By: Thomas Lee Abshier, ND

Because of their access to large quantities of money, the banking industry may have had an inordinate effect on the governmental-economic dynamic.  With wealth, it is possible to stabilize and enhance one’s position in the market through favorable legislation and media.  With wealth, it is possible to buy the ear of government through lobbying, and influence the votes of government through campaign contributions.  Thus, the bankers and every class of the super-wealthy may have an inordinate influence upon government, industry, and media.

In particular, governmental manipulation by the bankers may have been applied to legalize the practice of fractional reserve banking, establish the FDIC, and the Federal Reserve.  Having this legislation in place, the bankers could legally loan more money than they had in deposit, and have no fear of failure because of the government-sponsored rescue institutions.

There is probably a measure of truth in the allegations of influence by industries on government.  But, now these various policies are firmly entrenched as part of the economic culture.  Thus, we should ask if we should keep them?  Is there any value in them?  Are they the source of the weakness in the economic system?  Is it possible to administer them so that they work better?  Can they actually be compatible with the free market?

On the surface, it would appear that any legislation that modified an entire industry to allow behavior that the average man and corporation could not conduct, was probably inappropriate.  In other words, should the legislation that regulates the financial system allow bankers to loan more money than they have on deposit?

An argument against this perspective is that the bankers have taken control of the largest monetary tools of government for the purpose of securing their wealth against loss and ensuring profit.  For example, they influenced the formation of such agencies like the FDIC and the Federal Reserve.  Both of these are beneficial to the banking industries in that they stabilize and secure themselves against the macroeconomic fluctuations of boom and bust.

This is a plausible scenario that the bankers have influenced legislation to accept their practices and ensure their stability and survival.  But, the fractional reserve banking policy has been an integral aspect of making the banking industry profitable throughout history, so I don’t think it is necessary to consider that it was the pressure of the super wealthy that led to its official acceptance.

More to the point of the destructive influence of the super wealthy would be the establishment of a Statist control of the economy and political life.  Because of the willingness of the government to intervene in, and control the lives of the individual and group (corporations, agencies, associations, clubs, assemblies…) the authoritarian principles of life become more commonly expressed.  Thus, the question of whether the state should be involved at all is one important aspect of this question.  This would be the Libertarian or Constitutionalist consideration or critique.

Taking a historical-practical perspective about the issue of fractional reserve banking, the problem that legislators were trying to solve was the recurrent history of periodic panic withdrawals and bank failures.  Thus, the Fed was established (albeit under questionable circumstances) to resolve this problem.

Clearly, government involvement in ensuring bank deposits makes the banking system more attractive as a secure investment.  When the free market adjudicates the risk and reward ratio of any particular investment, people invest based on the risk and demand a particular reward for taking that risk.

In the case of a government-insured deposit, the risk to the deposits comes to near zero, which also lowers the interest the bank must pay, and makes the banking enterprise even more profitable.  Thus, clearly, government intervention has distorted the dynamics and prices for money (credit) as determined by the market.

This arrangement of government-supported banking is sustainable as long as the people support the government intervention.  This arrangement will probably continue as long as the government behaves in a fiscally responsible manner with regards to the insurance of bank deposits.

But, government fiscal responsibility in this arena depends on the banking industry accurately judging risk in the loans they make.  And, the risk can only be accurately judged within the context of a reasonably stable economic platform.  Thus, one of the reasons the government regulates money markets and domestic and foreign policy.

Money is the store of value only because it represents the commitment of others to give value (goods and services) in exchange for money.  Thus, any commitment to payback value (in return for a loan) is the equivalent of money.  Of course, the value of the money created by the loan is only as secure and valuable as the dependability of the borrower.  Hence the difference in the cost of money for people of different risk strata.

If the people want to secure the value of the community bank by a Reserve Bank, then that should be a choice of the market.  Ensuring the security of the depositors’ wealth is desirable from the standpoint of the general populace since it will help avoid the boom and bust cycle, at least from this cause.  And while the Federal Reserve act was probably put in place by people with ulterior motives, it was nevertheless a tool of economic stability that the market desired.

The disadvantage of government intervention in solving economic problems is that it is often not as responsive to allocating resources based on demand, risks, and rewards as a market-based solution.  The governmental solution is usually imprecise, provides too much or too little force, and is applied too early or late.  Often the market-based solution will be more precise and dynamic in judging the value of an asset, but it often does not recognize the threats of a developing catastrophic situation until the larger market or economy makes a catastrophic correction.  Many argue that many of the market crashes were actually caused by government & Fed intervention.

Certainly, the market crash and recession of 2008 was caused by the CRA (the Community Reinvestment Act), that forced banks to make “subprime” loans to people who would otherwise be unworthy credit risks.  Those who champion the cause of government intervention retaliate by pointing to the lack of regulation of the derivative markets, the Credit Default Swaps (CDAs) and the lack of regulation of the credit rating agencies such as Standard and Poors.  These agencies rated the Mortgage Backed Securities (MBS) as AAA investments, which enabled the Wall Street Bankers to repackage the bad loans as MBS and then market them aggressively.  Wall Street made high profits on the sale of these overvalued instruments and was then bailed out by government loans.

The news media has largely ignored the role of government in establishing the conditions that led to the Great Recession.  In fact, government has given itself more power to regulate Wall Street as a result of the collapse that the government caused.  The marketing and misrating of the value of the MBS was truly an error and in some cases possibly criminal.  But, if we return to the causative force, the current disaster, and subsequent cycles of compensation (bailouts, regulations, quantitative easing…) would not have been created if the government had not imposed the insane requirements of the CRA legislation (loaning money to people who could not afford to pay for them by conventional banking standards) upon the banking industry.

The government has taken upon itself to be the guarantor of bank-deposited wealth, which ultimately means that the taxpaying population is the guarantors of that wealth.  The Fed’s implicit promise is that the government, via the people, will work to repay the debt by their taxes, if there is a run on the bank.  And, keeping this promise to repay depends upon the willingness of the entirety of the society to repay by taxation.  Which, is only a problem if the willingness of the people to engage in productive behavior is diminished because of the reduction in reward for their labor.

When the taxes become so high that the people of the economy are no longer motivated to work, the debt will go into default.  A catastrophic tax revolt, a revolution against a governmental system, general strike, anarchy, or breakdown of the market is more likely when the society, both government and private sector, engage intolerable contracts of debt and taxation.  But, when the government obligates the populace to a debt load that leaves the common man with little current reward for his labor, he will lose motivation to produce, and the economy will sink into malaise.

As the common laborer becomes less well rewarded in tangible terms for his labor, he becomes less willing to work.  Thus taxes that service a debt sufficiently far removed from the currently received and perceived value produce an economic malaise.

In a normal, fiscally responsible scenario, the cost of the occasional bank failure, spread out over the entirety of the economy, supported by the burden of taxes to ensure that all have security in their deposits, is probably an acceptable value received in terms of taxes paid.  But, when a massive rescue is undertaken, that puts the nation in debt for generations, the people groan and may revolt.

Government programs and policies may force the unproductive allocation of resources.  The philosophy behind these policies may sound humanitarian, ecological, or fair, but large unintended consequences can result from placing regulatory restrictions on society and business.   Thus, the blunt intrusion of government programs and policies into the subtle market dynamics will likely result in problems worse than those the regulation was intended to solve.  The Founders intended that regulation of the market to be an issue of local governance.  The “Commerce Clause” was never meant to be an authorization for the Federal government to regulate every aspect of our lives under the color of regulating commerce.  The misallocation of resources results from inappropriate government intervention.  Then, a secondary problem arises when the government obligation becomes so great that general debt, and the resultant required taxation, becomes crippling.

A single small governmental program and intervention into the market would probably have little major distortion of the dynamics of wealth production, allocation of resources,  economic productivity, and tax burden.  But, when the number and size of governmental obligations grow to become a significant portion of the GNP, and the resultant tax obligation leaves people with little experience of value for their labors, the gradient of de-motivation of the labor force begins.  The de-motivation starts gradually with balking and a general slowing of the engagement of risk and labor.  In its extreme manifestation, a tipping or break point occurs where people have a sudden massive loss of confidence in the system of trade.  When this happens, society can slide into anarchy and reactive tyranny.

The governmental support of failed banking institutions has implications for liberty because of the distortions in the market, and the implications of increased taxation.  The risk of depositing money in an investment/savings vehicle could be minimized by private sector solutions, such as the various diversification strategies.  The governmental solution is to spread risk by creating state or regional reserve banks.  But, such banks all have as their ultimate source of faith in the storage of wealth, repayment by the labors of the people.  And ultimately, a reserve bank can only call on wealth by taxation or the appearance of wealth by printing.

The risk of government intervention, supplying guarantees against failure, is the creation of a welfare-state/serf mentality in the people.  The administrators and officers of this system become a de facto ruling or nobility class.  The rulers risk falling prey to the temptation to use the state for enhancing personal wealth, and manipulating or expanding the system to increase their own sense of personal power, their security, wealth, and legacy.  The insanity of the kings throughout history bears strong testimony against allowing a monarchy, dynasty, or oligarchy take rule over a country.

The government-administered systems are ruled by law, rather than the subtle, multi-factorial, signals of the market.  Thus, the governmental system applies a rigid response in the face of changing conditions.  A law-based system is accountable to the people through an initiative, referendum, and pressure placed upon the elected representatives.  But such feedback is slow and imprecise.  Thus, the inefficiency of government.

A perfectly righteous people would be servants, and compensate themselves justly, fairly, and appropriately for the value of the service they render, as compared to the rest of society.  But, it is unrealistic to expect that men will judge the value of their labor and product without interaction and feedback from the group.  Individual men cannot declare price and wages in a social vacuum.  Rather, the market gives feedback on these issues.  It gives a broad statistical averaging of personally felt need, and willingness to sacrifice.  The bargaining tool of price provides a method of exchange where each man considers his compensation and payment fair.  Without participating in the offer and bid dynamic of the market, the individual perception of price and value is easily skewed away from the statistical mean.

This is precisely the problem with government acting as sole arbiter of price, or risk, or allocation of resources.  The government is essentially an individual declaring its opinion as to these economic factors.  Government acts as much alone inside the vacuum of personal perception as does an individual, and from that place declares prices and wages by fiat.  The systems of perception and feedback in government allow for the legislation of personal benefit.  Thus, the individual desires for personal compensation and power can skew the law and market for the entire economy so as to benefit the individual.

The three limbs of the righteous society are righteous law, righteous people, and righteous judges.  The sanctification of the passions of the populace, and a commitment to follow the guidance of eternal law are the necessary elements for creating a just and right society.  The establishment of righteous legislation that reflects absolute law will guide the people and succeeding generations to respect self and others.  The body of law should be a terse codification of general principles of fairness in all manner of transactions.

The adjudication of violation should be by judges who are well versed in the principles of absolute law and its application to the issues relevant to the social and moral commerce of the era.  Each man should be sensitive to the principles of justice and equity, and by taking personal responsibility for judging righteousness rightly, he may operate in the maximum freedom/liberty that social interaction and absolute law can allow.  The fundamental rule of liberty is respecting another man’s space.  If I choose to follow the spirit of this primal law, I can judge the spirit of each moment, avoid transgression, and act without fear of violation.

A sanctified and rightly directed people will operate as a law within themselves, each man attempting to follow the law, and administer value and absolute law fairly to both himself and others.

The self is owned by God, and as such, there are no victimless crimes when I violate absolute law as it pertains to my personal welfare.  Thus, the moral crimes of adultery, homosexuality, drug abuse, addiction, abortion, and suicide are all crimes against the space of “other”.  As individuals, we each have a spirit that occupies a body.  That body is other.  It is a vessel, a being, a person other than the spirit.  We, as spirit, are to treat the body with respect by following the law governing our relations with another.  Thus, a man brought before a judge for a moral crime may be judged guilty of a violation of absolute moral law because of his inappropriate use of the space of the other, the body/soul given him as a trust by God.

Thus, there is a place for government, as a representative of God, as a point of accountability, when all other social barriers have been ineffective in enforcing the straight pathways of men.  When positing the possibility of a Christian society, we do not assume men to be selfless, or perfect judges of price and value.  Rather, each man in a Christian society will choose out of a commitment to God and a respect for His Law, to operate within the laws of the land, and will resist vice out of a commitment to moral rectitude.

Note, the Christianization of a nation does not automatically create an excellent and efficient social order, nor does it solve the problems of government.  The constitution of a righteous society must reflect the Absolute law accurately.  I believe the US Constitution of 1789 does in fact largely coincide with that Godly pattern of the absolute righteous society.  It is thus our duty as a Christian nation to continue to modify the laws of the land within the prescribed constitutional limits.  The Christian character of the people is valuable in this regard.  A Christian people will less likely fall prey to the temptations of women, gold, and power and the associated perversions of justice and righteous law that comes from succumbing to these powerful forces.  And as is relevant to this particular discussion, the expansion of the federal government into the marketplace was forbidden by the Founders.  Thus, the socialistic creep of the “New Deal”, the “Great Society”, and “Hope and Change” are all subversions of the Constitutional intent.

The power of the government to distort the market by laws which shape behavior is thus identified as the central problem.  The super-wealthy are simply one of the agents operating in the economy.  The super-rich are also subject to the moderating effects of the market as long as they are not able to use the powers of government to enforce policies which benefit themselves personally.  Thus, the market loses its ability to function as the unbiased mediator of fairness when government dictates policy for the exchange of goods.

Returning to the discussion of the merits and problems with the Fed and Fractional Reserve Banking, I believe the major point of mischief in this system occurs at the level of the Federal Reserve.  It was established as a quasi-private institution, having been given its authority by law, with the ability to issue money to banks for loans to meet their statutory requirement for reserves.  The banks pay the Fed interest for the use of money that they borrow, but that money is created out of nothing, hence there is no overhead associated with creating it.  Thus, there is a large quantity of money that the officers and agents of the Fed can use to move the market and government in the direction of satisfying their particular personal, political, or philosophic goals.  In short, the interest paid to the Fed can be used to shape the society into the image of the bankers.

Having acknowledged the distortion of the risk, reward, and resource allocation problems associated with government involvement in insuring bank deposits, let us simply assume that this systems of banking insurance,fractional reserve banking, and Federal Reserve will persist.  If that is so, then the best we can hope for is an administration of these programs and institutions in a manner compatible with the free market forces.

The major precaution required to tame the Fractional Reserve Banking and Federal Reserve system is full transparency.  The banking system is a holder of the public trust in that within that system is the intangible store of wealth.  The currency is not backed with gold, it is backed with the word of men who declare they will produce wealth in return for the wealth they consume.

Thus, to ensure that the public trust is kept regarding the store of wealth backing the nation’s money, there should be full disclosure about the performance of the loan holders.  The ideal monitor of the security of the nation’s wealth would be the financial position and performance of every individual, business, and corporation holding a loan.

Of course, this level of information monitoring could be invasive and used as a tool by government to manipulate.  Thus, at some level, there must be an information firewall that prevents the governmental leviathan from using such sensitive information to invade and regulate the individual’s life.  But, actually the IRS already has this information, and it may already be in use as a tool of government to regulate our lives.

The economy must have a tool that provides a general disclosure of the income versus debt load.  The society must know the security of receiving value in return for the value given.  Information gathering on this level could be extremely invasive, or it could be masked and impersonal.  The ethical issues of connecting the individual with his personal financial health are obviously issues for debate.  But, the bottom line is that without some measure of monitoring the ability of the individual, business, and corporation to perform on its debt, there is only distant inferential data regarding the health of the money supply.

Thus, to allow banks and/or government to have this kind of information would require a truly cooperative, neighbor helping neighbor type of society.

As mentioned earlier, the current financial market crisis was created by Congress by requiring that banks loan money to people who were financially unqualified to assume the responsibility of home ownership.  The legislators, judges, administrators, and executives who pushed, passed, and enforced this law may have had the intent to create a financial collapse, which could then be used to create an environment where more state control was required.  Or, they may have supported the CRA in the naive belief that by pushing the poor into home ownership that the poor would assume the responsibilities and work ethics of the middle class.  Either way, government was the force that introduced the disturbance in the structure of the market that in turn caused the financial collapse.

Returning to the issue of Fractional Reserve Banking (FRB), the market has accommodated to the laws and structures that have codified this practice of banking.  The depositors have found the risk acceptable of allowing banks to use fractional reserves to keep in store for withdrawal.  Banks charge interest on money they do not have in deposit, and loan out money they never had in deposit.  But, banking regulation has required certain percentages and limits to the amount of loans.  FRB has been called, crooked or dishonest, but since it is now openly practiced, regulated, and become part of the economic system, such depreciating characterizations are no longer appropriate.  Thus, we must examine the details of this process so as to understand how it has become an acceptable banking practice.

The essence of the fractional reserve banking system is that banks have loaned money that will be repaid by people who will be creating value in return for the credit extended.  And, as part of the transaction contract, borrowers pay a premium for the privilege of receiving credit from the market.  As those who loan money, and judge the creditworthiness of repayment, the bankers act as the gatekeepers or agents for retaining the value of money.  Thus, the banking industry is an agent of public trust, and their judgment must be accurate in judging the character and likelihood of repayment in return for the extension of credit.  Those who simply consume, and do not repay are unworthy of credit.  Those who borrow and default are consumers – they are de facto thieves, taking the goods and services of others for their use and returning nothing to those who sweated to produce it.  A sufficiently large system can absorb a small percentage of loss, but when it is systematically perverted by such governmental policies as the Community Reinvestment Act, we see the disastrous effect on the totality of the economic system.

By loaning money that was not deposited, the banks have created money.  If the money is given to producers of goods and services, and the borrower produces more goods and services for others to consume, then the general pool of value and wealth has expanded.  With this loan, the wealth of the entire economic system is increased.  All the workers along the entire production chain are enriched by the added goods and services that are now available for consumption.  The money put into circulation by the loan is given to the producers of the consumed item, who can now buy other goods and services with that money.  This system continues to perpetuate and facilitate the allocation of consumption and production as long as other producers create wealth commensurate with the production.

Price is the medium of exchange that regulates the flow of production to consumption.  Thus, while money is created out of nothing by the bank, it is given value by the implicit contract of the borrower to produce a given amount of value over a given period of time.  In other words, the borrower must create value, for which he is paid, which allows him to repay the loan.  There are many such transactions occurring each day, which smoothes the delay between the creation of new money, and the production of new value for consumption.

On the level of the individual loan, there is a lag between borrowing, consumption, and repayment.  But on the scale of a city, state, national, or world economy, the system contains many borrowers who eventually produce the value they promised and the system functions based upon that faith of future production.  Continuous needs feed the endless consumption of the economy.

When money is loaned into the system, someone takes that loan as a new debt obligation, which in turn can be the initiating contract that stimulates new production, such as building a house.  The loan (the debt obligation) received by the borrower may be used to purchase goods and services that have already been produced.  And, that purchase may, in turn, enable the payment of the producer who has borrowed money to produce value for consumption, with the expectation that such consumption would be forthcoming.

The money loaned is essentially a contract note that says, “If you accept this note, you will be able to exchange it for goods and services that you want.”  Thus, money is a contract with the larger society that the general “they” of the society will continue to work to provide goods and services that I need in exchange for the money that I tender.

Banks are the source points from which money is created, and the portals from which it is issued, having vetted each borrower and ensured that he was worthy, willing, and capable of committing to repayment of that loan by producing value.  Thus, each note reflects the commitment of the recipient to provide value in exchange for that note.

Ultimately, no other value can be attributed to money other than the promise of another person to provide value in exchange for that note.  The concept of the commitment to serve and produce value has been separated from the money-note itself, and money has become an object of lust, thinking that the money itself will supply the desired objects.  But, returning to its roots, the availability of money, and the availability of goods and services inspires and enables the exchange of good and services.

Money enables the circular process of production and buying of goods and services.  Money is the medium of exchange that allows consumer A, to buy from producer B, who has no need for the goods and services produced by consumer A.  Thus money becomes a generalized representation of wealth or value produced.  Price is ultimately determined by market consensus.  Every individual evaluates the value received from an item compared with the effort and pain associated with the value he produced.

Money has no inherent value, as it only represents the value that the market has placed upon my efforts, service, and production.  And in turn, I am the sole determinant of whether I consider the value offered for my tendering of money is adequate for the effort I exerted and pain I endured.

In a macroeconomic sense, the amount of consumption and production must be roughly equal over any given increment of time.  The human appetite for consumption is unlimited, but the human ability to produce is limited.  This has been immortalized as the Fundamental Problem of Economics, “Unlimited wants, and limited resources.”

If we consider production as an inflow to the pool of wealth, and consumption the outflow from that pool, then adjusting the price will regulate the rate of fill and drain from the storehouse of accumulated wealth available for consumption.  Price is the throttle valve that regulates the flow of consumption.  By properly pricing a commodity, the individual industry and larger economy will automatically regulate the balance between production and consumption.

If the amount of money placed into circulation is too great, and if prices are artificially constrained to stay constant by price controls, then the consumers will drain the pool of wealth and shortages will result.

If the amount of money placed into the system is too great, and prices are allowed to float in response to the bids for the product, then producers will naturally raise their prices so as to increase their profits, and meet the cost of future production.  The manufacturer must raise his prices in an inflationary environment so as to be able to afford the increased cost of supplies and wages.  An increase in the money supply will naturally raise prices throughout the economy.  And, to stay profitable, the entire market must eventually raise its prices.  Thus, the creation of an inflationary environment.

The creation of money by the loans enabled by Fractional Reserve Banking will not be inflationary if the rate of loan creation is moderated to a critical level.  At this critical level, the amount of money put in circulation by loans is met with an associated amount of production corresponding to the value of all loans.

But, computation of this exactly critical rate is difficult because it takes time for the contracted wealth to be created.  The amount of wealth created will be greater than the amount of the loan.  Note, this is a principle purpose of investment, to create a productive engine which produces more than it consumes.  But, for the purposes of regulating inflation and money supply, the multiplier between the loans and production is unknown.  Thus, it is necessary to monitor the growth of the money supply, e.g. M1, M2, M3, M4, as indirect indicators of production and consumption.  If the money supply is expanding faster than the production of value, then the value of the money will drop to match the value available for consumption.

The banking system creates a contract of indebtedness by borrowers of money, enforced by the penalties of law, with terms that explicitly elaborate the promise to repay.  This system of contract and enforcement has proven effective in providing men with the incentive they need to produce value to meet their debt obligation.

The banking contract is founded upon the Judeo-Christian value system of hard work, honoring your word/contract, and having faith in him to the extent justified by his past performance and evidence of character.

By social agreement, money in the hands of the borrower entitles him to trade money for value that has already been produced, or to contract for new production.  Fractional Reserve Banking gives value to newly created money by associating a loan of newly created money with a contract to produce at least an equivalent amount of goods and services, plus an additional percentage above the amount of the loan to compensate the banker for his work in vetting the loan, and providing a service point for the loan.

The current money supply, minus the rate of saving, pursues the tangible current production.  The savings rate, or delayed consumption, represents the faith that value will be produced when needed.  But, since human nature values current consumption over delayed consumption, the cost of borrowing for current consumption must be raised to throttle current consumption to a level commensurate with current production.  The money supply can only expand at a rate equivalent to the rate of the expansion of production.  The cost of money is regulated by the banks and by the Federal Reserve.

Money placed in circulation by the banks loaning money represents value that will be produced.  The society and economy allow this practice because of the trust that the borrower will repay with the production of goods and services commensurate to the accepted current value of the money.

The banking system began as a storehouse for money, but that role has expanded to being the conduit for the expansion of the money supply.  The banker provides a service by storing and loaning money.  They have overhead associated with various functions such as auditing, accounting, collecting, management, taxes, physical plant, advertising etc.  The banks make a profit between the interest received, and interest paid.  The initial capitalization of the bank allows the initiation of the process of loaning and borrowing from the Federal Reserve.  The greater the producing debt load carried by the bank, the greater their cash flow, and the larger their profit (Total Income – Total Expenses = Profit).  Thus a bank has an incentive to increase the debts they authorize, but the number of loans they can issue cannot increase without limit.  There are asset requirements and debt to asset ratios that limit the amount of loans that a bank can issue.

As noted, the wealth stored by a bank is not just in the value of the money deposited by its patrons.  Rather, the majority of its wealth is in the form of debt that people are willing to repay with value they create.  Thus, banks serve as storehouses of a type of wealth – they keep account of debt, which represents future production.  The bank provides tangible and intangible value regarding this storehouse type of function.  The market considers this a valuable function, and compensates the banker for that service.

When depositing money in the bank, the public considers the risk and reward associated with the bank holding only fractional reserves in relation to its total deposits.  Those who deposit there have tacitly voted the risk as acceptable.  And, with the advent of the Federal Reserve and FDIC, the risk has been reduced to near zero.  But, if the risk of this particular storehouse of wealth is too great, there are other instruments of storing wealth that compete in the same market such as mutual funds, derivatives, gold, commodities, real estate, etc. all which have their own particular level of risk and tangibility/intangibility.

It appears from the history of the development of the banking industry that the fractional reserve concept is very old, and it worked well until there was a run on the bank.  Since the banker held only a fraction of the total deposits, the depositors could lose a large portion of their stored value if a run occurred at a particular bank.  This lead to the desire for a central bank to reduce the risk of total failure of a bank.  Throughout history, there were times of political and economic volatility and bank runs would occur periodically.  Thus, the need to stabilize the banking industry, which was done by the establishment of the Federal Reserve, which is a central bank that loans money to a local bank in order to keep its reserve level at the required amount.

The Federal Reserve System: One aspect of the establishment of the Fed was a law requiring banks to hold a certain fraction of their deposits in reserve.  If the banks did not have that amount of cash in reserve at the end of each banking day, then they were required by law to borrow that amount overnight, or however long was necessary, to meet that requirement.  The major reason for establishing the Fed, and its most important public function, was to provide a level of security to the depositors, which is a good and proper reason for establishing a central bank.

We do not know for certain how the Fed uses the funds they collect from loaning money to the member banks.  But, it is unlikely that they have in turn invested their profits so as to create a store of wealth, value, and equity that can be used as a buffer in case of a bank failure.  The money collected in interest may go into the general fund.  Or, the Fed may be able to use their profits to support efforts that shape society.

The law has given the Fed a franchise to create money out of nothing, and there is no associated promise to create value associated with the money the Fed loans to banks.  The lack of a reservoir of value from which the Fed creates the loans can thus create money without an associated contract to repay by creating more value.

The Fed accumulates money by collecting interest from loans it makes to banks, and repayment of the national debt, which is created to fund expenditures by Congress.  There is little overhead cost associated with making those loans, so the largest percentage of the interest received in repayment of the loans is profit.  The profit accumulated by the Fed was ultimately created by the hard work and effort of the people who have made money in the economy.  Thus, money was fabricated from nothing, interest charged for the money, and the profit from those loans is now available to the Fed to use.  The Fed now has dollars in its possession which can be used in a non-inflationary way.  The money loaned was fiat money, but that money was turned into real money when it was received as payment on interest.  A repaid loan represents that the borrower has been paid for having created value and that credit to consume is the cash they were paid for doing the work.  When interest is repaid to the Fed, that money is real money because it represents value that was created or value that was promised to be created.  That money can then be used to consume the value created by various types of work done in the economy.

Thus, the officers and agents of the Fed can take the profit extracted from the fiat money they loaned, and spend it however they please.  In particular, that money could be used to buy the services of the media, government officials, policy makers, industry, etc in order to shape the society in the manner they so chose.  The creation and operation of the Fed is well documented in the book “The Creature from Jekyll Island”.  The book notes the Fed’s links to European bankers, the link between Congress and the Fed.  Thus, the money gathered in the above-mentioned percentage may be directed in its disposition by the will of the European banking community.

As a resolution to the problems mentioned above, the Fed should store the money they make from the interest on the loaning of fiat money, to establish a true reserve in the form of securities, industry, or other financial instruments.  The Fed truly should provide a storehouse of value that the society truly trusts.  The same should be done for social security, Medicare, and other social programs if we are going to use the government as the mediator and provider of such social services.

As far as the relationship of the Federal Reserve, Fractional Reserve Banking, and Christianity, when people have a moral center to their lives, they can be more sensitive to the evaluation of value, and fair trade of value for value.  The Christian ethic is embodied in the principle of obeying the God given natural laws of relationship, and loving neighbor as self.  Or restated, “Love God’s way, and do unto others as you would have them do unto you.”  When there is a strong commitment in each man to behave in a manner that provides value in exchange for value the system is sustainable.  Every individual has needs, and those needs persist throughout life.  Life is interdependent, and the largest play of life revolves around serving and being served in the satisfaction of needs.

The current arrangements as they exist in the Fed-banking relationship should be openly evaluated and judged.  Questions need to be answered with regards to the interest the Federal Reserve is receiving from loaning money to banks, and interest received from the payment of interest and principal on the national debt.  There are many layers of transactions between ordinary commerce and the function of the Fed, and the function and influence of this organization remain a shrouded mystery.  We must know the Federal Reserve, and the huge amount of money they direct is acting as our societal economic servants or as the puppet masters of the economy.

Money and the Christian Nation: A nation where the people are put in a master-slave relationship is not befitting of the Liberty we have in Christ.  Is the labor of my hands, in the form of interest and tax payments, being used to shape society by the expenditures of the Federal Reserve?  Am I enabling people to enslave me?  If so, I truly am forging my own shackles.

The flow of money follows this course: the effort of my hands is paid to the bank to repay loans and interest and taxes to pay for the national debt and its interest.  If the Fed uses that money to influence governmental policies by campaign contributions, or if it buys media influence, then the Fed is able to shape society.

If this is the case, then it is a tool by which the social elite could apply real economic force in removing our Christian heritage from the educational system, feeding Statist propaganda to the children, promoting anti-moral social policies, disarming the populace, and controlling the media by allowing only a thin bandwidth of pro-Statist propaganda.

This social vision of the Statist opposes the moral organization of the Christian nation and its Biblical standards.  To re-establish a Christian Nation, we must have a broadly educated populace.  We must pursue the scientific-philosophical basis of Christianity, rather than supporting only the intellectual pursuit of understanding the Godless evolution of matter into full human consciousness.  We must educate and learn how to sanctify our social interactions in marital relationships, child rearing, work, government, and group interactions.  We must return men to productive employment, giving them the results of their labors, and allowing them to dispose of them through charity or group contributions to create larger public projects.  We must take responsibility for our own bodies and souls and really try to nourish our spirits, soul, mind and body in the way of the Lord.

Creating a Christian nation requires populating the nation broadly with men who have pursued a great deal of maturing after saying, “I believe in Jesus as my Lord and Savior”.  Mature righteous men must be capable of wise discrimination in the marketplace of ideas and commerce.  A nation populated by hearts which have embodied the message and principles of Jesus Christ will self-regulate around the absolute and true concepts of justice and love.  The mature Christian will act out his understanding of God, Absolute Law, and love of fellow man in his thoughts, words, and deeds.

The market and society are the stage where the drama plays out and gives feedback as to the actual experience and fruit produced by the ideals.  The pain and pleasure of experience give the feedback that inspires correction and shapes our character into the image of Christ if He is our standard of Truth and goodness.

For the concepts of Christianity to have a good effect on the society, the populace must take the study and practice of education, philosophy, culture, politics, economics, law and justice and compare it with the Biblical standard in an ongoing way.  Having a nation ruled by, or declared Christian will have little effect on the general felicity of the people if there is no pursuit of the highest ideals of Christ by the individuals comprising that social organism.

Religion without the spirit of Christ has little certain value in properly regulating men’s hearts since religion can be used as a mechanism of controlling the populace by men who have put on the Pharisee spirit.  Power satisfies one of man’s largest innate hungers.  Men can see that religion moves the masses.  Thus, those who have a form of religion but do not have the spirit can use religion for their own purposes.

The value of religion in organizing the Righteous Society comes by the true heartfelt worship of God.  The most satisfying social order arises when men organize their hearts and actions to coincide with the actual patterns and laws underlying the natural laws governing the human heart, soul, spirit, mind, and physical universe.  Until that occurs, we push against the hand of the divine and labor in vain.

The Federal Reserve System & Fractional Reserve Banking: If properly regulated in its rate of currency production, Fractional Reserve Banking presents no threat to the integrity of the meaning and value of the money supply.  The newly issued money corresponds to real value as long as the loans corresponding to the commitment of faithful and industrious men willing and able to create new value in return for the credit they produce.

The FRS and FRB systems have placed the money supply in the hands of the bankers, and as a result, placed the entire soundness of the societal exchange and structure with them.  As a society, we must have a justified trust in the integrity of its managers and their judgment of the character and creditworthiness of the people to whom they issue loans.  This public trust of the banks was betrayed when Congress required the bankers, by the force of law, to loan money to un-creditworthy customers over the period of 2000-2008.  This extreme injection of currency, rated too highly for the risk, paying high percentages caused the entire market to be swept into trusting in the labors of people who had no ability to keep that trust.

The real problem is thus with Congress and their allies in the Federal Reserve.  The problems are as follows:
 Legislation distorting the market: Congress passes legislation which directs the market to direct social behavior under the penalties and incentives of law.  Those expenditures are forced by law, indicating that this spending would not have been generated by the desires for normal consumption and of the common man.  The expenditures could be good, and organized for highly beneficial programs, such as NASA and the space program, or for extreme ill such as tax breaks incentives, ACORN, affirmative action, hate crimes, abortion, and the Community Restoration Act.
 Fiat Money creation for Projects: Congress passes laws which authorize expenditures for projects, without passing corresponding tax revenue legislation.  Thus, the Federal Reserve prints money, gives it to Congress to disburse, and charges interest of the American public for the service of creating money out of nothing.  When congressional expenditures are given as entitlements, the recipients only consume goods and services out of the fixed pool of the economy.  Thus, the money supply has expanded, without creating a corresponding value in return for that injection of money.  This creates inflation by creating more dollars chasing the same amount of goods.
 Federal Reserve unaccountable expenditures: The money the Federal Reserve receives in interest payments from tax revenues, and corresponding expenditures, have not been openly accounted for.  Ron Paul has asked for an audit of the Federal Reserve to correct this deficiency of accountability.

Regarding this last point, the Federal Reserve banks are private entities.  If they receive actual taxpayer generated payments to pay off the principal and interest of the national debt, then the managers, directors, and/or owners should be accountable to the society for those expenditures.  Such expenditures put direct the labor of men, and as such, they can mold the society into a shape that reflects their vision of utopia.  If their vision is of a world whose head and king is Christ, and the Law is the Way of God, we truly are moving toward that desired Righteous society.  If they push against the divine, we are moving toward a slave state, with mere mortals as our masters.