Thursday, October 15, 2009

Problems with Modern Banking

The practice of loaning money deposited on call is unacceptable. Money is a legally enforceable claim to goods and services and two people cannot hold the same claim at the same time. If I entrust my claim to a bank to look after, and they loan it to someone else, that person will be able to obtain and use the goods and services to which I am entitled.

The bank cannot be certain that when I come to take up my claim, goods and services will be available for me. They have allowed those to which I am entitled to be stolen. The bank is an accessory to theft. It has allowed someone to buy the goods that are mine. They have breached their duty to me (Exodus 22:7-9).

This can be seen more clearly from an example. Suppose that I give my gold jewellery to a friend to look after, saying that I will come and get it when I next need it. If that person then lends that jewellery to someone else, hoping that it will be some time before I want it, or that he will be able to get it back or buy some similar jewellery when I come to ask for it, he has breached his duty to me. He has put goods entrusted to him at risk. If the friend is unable to get them back when I want them, I would be justified in accusing him of theft.

Economics textbooks describing the origins of money, give the example of a gold broker, who finds that only a fraction of people come back for their gold held in his store at any one time. Therefore, he can lend most of it out to other people, keeping a fraction for those who do come back for it. The textbooks describe this as clever use of gold. Actually, it is nothing more than theft (as is shown when there is a run on a bank).

For a detailed analysis of this problem see Bank Deposits and Loans.

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