Monetary Policy and the Philippine Economy - Biblical Critique of Inflation

This is the 4th and last part of my series in "Monetary Policy and the Philippine Economy". The content will be taken from Gary North's "The Biblical Critique of Inflation". I want to present North's material in four parts: 

• Identifying currency debasement as a concrete call to repentance

• The law commands honest measurement and money

• Consequences of inflation, and

• Multiple indebtedness

Concrete Call to Repentance

North started his critique by citing that unlike today's church leaders, Old Testament prophets confronted both the nation as a whole and their civil governments with a concrete call to repentance. Isaiah 1:22 is an example of such call. In this verse, prophet Isaiah declared that Judah was guilty of economic dishonesty. Currency debasement and deceiving the public about the quality of the products in the market were considered normal and ordinary.

Precious metals such as silver and gold were used as money both nationally and internationally during biblical times. North mentioned that you can find "over 350 references" showing various contexts where silver and gold were used. Example passages include 2 Kings 5: 5 and 2 Kings 12:13.

Honest Measurement and Money 

Since gold and money were used as medium of exchange, honesty in economic transaction was vital. North argued that the law's provision concerning honest weights and measurement was also applicable to honest money. He quoted Daniel-Reps' study to show the importance of honesty in economic transaction: 

"Exactness of weight was important not only for dealings in corn and other goods, but also as a guarantee of the soundness of the currency...The practice of weighing money rather than counting it was still general in the Palestine of Jesus' day, as it was all round the Mediterranean. The scales also served to ensure that the coins were of the true metal and that they had neither been filed nor clipped.; indeed, this inspection was one of the banker's and money-changer's chief tasks" (Gary North, Introduction to Christian Economics, 1973, pp.5-6).

During Isaiah's time, silver and gold coins were not yet in existence. They were used as money in the form of "ingots" (p.6). Exactly, the debasement of ingots with cheaper metals was the offence committed by the people of Judah during the prophet's time. 

For North, that was an act of monetary counterfeiting. He considered it fraudulent, an act of theft, and immoral. He then equated it with the use of legal tender laws. And he contends that not even the government is above the law concerning the use of honest money. North explains why this is so:

"...legal tender laws are immoral; currency debasement is immoral; printed unbacked paper money is immoral. To mix cheap metals with silver or gold and call the result pure gold or pure silver is totally fraudulent. Yet this is what was being done in Isaiah's day" (ibid.).

Such act of monetary dishonesty was not new in Isaiah's time. It happened long time before his day. Proverbs 25:4 clearly identifes the command "to take away the dross from the silver".

Consequences of Inflation

"Currency debasement is the oldest form of monetary inflation" (p.7). North warns about the destructive impacts of monetary inflation on the economy. He quoted four paragraphs from Murray Rothbard's "What Has Government Done to Our Money?". I gleaned twelve destructive consequences of monetary inflation from those paragraphs :

• Gain for counterfeiters

• Losses for late receivers

• Redistribution of wealth in favor of first-comers

• Distortion of business calculation (consumers' demands and operation cost)

• Illusory profits

• Suspension of free market's penalty for inefficient firms and rewards for efficient firms

• Business cycle

• Decline in quality of goods, services, and work

• Popularity of get rich quick scheme

• Penalizing thrift, saving, and lending

• Encouraging debt and spending

• Reduction of standard of living in the name of creating "prosperity"

 See how North concluded Rothbard's analysis:

"Rothbard's analysis indicates why God so opposes monetary inflation, whether practiced directly by the State or simply private fraud which is tacitly sanctioned by the State. Currency debasement is theft. It involves the redistribution of wealth. Those on fixed incomes suffer. The quality of production tends to decilne. Monetary inflation (currency debasement) is a fraudulent, invisible tax, and the Bible prohibits it. The nation which permits monetary inflation to persist, as if it were not a terrible moral evil, will suffer the consequences described by Isaiah and Ezekiel (22:18-22)" (p. 8). 

Multiple Indebtedness

Since monetary inflation promotes debt instead of thrift and saving, a corollary economic and monetary phenomenon occurred. North described this as "multiple indebtedness". He got this idea from Exodus 22:25-27.

The passage speaks about the use of interest in lending money and the use of a pledge or collateral. It is this use of collateral where North got this idea of multiple indebtedness. For him, the cloak as pledge serves as a protection for both the creditor and the debtor. The debtor cannot use the same cloak as collateral in multiple loans or transactions. He is confined by his immediate assets. This economic principle prohibits multiple indebtedness. 

1. Fractional Reserve Banking

After laying down the basis for multiple indebtedness, North claimed, "The entire public sphere of civil government rests on the violation of the principle. The whole structure of modern credit is based upon the idea that men should not escape from perpetual debt" (p.11). Particularly, "fractional reserve banking and the limited liability corporation" (ibid.) have violated this economic law. This violation was later organized and designated as "the monetization of debt" (ibid.). Notice how North described this economic phenomenon:

"The central bank of every nation...prints up the money to finance the deficits of the central government, and in return for this fiat currency, the government gives an interest-bearing bond to the bank...From a biblical standpoint, this is utterly corrupt: 'The wicked borroweth and payeth not again' (Psalm 37:21a). The civil authorities do not intend to reduce this debt and repay the principal. They favor perpetual indebtedness. Laws that are transgressed in God's universe will be found to contain their own built-in punishment...Massive national indebtedness is highly dangerous" (ibid.).

Concerning fractional reserve banking, its mechanism is unbelievable. It all starts with a citizen making a deposit either checking or savings account. And from that deposit, fractional reserve can create loans nine times the size of the original deposit. North referenced Wilhelm Roepke saying the same thing about fractional reserve banking as resting "upon the systematic violation of the biblical prohibition on multiple indebtedness" (p. 12). For Roepke, without understanding the mechanism of fractional reserve banking, we cannot understand also "the perils and the problems which currently beset our economic system" (p. 13). 

Fractional reserve banking violates the principle of multiple indebtedness for it indebts itself beyond its immediate assets by loaning money to borrowers. Banks do this for they assume that their creditors will not ask for their money simultaneously. The faulty foundation of this mechanism is exposed when a bank run occurs. 

2. Limited Liability Corporation 

LLC has been in existence for more than a century. North describes this institution as a creature that came out of the economic environment that promotes multiple indebtedness. Or we can also say that with the existence of fractional reserve banking and government intervention, LLC is another form of violation of the principle of multiple indebtedness. North describes three things about this institution. 

First, LLC works as follows: 

"The corporation...is responsible only for the value of its assets. Creditors can collect, in case of coporate bankruptcy, up to the value of the corporation's property, but they cannot gain access to the funds of the legal owners, i.e., the shareholders...Thus, the LLC tends to become a huge, impersonal structure in which effective ownership is separated from management" (p.15).

North's second observation is about the shift in responsibility. Here North relies on Rushdoony's comments:

"...the liability thus shifts responsibility away from the responsible to society at large...with limited liability, a premium is placed on profit irrespective of responsibility. The shareholder is less concerned with buying responsible ownership and more concerned with buying a share in profits. And then, as the state further protects the shareholder against liabilities in his irresponsible pursuit of profits, the shareholder becomes less and less concerned with the responsible and moral management of his company" (pp. 15-16). 

Finally, North identified the influence of government intervention preparing the way for socialism. The limited liability laws are actually one form of government intervention. They destroy personal responsibility before God and before men, they produce subtle people who know how to use bankruptcy laws, and they erode the very foundation of Western civilization. Notice how North explains the connection of limited liability laws to socialism:

"Limited liability laws have produced the era of the huge, impersonal corporations that have produced unquestioned material prosperity, but at the same time these laws are now producing something very foreign to free enterprise...The drift into socialism continues, for it is socialism, above all other systems, which destroys personal responsibility and removes power from ownership..." (pp.17-18). 

Conclusion

At last, after 15 days, I finished my series on "Monetary Policy and the Philippine Economy". So part 1 talks about Dr. Nye's lecture where he identified the economic problems of the country and offered a corresponding solution. Part 2 contains six recent news articles related to monetary inflation written from different perspectives. Part 3 deals with Mises' lecture on inflation. And this last part is about biblical critique of inflation.

In blogging this series, I recognize the existence of gaps. It is just a draft, which needs to be finalized to come up with a lecture format. At its best, this series and other related articles in this blog serve as an introductory overview in the study of monetary inflation.


Part 1 - Dr. Nye's Lecture

Part 2 - Summaries of 6 Related Articles

Part 3- Mises' Lecture

Reference: North, Gary. (1973). An Introduction to Christian Economics. The Craig Press.