In your national economy, most of the money rests in accounts in the banks scattered throughout the nation. Only a few people stuff their savings in vaults at home or hide their assets under a mattress. That's old school. This means that the saving, investing and lending habits of banks together dominate the ebb and flow of money in your economy. They run the show.
As you know, when someone drops money into a banking account, the funds don't sit around in the vault playing yahtzee. The bank loans them out to someone else to make interest on the money you deposited. This means that when banks have more money to lend out to customers, the economy grows faster, and when they pull in the lending reins, the economy slows down. Think of it -- the lending pace -- like the gas pedal and brakes in your car.
If you want the economy to grow faster, hit the gas. Lend more. If not, you know what to do. Brake. The idea is to drive so as to make the ride as smooth as possible because businesses like predictable and (therefore) managable costs, and so do foreign investors. They try to be nice to the customers.
Now one set of banks -- the big boys -- gets the name "The Central Bank." This bank sets the pace for all the other banks in your economy. And thus these institutions in various nations manage the rate of their economic growth. It's a bit like counting calories and controling how much you eat to manage the size of your waist.
Now a bank's supply of money to loan out is not indefinite. It has limits. These lending limits go by the name "reserve requirements." In the U.S. the law requires most every bank to put at least 10% of its deposits on reserve with the Central bank.
You will have noticed that this comprises a small fraction (1/10th) of the total money it may lend out. This is called by the very fancy name, "Fractional reserve banking" (FRB). It's here; it's popular, and it's less-than-desirable. But first the rationale behind this practice needs illuminating.
First, this gives the Central Bank the ability -- by increasing the reserve requirement of other banks (when it deems necessary) -- to reel in the money supply of the economy. Adjusting the size of the reserve requirement thus creates a kind of "adjustable lever" by changing the amount of money banks can lend to businesses and customers.
This practice, however, has the potential to cause some real problems for account holders. By lending out more than a bank can repay at any one moment, this makes the problem of a possible run on the bank's assets unmanagable (as when a large number of people withdraw money at the same time -- for whatever reason -- it could be a terrorist-sponsored run on the coffee and donut supply to put a stranglehold on early morning corporate meetings everywhere).
Second, Central banks can also regulate the economy by adjusting the money supply in other ways. One way consists in raising or lowering the prime lending rate -- the interest rate at which banks borrow from other lending institutions. This is why economists speak (somewhat oddly) of "cheap money" or "expensive money." Typically, we think of money not as "something you buy," but as something you use to DO the buying of something else.
But banks rent out the lion's share of the money supply at interest. By raising the interest rate, the federal reserve board either loosens or tightens the money supply -- making money either cheaper or else more expensive to rent.
When money is cheap, more borrowers show up. Raise the prime lending rate, and they cut their borrowing to a minimum, not wanting to pay back the loan at too costly a future price.
The third way Central banks control the supply of money in your economy comes by what are called "open market operations." Mostly this consists of buying bonds or other debt securities. A bond is an "I.O.U." written on really cool-looking paper. When one buys a bond, he is lending money to the bond issuer. Almost anyone can issue bonds -- corporations, states, and cities do this too when they want to raise funds to upgrade or build something that will bring in more tourism or what not.
This is why I said Central Banks have issues. By purchasing large blocks of debt securities (say treasury bonds), the Central Bank essentially shoves "newly-created" money into the economy (new funds not previously part of the economy) for banks to lend to customers. This makes money cheaper to borrow.
In short, Central Banks can grow the money supply by adding "debt-based dollars" to it. When they sell the bonds back to agents of the open market, this shrinks the money supply again. Now money gets more expensive again.
These each have effects on inflation. Supply and demand tells us that flooding the market with dollars tends to make each dollar worth less (inflation results, reducing the real purchasing power of each dollar -- i.e. you can't buy as much cranberry sauce with a buck as you could before). This puts a damper on food fights everywhere.
If you remove large numbers of dollars from circulation, then the dollar deflates -- so that each dollar can buy more stuff, but dollars are harder to find.
The fiscal tactics of Central Banks bear the name "federal monetary policy." The federal reserve board tells the Central Bank (in consultation with others) whether interest rates will rise, fall or remain "as is" when they meet. Stock investors pay close attention to (and try to guess ahead of time) what "The Fed" will do. And Fed announcements have immediate effects on the stock market. The present spokesman for the Fed is Benjamin Bernanke (said "Bur-NAN-key").
Finally, what is the biblical take, we should want to ask. Well, on the biblical view, Central banks are wholly unnecessary. Governments feel that they need direct control over economies to keep them in check. But the Bible does not give the right to governments to manipulate the money supply directly in this fashion. The job of the government is to make and execute just laws, not manage your 401k and manipulate its value. That's your business, and its your bank's business (if your hire your bank to manage your 401k or other money).
Nevertheless, just as when practices become commonplace (and everyone assumes they must be good because they are typical) in other arenas, most Christians do not think much about it until someone points out that the Bible clearly opposes this practice. Caesar has the right to coin money, meaning that each nation may print its own money. But this does not give Caesar a blank check to do with that money whatever it wishes once minted. The Bible regulates the regulators. This implies that Jesus is the Lord of money too (which is true, since He has all authority in heaven and on earth, and since God is the original and final source of all value).
God commands nations to be righteous (proverbs 14:34). This includes not stealing the money which comes into your hands by lawful trade or gift. By manipulating the money supply this way, the Fed directly changes the value of assets you and others ALREADY possess. Sometimes Uncle Sam giveth, but usually Uncle Sam taketh away. This amounts to a clever form of stealing (albeit unintentional in many cases).
Free-market capitalism (within Biblical boundaries) indicates that each bank should be allowed to set its own interest rates (but never is any to be allowed to charge more than 10% at any time -- this is usury as defined by the Bible), without governmental interference. Any state or bank that presumes to assess its "customers" at more than 10% reerves a right to declare itself -- by implication -- greater than God himself.
At least the Caesars were honest about this. In charging more than ten-percent, they got consistent with their actions over time and eventually declared themselves divine. The Egyptian Pharaoh who enslaved Israel -- probably Rameses II -- charged a 20% tax Exodus tells us (the "fifth part."). When Israel asked for a king to be like the other nations, God sternly warned them by the prophet Samuel -- that because they had done this -- the king (Saul by name) He would give them would enslave them -- charging an outrageous 10 percent of everything for himself -- called in the text "the best" meaning the first 10%, in addtion to the tithe which went to the priests for the Lord's House and Temple treasury).
Fractional Reserve Banking is wrong because it promises more -- far more -- than it can reasonably expect to deliver in a crisis situation, even if the crisis only lasts a short span and packs only a modest punch. The Bible requires one to put up security for any and every loan. Insuring loans is an acceptable practice -- to cover potential losses -- because this would make it so that lenders could recover their money. But the FDIC and FSLIC -- the federal insurers -- history has already shown us cannot manage anything like a bailout of the collapse of more than maybe 5 or 10 intermediate sized banks over a relatively short period. This happened in the late 80's in the U.S., and severely tested the FDIC's ability to meet its implied promises.
If this worries you, buy gold and silver. You'll sleep better.
Bottom line: fractional reserve banking is sinful -- it gives the government's banks an unfair advantage, transfering some of the value of YOUR money to its own holdings from the money supply by extending credit for which it has no liquid collateral. This shrinks the value of your dollars to inflate theirs. So does the printing of fiat money -- money not backed by liquid assets such as silver or gold. But more on these topics later.
Questions for people who simply must know:
1. Who is Ben Bernanke?
Answer: He is the Chairman of the Federal Reserve Board of the United States of America and its chief spokesman.
2. What is the Fed?
Answer: The Federal Reserve Board sets and/ or announces the prime lending interest rate, and any adjustment to it (up or down), the rate of interest against which banks may borrow money.
3. What happens when you put money in a bank account?
Answer: Banks know what most do not: money is a workhorse, so the bank invests the money in the marketplace directly to make higher rates of interest from it. Then they pay account holders a slight amount of what they earn with your money (this is not wrong since you agreed to it). This grows the economy by adding to the money supply. The other side of economic growth is production (labor and investments which yield goods and services).
Things to think about: why not find out what the banks do to make money with your money, and just do it yourself -- giving yourself a big, fat raise and cutting out the middle man? If you want to know what banks do with your money, you can look it up on www.wikipedia.org.
4. If the Central Bank wants to grow the money supply, what are three ways it might do this?
Answers:
A. It can shrink the reserve requirement down to 10% from its present level (if it is not at this level already).
B. The Fed can raise or lower the prime lending rate -- the interest rate at which banks borrow from the Central Bank, and each other.
C. It can buy bonds, spilling in effect new money into circulation to beef up a lagging economy.
5. What is "federal monetary policy"?
This phrase describes the set of strategies Central Banks use to control the flow and amount of money in circulation, called "economic growth." Central Bank money management is something of a guessing game, so it had better sound sophisticated. By way of postscript, even critics of the U.S. economic system have had to admit that the Fed has some very skilled economic manipulators. I would not dare contradict this rather learned opinion, but I maintain (with the Bible's approval) that they have chosen the wrong tasks (in many, not all) cases at which to apply their considerable collective skills and intelligence.
Anyone who thinks it sinful to speak this way needs to read the words of the prophets in Israel and those of Jesus (who openly and somewhat surprisingly cursed the political leaders of his time -- see Matthew 23 and the seven-fold woes). My aim is not nearly so severe. I am at information according to the Bible to highlight what the right approach would be so that future leaders and students might know which is the biblical position. This aims to fulfill the commandment "Rebuke your neighbor frankly, do not share in his sin."
6. Why do we have Central Banks?
We have Central Banks because governments do not trust the intelligence of people motivated by profit to set the best prices for money on the open market, and to manage the economy's money supply by enlightened self-interest (the biblical view of banking) -- even though capitalists do everything else better on the open market than the government does.
7. What is the biblical alternative to Central banking?
The Bible affirms the right of individuals and institutions to bargain for the best prices -- for the best prices of money, as well as that of other lawful goods and services -- without interference from third parties. Under the eighth andninth commandments, it requires full backing (collateralizing or insurance) of all assets loaned out so that the lender has something of equal value he can keep if the borrower cannot repay the debt. This omits federal reserve banking. Banking reserves are to be not held merely in paper, but in the form of liquid (redeemable) assets like gold and silver. This provides extraordinary stability to the markets.
The stability provided by precious metals held in reserve is just what removes the need for Central Banking, and the alleged "needed stability" they offer. In other words, one only needs Central Banks when a nation does not follow biblical counsel in the first place.
Conclusion: The Bible has the answer to the problems of Central and fractional reserve banking, of money supply management, inflation control, and the standardizing of economic growth (stability). All other approaches must fail in the end since systems -- ideological or economic -- built on principles other than those of the Bible (which self-refers as "wisdom") cannot be other than "foolish." Folly has the interesting characteristic that it always carries points of internal dissent of some of its parts. Somewhere someone has called these "dialectical tensions." These internal contradictions add drag to the economy, rendering it less efficient over time.
The Bible is sufficient for one to obey all that it commands. It spells out the proper goal, motive and standard for all ethical choices (either explicitly or implicitly). This includes matters of national, and international -- not just personal or ecclesiastical righteousness (justice). Therefore, what it teaches and implies for national and international economics all men are bound to search out and obey, and to perform it with full sincerity of heart (according to their stations and callings), not turning to the right or to the left -- regardless of popular opinion.
If you have economic questions, the Bible has the answer (even if no one else does). By way of a final note, I find it ludricrous that some find it ludricous when I suggest that God knows everything there is to know about the internet, nuclear physics, chemistry, philosophy, the history of food, or the study of bugs. The Bible does not tell us everything God knows (obviously), but it does tell us what is sufficient for understanding and applying properly the ethical aspects of all fields of study and all possible human choices.
God is that wise. And we're not.
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