Chapter 6: Money and Banking
6.1 What Freedom in Money and Banking Looks Like
Money is one of those things that we today can rarely mentally separate from government. Printing money, coining coins, and regulating banks, it seems, are simply things governments do, and most people cannot remember a time in which this was not the case. Total government control of money is simply our common experience. But a whole generation is beginning to awaken to the fact that this state of affairs is not biblical, favors the few, does not represent the best of American liberty, and that the ideal of freedom calls for a much different view of money and banking than what we have today. In fact, by biblical standards of money, what we have today is an oligarchy, a scam, a tyranny, a sin, a crime.
It helps to begin with definitions. What is money, after all? The answer is simple: money is the most marketable commodity in any given society at any certain time. This means money is the most universally accepted means of exchange in trade. If you have money, anyone who engages in business will be willing to trade their goods or services with you at any time in exchange for the accepted money. They will do this because they know that someone else will accept the same commodity later in exchange for other needs or wants. Money is therefore the product of human interaction. It arises naturally in a market as people make decisions to buy and sell.1
In a free market, many things can act as money. In American colonists’ trade with Indians, beaver fur and wampum acted as money. In some parts of America, fish and corn worked as well. In Virginia, the most widely marketed commodity was tobacco. Into the eighteenth century, even taxes were still paid in pounds of tobacco. This was true also for government imposed fines. Warehouse receipts often circulated as currency, but these were backed by stores of tobacco.2 When precious metals become available, however, they tend to have a way of stealing the show for this purpose.
It is by no means necessary that metals be made into State-sanctioned coins, but coinage does tend to enter the picture in practice. Conveniences added by coinage—State sanctioned or not—are portability and regularity. Each coin will, it is assumed, have a practical and regular size and weight. This, of course, can be abused if the coining agent slightly decreases (cheats) the size, or debases the metal, and yet tries to maintain the same face-value. This has been done thousands of times in history and continues today.3 The Bible calls this stealing, and this applies whether it is done by private mints or agents of the government. The value of money should not derive from what is printed on the face of it. As we just saw, money arises naturally as a result of commerce. Its value is tied to its market-determined valuation as a commodity—and this can change over time. Its valuation is a function of how much people want it.
The biblical standard for money is clear, and it is the same as the biblical standard for the exchange of any commodity: just and honest measurements. God says,
You shall do no wrong in judgment, in measures of length or weight or quantity. You shall have just balances, just weights, a just ephah, and a just hin: I am the LORD your God, who brought you out of the land of Egypt (Lev. 19:35–36).
This is repeated in more detail later:
You shall not have in your bag two kinds of weights, a large and a small. You shall not have in your house two kinds of measures, a large and a small. A full and fair weight you shall have, a full and fair measure you shall have, that your days may be long in the land that the LORD your God is giving you. For all who do such things, all who act dishonestly, are an abomination to the LORD your God (Deut. 25:13–16).
When anyone, including government, gets involved in manipulating the money supply, and thus devaluing its purchasing power, they are engaging in diverse weights and measures. It is acting dishonestly. It is, according to God through Moses, an “abomination.”
All those who make such a political issue over homosexuality—calling sodomy an “abomination” (which it is)—should be shouting a thousand times more that our money and banking system are an “abomination,” because this biblical transgression is a much more pervasive evil and it affects everyone, everyday. The comparison in regard to frequency of offense is not even close. The Federal Reserve System is the abomination of abominations in our society, topped only by abortion. While the homosexual lobby is powerful in many places, the finance lobby is by far the largest of any, and it has influence in every office, party, and hall of government.
But I digress. The biblical standard is just weights and measures. Ideally, this means a physical commodity-currency such as gold or silver coins with a clear and honest (and verifiable) weight of metal content, or a paper receipt or certificate that is “backed” and freely redeemable from a bank or other institution for such an amount of physical commodity money. For a bank not to keep 100% physical reserves ready to be redeemed for each paper receipt or certificate issued is simply fraudulent, though it is the standard practice today to keep only about 10% in reserve (which today also is not gold or silver anyway). Historically, banks have found it irresistible not to issue more paper receipts than they have reserves to cover. This is called fractional reserve banking. It allows a bank to loan out and collect interest on more assets than it actually has in reserve.
Historically, the best example of honest money is by far the Byzantine Empire. With a consistent gold coin standard, prices remained stable for over 1,000 years. When America has been at her best, things have operated closer to this standard. Despite episodes of paper inflation due to wars, the era of the international gold coin standard—from 1815 until 1914—was without measure the period of the most economic growth in America.
Perhaps the most widely-used coin in colonial times was the Spanish dollar. Despite British attempts to monopolize the coinage in the Empire, the American colonies continued to import (and even smuggle when they were outlawed) the Spanish silver dollar. (The Spanish dollar was cut into eight pieces, with each of the “pieces of eight” called a “bit.” The epithet “two-bit” thus refers to the old quarter-dollar.) Our word “dollar” today comes from this originally dependable silver coin. It is, of course, today, completely unhinged from any physical standard of weight or measure.
Banks and treasuries, as I said, have historically been unable to resist loaning out more than they have in reserve. This is true going back to the goldsmiths of the late middle ages. This was true also throughout much of U.S., including when he have had a national or central bank, and especially in times of war. We will cover some of these instances in our next section on how freedom was lost.
There was at least one great exception in American history which illustrates how private currency issued by private banks backed completely by marketable assets (such as gold) can both thrive and help maintain a free market. Two Boston banks—the New England Bank of Boston , founded in 1814, and the Suffolk Bank, founded in 1818—were concerned over the excessive paper being issued by competing banks from farther out in the country. Since the country banks were more difficult to reach for redemption, they could more easily get away with issuing more paper, as fewer people showed up to redeem it. Many other city banks had refused to redeem their notes at all. Suffolk devised a system to buy up all the less valuable country bank notes, but would only redeem them if country banks agreed to keep gold deposits in Suffolk Bank. While country notes tended to trade at a discount in the city, Suffolk devised a “clearing house” that would enable them to be traded at par. Every other bank in the loop was thankful for this convenience and relief.
This system simultaneously forced the country banks to keep their paper issuances honest. Being forced to redeem in gold chafed them a bit, but the threat of being completely shunned by all the other banks in the circle was much worse. So they made their deposits of gold with Suffolk and closely monitored their paper. The system had the added benefit of lending new credibility to the country banks as long as they participated.
Suffolk’s free market money and banking system prospered for forty years—from 1818 to 1858. In that year, a competitor arose with the same system—the Bank of Mutual Redemption—and a negative reaction from Suffolk cost it considerable market share. The real demise, however, was in 1861 and 1863, when Civil War measures stopped all redemption in gold and prohibited private issuance of paper. We will cover the government monopoly on paper that followed in the next section as well.
In the end, “While it lasted . . . the Suffolk banking system showed that it is possible in a free-market system to have private banks competing to establish themselves as efficient, safe, and inexpensive clearinghouses limiting overissue of paper money.”4 Indeed, it is proof positive that a free market can regulate both money and banking: check fraud, keep would-be cheaters accountable, provide viable private currency, protect wealth, and bring great profits to the most honest competitors.
So we can see that a free market in the creation and production of money, and a decentralized free market in banking, including a 100% reserve standard, are absolutely viable. It is the biblical standard, and it has been viable historically, most famously in the Byzantine Empire, but also right here in America in at least one regional example. So free market money and banking are biblical and they work. There is no reason we could not restore this standard, although it would cause, probably, a short period of uncomfortable transition.
I have already said, however, that such freedom was compromised many times in American history. Truthfully, money and banking manipulations have been more often the norm than honest money. We will survey some of these instances in the next section, and discuss some common themes in relation to their cause.
- Gary North, Honest Money: The Biblical Blueprint for Money and Banking (Tyler, TX: Institute for Christian Economics, 1986), 24.(↩)
- See Murry N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn, AL: The Ludwig von Mises Institute, 2002), 48.(↩)
- From 1909 until 1982, for example, American pennies were 95% copper. Around 1982, the copper value began to be worth more than the face value of the coin. The government switched to much cheaper zinc. In today’s prices, a pre-1982 penny is actually worth 2.2 cents on the copper market. A post-1982 penny is worth about 0.5 cents on the zinc market.(↩)
- Rothbard, 122. See Rothbard, 115–122 for the whole story from which I have drawn.(↩)