calculated into the future, and by which those preexisting contracts would be fulfilled to their end. Thus those old mortgages, etc. could be paid off in the new money calculated by its equivalent to the old inflated money.
Then we have the problem of getting the gold and silver into the hands of the public. Supposing the gold actually exists, it would only take a simple act of Congress to force the Fed to redeem its gold to the U.S. Treasury. That’s a small but necessary first step. A second would be the equitable distribution of those gold and silver reserves from the U.S. Treasury to every account holder in proportion to the previous dollar-values of their accounts.
Once all of the loose ends were tied up (and I have certainly left many loose ends out of this very brief discussion of practical consequences), then local communities, states, and even the nation (though I would prefer to leave the legislation as much as possible at the local level) could have a biblical system of honest money and banking in place. From here the issue would only be maintenance of that system, meaning the enforcement of contracts and thus the swift and immediate punishment of any bank that tried to inflate upon its own reserves.
What can the average individual do toward such a goal? While at this point options are limited, there certainly are steps to take. The first is personally to purchase gold and silver while you can. This, of course, is an area not entirely free from investment dangers, scams, and confusion; for example, notice I did not say “invest” in gold and silver. Some people like to buy gold and silver for speculative purposes hoping the price will rise. They will then sell off the gold for a profit, so they expect. As part of preparation for a biblical system of money, I am not talking about this kind of transaction at all. After all, for what will you sell your gold at that future time? More inflated Federal Reserve dollars or digits? And what will you do with those dollars? For by that time, most likely, bread and milk prices, land prices, gas prices, and moon-pie prices will have risen by the same rate of inflation as gold prices, generally. On top of this, sales of gold bullion are considered capital gains, and taxed at the highest capital gains rate—15 percent. Some people can beat this system, but they are generally the lucky few who are gifted at commodities speculation—not the vast majority of people. Nor is gold a good investment for barter during an impending crisis. In times of crisis, food and water will be far more valuable than gold (after all, you can’t eat gold). I am speaking of none of this here. Instead, I am recommending gold and silver simply as a very conservative, long-term valuable good that will be the natural choice for money and the monetary base in a biblical monetary system. For those awaiting the day for an honest monetary system, having at least 20% of your long-term savings in the form of gold and silver is nothing short of good preparation. In the mean time, it will be subject to the roller-coaster ride of any commodity, and as such, may require a stomach for those who can only think in terms of dollars.
So step one, own some gold and silver. This is not difficult, but some tips will help. 1) Buy only bullion, not “numismatic” coins (these are antique and otherwise special “collectable” coins more suited to speculation than the reconstruction of society). 2) Try to buy from a dealer who only sells bullion coins; others will try to “upsell” or “bait-and-switch” you to the collectable coins with pressure sales tactics, and they are quite good at it. 3) Buy only coins with the lowest premium or commission: this should be around 2.5 to 3.5 percent max. Many people want to buy American coins (“Golden Eagles”) because they are American, but these often sell for a much higher premium (6 to 9 percent or more). You are not concerned with nationalistic patriotism here: you want the gold content. South African Krugerrands, gold Mexican Pesos, or Austrian Coronas are just fine and will cost you less to buy. 4) Keep your gold safe: do not advertise your purchase to friends or neighbors, don’t show it off, keep it quiet; don’t use a regular bank safe deposit box, but put it in a safe, hard-to-find place known only to you and your spouse (and perhaps one very closely trusted friend). Following these simple steps will save you possibly thousands of dollars with the dealer, and put you ahead of the game in preparation for an honest money society.
What else can be done? As with previous topics, you need to spread the word. Teach a Sunday School course in your church on honest money and banking (you can follow Gary North’s short book, Honest Money: Biblical Principles of Money and Banking—down load it for free here or here). Inform you local, state, and national representatives and officials of the lessons taught here in regard to honest money and banking.
It would also be great if we had the option to simply move our money to banks which themselves did not practice fractional reserve banking. Of course, this would not eliminate the same problem happening elsewhere and above their head, but it would eliminate one corner of it. The Federal Reserve system currently does not forbid banks from keeping 100 percent reserves—it just doesn’t require it, and all banks choose not to do it. It is certainly conceivable that some Christian banker somewhere could choose to keep 100 percent reserves in his own bank and refuse to lend beyond that base. This could act as 1) a service to local Christians, 2) a testimony against the evil of fractional reserves, and 3) an example to other banks of how such a system could work. Such a bank, of course, may not be as profitable as banks that leverage their fractional reserve power, but then again profit is not the ultimate Christian virtue when it comes to money. Honesty is.
Again, however, such a bank would not restore biblical money in general, even for the customers of the bank, for at least two reasons: 1) banks are forbidden by the Federal Reserve system from keeping precious metals as their reserves. Any “100 percent reserve” bank would still only have at best vault cash as its base. Thus, 2) since the rest of the system would still be inflated and inflating the same currency that our example bank is forced to use, the devaluation of the whole money supply also devalues that of even the 100 percent reserve bank. Such a bank can at best provide a “protest” example against a system in which all banks are forced to use inflated money.
There is something similar to 100 percent reserve banking available in the online “gold bank accounts” provided by, for example, goldmoney.com and bullionvault.com. In these systems you essentially purchase gold with dollars and the company maintains an account, valued in some form of “units” of gold, and the vault holds the actual amount of gold for you. The “value” of the gold will fluctuate over time with the market price. You can sell later and withdraw currency easily. The drawbacks are that there is nothing like a debit card or the convenience of modern checking accounts; and every conversion of gold units back into dollars is considered a sale and thus a taxable event. Thus, the account functions much like a gold-backed savings account. You would want to withdraw from it only for rare and major purchases, if at all.
You may also consider moving your money to a credit union instead of a bank. Granted, the change would not be greatly significant, but at least one problematic aspect is avoided. Many people don’t know that a key factor in the 2008 financial crisis was something called the Community Reinvestment Act, expanded under Bill Clinton in 1995. I have written about this elsewhere.3 In brief, this Act required all banks in the Federal Reserve System to make loans to people with poor or no credit. It was a recipe for disaster, and when the Fed-induced bubble finally popped, a myriad of risky loans turned into foreclosures. This act 1) filled many middle-class suburban areas with lower-income families with attendant crime and welfare rates, and 2) has left entire neighborhoods with rows of foreclosed, empty homes. In short, progressive manipulation of banking has left us with little but ghettos and ghost towns. But, here’s the rub: credit unions by law are not required to participate in the Act. Thus, while they still may engage in fractional reserve banking, they are usually not participating in the direct government-led destruction of local communities. This much at least is laudable. Even here, however, you should research individual institutions, for some participate voluntarily in community improvement programs (which may or may not be desirable), and some are actually part of international organization to which you may or may not wish to be a contributor.
There is the possibility also of alterative currencies. These are not “money” in the legal sense, but are legally legitimate. Several local systems have existed historically, and several smaller, localized versions exist still today. These are essentially paper-assisted barter systems. They tend to remain local because they require a network of businesses that agree to accept the currency. This could be a viable practice in the future if it became prevalent enough. For now, they are very limited in their utility.
In short, the best thing an average person can for now do is to buy some gold and silver, and to help spread awareness of the moral evil of fraudulent money and banking. By these efforts we are looking long term—hoping that education, preparation, the courage to face contraction, and the willingness to sacrifice through it will pave the way for a better, more honest system in the future. As tough a challenge as they may seem, these things are all a moral imperative for society. Until we return to honest money, we are as a society trashing God’s most fundamental laws—and God’s longsuffering will not last for ever.
- The absolute end of all inflation is impossible. Even in a free money society where, for example, gold and silver act as money, mining companies constantly increase the metal supply and thus (it is assumed) the money supply. The difference is that the rate of increase is generally so small as to be statistically insignificant, and the mining industry is a product of legitimate business risk, investment, and labor in mining industry. Exceptions historically have been when tremendous discoveries have been made overnight and huge quantities entered the money supply in a brief period (such as the California gold rush of the 1840s-50s). Nevertheless, such events are sporadic, unpredictable, and few, and thus do not empower the predictive and predictable evils of bankers’ whims. [↩]
- Gary North, Honest Money, 123–131. [↩]
- See Joel McDurmon, God versus Socialism: A Biblical Critique of the New Social Gospel (Powder Springs, GA: American Vision, Inc., 2009), 43. [↩]