Exodus 22:26-27 If thou at all take thy neighbour’s raiment to pledge, thou shalt deliver it unto him by that the sun goeth down: 27 For that is his covering only, it is his raiment for his skin: wherein shall he sleep? and it shall come to pass, when he crieth unto me, that I will hear; for I am gracious.
This Biblical passage introduces us to a couple of different concepts regarding lending, specifically one regarding fractional reserve banking. The passage first tells us that the borrower was very poor, he only had his raiment as collateral and thus could only borrow a small amount. He also had to give up his raiment during the day, thereby having to come each night to collect it and return each morning to pledge it.
In regards to fractional reserve banking, we have to draw some conclusions from such a practice. As the lender, I had right to his collateral each and every day of the loan. Why would the borrower have to give up something of such little value? The reason is that if he gave up his collateral to me, the lender, he could not use this collateral with any other lender. Thus, he couldn’t borrow money from me with the raiment as collateral, and from persons B,C,D, and E. If he were able to do so, he could easily run off with the money, leaving lenders A-E to figure out how to split the raiment. He could only borrow what was backed.
In banking, the “crime” of fractional reserve banking is committed. More money is loaned out than what is actually possessed in reserves. In a gold-based society, this happens when more receipts for gold are given out than there is gold in reserves. In a fiat currency-based society, more money is loaned than what there is “cash” on hand.
This is what it looks like. According to the regulations of the Federal Reserve, local banks are required to deposit around 10% (sometimes less) of each deposit at the local bank into the regional Federal Reserve Bank. So if I deposit $100 into my bank, they are required to deposit $10 of that into the regional Fed bank. They can then loan the remaining $90 to the next customer. That customer writes a check for $90 to another, who deposits it into his bank. That bank deposits $9 into their regional Fed bank, and loans out the remaining $81. This continues until the original $100 has been expanded into about $800. Now, what if just a couple of the customers come to withdraw their original deposits, the $100 depositor and the $90 depositor? They are trying to claim $190 of their money where only $100 exists (actually only that which was deposited into the regional Fed bank, maybe the 10% deposits will add up to the original $100 if every borrower deposits the money). They are still $90 short (and this example excludes the possibility of other customers coming to claim their deposits). This action of withdrawing more than what is in reserves is referred to as a bank run. It leads to the collapse of banks (and the eventual need for the Fed or the Government to come along and bail them out).
This process is a form of theft for a couple of reasons. First, it inflates the money supply. In this scenario, there is really only $100 in the money supply, yet it has been inflated to $800 (or more depending upon the reserve requirements) through the practice of fractional reserve banking. Thus, more money is in the market than was originally intended. The market will “feel” this increase of money and its value will subsequently drop. Prices will go up to compensate for the devaluing of the dollar and we will have been robbed of our hard-earned money. Second, it gives people the illusion of money that does not really exist. When they then come to withdraw their money, in the event of a bank run, there will be no money to give them. They honestly and legally deposited money they thought they possessed, and the bank, through legal but criminal actions, no longer has that money to return to them. When they come to claim their raiment, it is no longer available.
This theft is currently legal, and so continues unchecked against us. If a bank issues “counterfeit” money, money it does not have, this is legal. If the government issues “counterfeit” money, money it does not have to issue, this is legal. If a printer prints “counterfeit” money, he goes to jail. It is a double-standard, and one we need to recognize to stop. The Bible prohibits lending what is not there to lend, this is theft in multiple forms.
Liberty exists where we are free in knowing that our money is of value, where there are not secret cabals of government and banking working behind the scenes to increase their own wealth while subsequently destroying ours. This is liberty, and this is what we must demand.