An important topic in the economic and political literature is banking. In keeping with the Constantine Doctrine, to understand banking ideas extracted from one of the seminal texts on the subject must be explored. Suspicion abounds around banking and investments in America today, especially after 9/11 and the Financial Crisis of 2008. During the last 25 years, our national debt has increased nearly 700% from $5 trillion to almost $35 trillion. We have seen the market tank and banks seize up only to get bailed out. Yet, the confidence people exhibit about the future of their own finances belies this reality. Most people engage in all forms of buying through cash (held by banks) credit cards (issued by banks), and mortgages (through banks) all diminishing in their purchasing power regardless of the benefits of spending less, saving, and wise investing.
What is the problem with banking? It has become a means of control based on the moral presuppositions used to impose certain laws over money.
I have an Italian friend who loved to tell me how Italy was the seat of accounting and banking innovations. From Luca Pacioli, the father of double-entry bookkeeping, to the Medici family banking conglomerate Italians learned from the Roman empire the power that comes from controlling money. Financing war is a vehicle to great wealth. My friend is correct, and learning about some of these principles was of great interest to me.
In addition, at the time we were living and working in the UAE a country with Sharia laws over banking. This resulted in a unique combination of lending and financing that wrapped interest (forbidden - haram - in Islam) into the purchase price of the item you were buying (mainly cars). This is similar to many kinds of taxes. And it dovetails with the medieval Catholic church’s proscriptions on usury that have been eliminated. Usury is often wrongly called interest but is more specifically uncollateralized loans at exorbitant interest rates. All of these restrictions on banking are connected to religious principles designed to protect the public from a lender’s avarice and greed.
“Money never sleeps” and “it takes money to make money” are common aphorisms to describe what has been called the miracle of compound interest or exponential growth. We read, “The rich rules over the poor, And the borrower becomes the lender’s slave” (Proverbs 22:7). Our nation endured a Civil War that resolved the issue of slavery but opened other problems. We still deal with racial bias, division, and hatred. And we still deal with debt slavery, even if manumission from plantations released and freed men and women from bondage. This strikes at the fact that while slavery should be irradiated, indentured servitude is embedded in the capitalist system and accepted broadly. And, this connection between labor and capital is an age-old economic challenge.
Clearly, Adam Smith was a genius when he described certain problems with banking. In the following passage from The Wealth of Nations, he accurately links power over money used by governments and bankers to ethics and social stability.1 If certain institutions and companies are the only ones who can issue coinage and banknotes then they control all means of payment between people apart from barter. There are no universal creditors, instead, every man may only issue credit in his own name for products they produce. This is most commonly seen in labor given on a daily rate and paid weekly or monthly. If you are an employee then you lend your work for the promise of future payment. Further, channels for general notes for any debt become a choke point on economic activity and the reins on the nation’s prosperity.
“If bankers are restrained from issuing any circulating banknotes, or notes payable to the bearer, for less than a certain sum; and if they are subjected to the obligation of immediate and unconditional payment of such banknotes as soon as presented, their trade may, with safety to the public, be rendered in all other respects perfectly free. The late multiplication of banking companies in both parts of the United Kingdom, an event by which many people have been much alarmed, instead of diminishing, increases the security of the public. It obliges all of them to be more circumspect in their conduct, and, by not extending their currency beyond its due proportion to their cash, to guard themselves against those malicious runs, which the rivalship of so many competitors is always ready to bring upon them. It restrains the circulation of each particular company within a narrower circle and reduces their circulating notes to a smaller number. By dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the public. This free competition, too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. In general, if any branch of trade or any division of labor, be advantageous to the public, the freer and more general the competition, it will always be the more so.”
“If bankers are restrained from issuing any circulating banknotes, or notes payable to the bearer, for less than a certain sum…” This is a prohibition against microlending. Debt is simply money over time. It is a way to consume more than you’ve earned, finance a lifestyle in advance of earnings, or capitalize a business to earn revenue in the future. Businesses must be able to establish revenue streams to justify investment. Owners equity comes from earning, saving, and investing their own cash into the business as a proof of concept. If you seek out investors who fund your business you must sell a portion of your business to qualify their risk.
“…If they are subjected to the obligation of immediate and unconditional payment of such banknotes as soon as presented, their trade may, with safety to the public, be rendered in all other respects perfectly free.” A bank that provides liquidity, ease with which an asset or security can be converted into ready cash without affecting its market price, is itself a public good. Bank regulation is a key form of state power that subtly impacts individuals’ lives. This is one of the key problems with central banks such as the Federal Reserve — they invisibly manage levers that extract from the US population its wealth.
Governments that do not force banks to pay their debts, but force the people to pay their debts are acting as slave masters. If a state is going to relieve debts it must be done according to the principles of jubilee (see Leviticus 25). One generation cannot hold the next bound to debt accumulated in the protection of itself.
Many banks are better than a few because this “increases the security of the public” makes them “more circumspect in their conduct” and forces them “to guard themselves against those malicious runs” so they must weigh the creditworthiness of each customer and vice versa. Customers will gravitate toward banks that meet their obligations. Those that do not would be run out of business. If a bank folds that should harm the account holders, and incentivize customers to protect their own assets by only banking with honorable banks. For example, on March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run. That’s the story the media is telling us, but there is more to it. The FDIC guaranteed depositors would not lose any money even though the bank itself was an exclusive investment vehicle to extract wealth for owners of high-tech companies that were funded through unsecured loans. Competition creates stability and weeds out folly.
“It restrains the circulation of each particular company within a narrower circle and reduces their circulating notes to a smaller number.” This means that the damage and fallout from failures should be limited. Bank failures can be mitigated by distributing lending across geographic and demographic profiles. Smith continues, “…the failure of any one company… becomes of less consequence to the public.” National banks must never get too big to fail. But politicians who are lobbied, and funded, by bankers will never bite the hand that feeds them. Allowing and even encouraging consolidation of banks through mergers and acquisitions through some of the biggest financial corporations in the world destabilizes the US economic system. Small and medium-sized banks must be supported and protected through favorable laws so that regional and targeted lending takes place readily.
Our financial system was built upon the morality of Christendom. We once had incentives to maintain honor and ethics. However, now we reward the criminals who prostrate themselves before the God of the state. “The wicked borrow and do not repay, but the righteous give generously” (Psalm 37:21). We must avoid wickedness and uphold righteousness, in our lives and finances as a people and nation.
Smith, A. (1776). The wealth of nations [1776] (Vol. 11937).