Fractional Reserve Banking - Greed, Government & Central Banks

Don’t be fooled by the slight of tongue used here. Large underlying issues are gleaned over when emotively powerful words (e.g. fundamentalism, excessive greed etc) are used. Decisions are being made now, on your behalf, which can and will affect the way you and your children live in the future. Economics is important. Lionel Robbins defined economics as; “the study of the use of scarce resources which have alternative uses.”^[2]Rhetoric must be put aside. It is vital that decisions concerning scarce resources are made while thinking beyond now. Our politicians must be “looking not merely at the immediate but at longer effects of...policy;…[they must trace] the consequences of that policy not merely for one group but for all groups.”^[3]

Let us tuck the rhetoric in bed. Realise that, “blaming the crisis on ‘greed’ is like blaming plane crashes on gravity.”^[4]It is simply begging the question. Those who have caused the crisis are averting responsibility everywhere, away from the intrinsic issues that need to be discussed. Like the King of Jericho (Josh. 2 ), we have been deceived and sent in every wrong direction. The collapse we are experiencing is not the result of the free market or “excessive” capitalism. Rather it is the result of governments intervening in the financial systems of the world.^[5]How do you know this? Easy! Simply answer the question; what is the single common thread that unifies every economy; and who controls it? The short answer; money and the government owns/controls it! Money is the single common thread through all economies. It is vital to understand its importance in the rise and fall of nations. Money does not make the world go round; but the love of money is the root of much evil (1 Tim. 6:10 ). Loving money in the place of fearing God is greed. Individuals are not the only ones capable of loving all that glitters.

Money has always been an important characteristic in the development of civilization^.[6] It is a commodity that facilitates transactions beyond bartering. Thus the development of advanced production structures was facilitated by the emergence of money^.[7] Due to its importance money has often been abused and loved in the place of fearing God (i.e. anti-god or anti-Christ). The government did not create money. It did not originate from the decree of some committee or government body. In fact, coins only appeared in history towards 600 B.C. Money was the byproduct of individuals making decisions to buy and sell.^[8]Gold and silver became forms of money for various reasons; high divisibility, durability, scarcity, measurability and security against counterfeiting. Private individuals and silversmiths produced money in the form of ingots and various other denominations. By Jesus’ time government monopolized mintage rites^.[9] Governments soon realized how powerful coinage was. It symbolized governmental sovereignty. Many historians are now also attributing government coinage to state sovereignty and loyalty^.[10] However, governments soon despised precious metal backed money. It is expensive to produce and is 100% measurable. When a society’s medium of exchange (i.e. money) can be weighed and measured it is not so easy to defraud the public.^[11]Governmental accountability is looked on as a dreadful thing by politicians. But the Law of God prevents monetary fraud through the use of just weights and measures (Deut. 25:15 , Prov. 20:10 ). It keeps the system honest. There are checks and balances; I pay you with something you can test. The government cannot easily fiddle with the value of money, because monetary supply is governed by the expense of finding and producing more.

But politicians have always liked to spend and individuals hate to pay taxes. No politician is perpetually re-elected after continuous tax increases. Enter monetary debasement. In times of coinage, governments reduced the gold or silver content in coins, replacing a fraction of the valuable with dross metal (e.g. tin). More coins were produced with the siphoned precious metal. Nothing has changed. Once upon a time our dollars (previously pounds) were backed by gold. Notes and coins in circulation were not to exceed the value of gold in our vault. But the first and second world wars needed to be financed. This afforded John Maynard Keynes respectability in encouraging government creating and unequivocally expanding fiat paper money in circulation^.[12] Australia departed the gold standard. Government restraint was removed and greed abounded.

In 1959 the Reserve Bank Act granted the Reserve Bank of Australia (RBA) sole authority for Australian monetary policy. The RBA’s primary tool for implementing monetary policy is the Cash Rate (bank lending rates correlate to this). The Cash Rate is largely determined by commercial banks demand for and the RBA’s supply of exchange settlement funds. The supply of exchange settlement funds is solely monopolized by the RBA. By increasing the supply of money (i.e. exchange settlement funds) the RBA reduces interest rates (i.e. the cost of credit).^[13]But, as you increase the supply of a good the price of each individual unit of that good decreases^.[14] Thus, as our government increased monetary supply the buying power of our money decreased (aka inflation). By the ex-nihilo creation of fiat money the government reduces the value of each unit of money you hold. Extra units of money pumped into the system via decree represent “dross.” It inflates your wage each year at the expense of your money’s purchasing power. Thus Australians earn more and more money but find times tough! How is the paradox solved? The federal government desires you to earn a higher wage. So what! Well, our personal income tax system mirrors the graduated model of Karl Marx. The more you earn the more you are taxed! Have you noticed that our PAYG tax rates are never annually indexed to inflation! Between 1970-71 and 2000-01 Australia’s personal income tax percentages decreased. At the same time the proportion of personal income tax of Australia’s total tax increased by 3.5%.^[15]As individuals and a nation we are becoming progressively poorer! Although our wages are rising our money is worth less each year^.[16] The added bonus is that as our income increases so does our tax liability! Dross has that sort of affect.

Historically, God’s judgment is eminent as soon as dross is added to the monetary supply (Isa. 1:22-25 ). It is sobering to read Isaiah 1 in times like this. Our nation was founded on Christian principles. Thus the Australian constitution is steeped in Biblical heritage. Australia was founded a Christian nation^.[17] Throughout history Christian peoples have struggled against statism to win societal liberty^.[18] Christianity and any form of statist socialism are not compatible. Increasingly we are disowning our heritage. In some cases we are running from it. The free market and capitalism (understood correctly) are not foes of Christianity. In fact the basis for the free-market presented by capitalism is private property (aka ‘thou shalt not steal”); which is to be protected by government (Ro. 13)! Ludwig von Mises surmised well; “the socialist regime controls…every individual’s whole life…[T]hose in charge of the supreme conduct of government affairs ultimately determine which ideas, teachings, and doctrines can be propagated and which not…A socialist government has the power to make dissent impossible by discriminating against unwelcome religious and ideological groups and denying them all the material implements that are required for the propagation and the practice of their convictions.”^[19]Our political leaders have adopted monetary socialism and are inflating the money supply. As a result our rightful, hard earned prosperity is being swept from under us. But the true irony of it all is our government’s arrogant rhetoric against freedom, liberty and justice. When an airplane crashes; investigation is made into the causes, gravity is never blamed. Governmental greed, in the form of monetary monopoly, must be thoroughly investigated. Ignorance and oversight will be to our great peril. It is time to loose our faith in government greed.

End Notes

[1]Hazlitt, H 1979, Economics in One Lesson, Random House, New York, p. 31.

[2]As cited in Sowell, T 2007, Basic Economics - A Common Sense Guide to the Economy, 3rd edn, Basic Books, New York, p. 2.

[3]Hazlitt, op. cit., p. 17.

[4]Woods Jr., T, E, 2009, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse, Regnery Publishing Inc., Washington, p. 2.

[5]Woods, op. cit., p. 2.

[6]Rothbard, M N, 2008, What Has Government Done to Our Money? Ludwig von Mises Institute, Auburn, p. 13, viewed; http://www.mises.org/books/whathasgovernmentdone.pdf.

[7]Rothbard, op. cit., p. 16.

[8]North, G, 1994, Honest Money, Christian Liberty Press, Arlington Heights, pp. 20-23.

[9]North, op. cit., p. 59.

[10]North, op. cit., pp. 60-61

[11]North, op. cit., pp. 62-63.

[12]Rothbard, op. cit., pp. 105-106.

[13]Reserve Bank of Australia (RBA), 2009, About Monetary Policy, viewed; http://www.rba.gov.au/MonetaryPolicy/about_monetary_policy.html.

[14]Sowell, op. cit., pp. 345 & 349.

[15]Davidson, S, 2004-05, Taxation with Misrepresentation, in Policy, Summer 2004-05, vol. 20 no. 4; viewed; http://www.cis.org.au/policy/summer04-05/polsumm0405-5.pdf.

[16]Sowell, op. cit., p. 344.

[17]Eason, R, Australia is a Christian Nation, chapter 5 of Understanding Our Christian Heritage – Volume 1, viewed; http://www.chr.org.au/fpbooks/vol1/Vol1ch5.html.

[18]Von Mises, L 1990, Economic Freedom and Interventionism - An Anthology of Articles and Essays, Liberty Fund Inc., Indianapolis, p. 4.

[19]Von Mises, op. cit., pp. 9-11.