Chapter 35: Banking
Updated: 4/13/20
Then the servant who had received one talent came and said, ‘Master, I know that you are a strict man. You reap where you did not sow, and you harvest where you did not scatter. I was afraid, so I went away and hid your talent in the ground. See, you have here what belongs to you.’ But his master answered and said to him, ‘You wicked and lazy servant, you knew that I reap where I have not sowed and harvest where I have not scattered. Therefore you should have given my money to the bankers, and at my coming I would have received back my own with interest’ (Matthew 25:24–27).
I have analyzed this in greater detail in Chapter 47 of my commentary on Matthew. This passage is the crucial New Testament passage on banking. It established the legitimacy of lending money at a rate of interest in commercial transactions. It refutes any argument that lending at interest is immoral. If the theologians and bishops in the early church had taken this parable at face value, they would not have issued prohibitions on interest. These prohibitions set back Christian business and entrepreneurship for well over a millennium.
Jesus’ parable of the stewards appears in His most detailed discussion of the final judgment. It has to do with God’s evaluation at the end of time of the productivity of his stewards. God imputes economic value to their performance, and He rewards them accordingly. Of course, this refers not simply to personal economic productivity, but to kingdom productivity. Jesus used the language of investing to describe the process of God’s original ownership, His delegated transfer of ownership to His stewards, and His final accounting of their performance as stewards.
The greatest reward went to the steward who had been responsible for the largest amount of money, which he doubled. There was an economic reason for this. It is more difficult to double a large investment portfolio than double a smaller one. The larger a capital base is, the more difficult it is to maintain a constant percentage rate of return. The second-greatest reward went to the steward who had been in charge of the second-largest amount of money, which he doubled. The penalty was imposed on the steward who buried his coin, and who returned it at the end of his period of stewardship. The owner announced his condemnation of this steward. The steward had attempted to deflect attention from his own lack of performance by accusing the owner of being a harsh man who profited from other people’s productivity. He reaped, yet supposedly he did not sow. This is the perpetual argument of all haters of capitalism. They blame the capitalists for being exploiters. The owner cited this accusation back to the steward. He implicitly asked the obvious question: “Why didn’t you turn my money over to the bankers, who would have paid a rate of interest on this money?”
Jesus’ listeners would have recognized the nature of the steward’s lack of performance. He had been given authority over the investment of the coin. He had done nothing creative with it. He had produced a loss for the owner, namely, the money that the owner would have received if the steward had simply handed the money over to local bankers, and had them invest the money. He would at least have received a rate of interest on his money, which was not his money, but which belonged to the owner.
This owner’s statement unquestionably validates the legitimacy of banking as a business. Otherwise, Jesus would not have used the example of banking as a legitimate way for the steward to have performed a positive service to the owner. The greatest reward went to the most skilled entrepreneur. But the complaining steward would at least have received some praise for his investing skill, even though it involved only turning money over to bankers. Instead, the owner took the coin and transferred it to the most successful investor. This is the biblical pattern for the final judgment: “The rich get richer, and the poor get poorer.” Covenant-keepers gain everything; covenant-breakers lose everything. The poor man in this case was a man who had a bad attitude towards wealth in general and toward the owner of the coin specifically. It was not just that he was a bad investor. It was that he was a morally corrupt person. He was in rebellion against the system of private property that God had established in the garden, and had reinforced through the Mosaic law.
God has established a system of property management in which the rich get richer, and the poor get poorer. But this second outcome applies only to the final judgment. It does not apply to history. The process of capital creation and entrepreneurship in history leads to an increase in wealth for rich and poor. This is a tremendous benefit of the free market system. It is not a zero-sum process. It is not like gambling. The rich do not profit at the expense of the poor. Only at the final judgment is this system revealed to be a zero-sum wealth-transfer process. Here is its general principle: “Disaster runs after sinners, but righteous people are rewarded with good. A good person leaves an inheritance for his grandchildren, but a sinner's wealth is stored up for the righteous person” (Proverbs 13:21–22). [North, ProverbsProverbs, ch. 41] Paul taught this: at the end of time, God the Father will place all things under the rulership of Christ. Then Christ will transfer everything that He has been given by God the Father back to God the Father. “Then will be the end, when Christ will hand over the kingdom to God the Father. This is when he will abolish all rule and all authority and power. For he must reign until he has put all his enemies under his feet. The last enemy to be destroyed is death. For ‘he has put everything under his feet.’ But when it says ‘he has put everything, it is clear that this does not include the one who put everything in subjection to himself. When all things are subjected to him, then the Son himself will be subjected to him who put all things into subjection under him, that God may be all in all” (I Corinthians 15:24–28). [North, First Corinthians, ch. 17] Then God the Father will transfer this bride price from Christ to the church as the church’s dowry. This will consummate history: the marriage supper of the lamb (Revelation 19:6–9). I discuss this in Chapter 48.
After they die, covenant-breakers forfeit ownership of all of the wealth they accumulated in history. They are judged for eternity in terms of their performance as builders of the kingdom of mammon. The more wealth that they accumulated or spent on themselves in the service of mammon, the more terrible their judgment. Jesus taught this clearly. I have cited this passage before, but it is so important, that I cite it again.
The Lord said, “Who then is the faithful and wise manager whom his lord will set over his other servants to give them their portion of food at the right time? Blessed is that servant whom his lord finds doing that when he comes. Truly I say to you that he will set him over all his property. But if that servant says in his heart, ‘My lord delays his return,’ and begins to beat the male and female servants, and to eat and drink, and to become drunk, the lord of that servant will come in a day when he does not expect, and in an hour that he does not know, and will cut him in pieces and appoint a place for him with the unfaithful. That servant, having known his lord's will, and not having prepared or done according to his will, will be beaten with many blows. But the one who did not know and did what deserved a beating, he will be beaten with a few blows. But everyone who has been given much, from them much will be required, and the one who has been entrusted with much, even more will be asked” (Luke 12:42–48; emphasis added).This principle of wealth transfer by God applies to every individual at the time of his death. It also applies to world capital at the end of time. This capital extends into eternity. It will become the capital base for individuals living in the post-resurrection new heaven and new earth. It is the final inheritance of history. In the free market social order, men prosper because they have served consumers well. The rich get richer, and so do the poor. But the long-term economic system really is a zero-sum process. After the final judgment, covenant-keepers become the heirs of covenant-breakers. The model is the rebellious steward.
There are people who wish to lend. The Bible teaches that covenant-keepers who have accumulated wealth are supposed to become lenders. “The lord will open to you his storehouse of the heavens to give the rain for your land at the right time, and to bless all the work of your hand; you will lend to many nations, but you will not borrow. The Lord will make you the head, and not the tail; you will be only above, and you will never be beneath, if you listen to the commandments of the Lord your God that I am commanding you today, so as to observe and to do them” (Deuteronomy 28:12–13). This is an aspect of the process of dominion. [North, Deuteronomy, ch. 70]
An individual is entitled to lend money in search of a positive rate of return on his wealth. He must assess the creditworthiness of potential borrowers. This takes specialized information. The outcome of a loan to one individual or one business is uncertain. There is no formula comparable to an insurance contract that is based on the law of large numbers. Most individuals therefore do not want to take the responsibility of becoming professional lenders. It takes too much information. It also takes much capital to spread across a large number of borrowers, thereby reducing uncertainty of default on the part of the borrowers. Only a few individuals feel secure enough or knowledgeable enough to become professional lenders. We call these people bankers. (If they lend at very high rates of interest to people in a crisis, we call them loan sharks.)
1. Traditional Banking
An individual who invests only his own money is a creditor. He does not owe anyone money. He is limited by his own supply of capital. If he wishes to make even more loans, thereby reducing the uncertainty of default because he can rely on the law of large numbers to protect him, he will have to become a banker. A banker is a borrower. He will have to go to potential depositors, meaning lenders, to persuade them to let him manage the lending of their money. If he is successful, everybody wins. The depositors win because they receive a guaranteed rate of return on their investment. The banker wins because he makes money on the difference between the rate of interest that he pays the depositors and the rate of interest that he collects from the borrowers. The borrowers benefit because they have the use of money during the period of the loan.
Prior to the development of consumer credit in the United States in the 1920s, bankers focused on lending money to governments and businesses. This was the focus of the parable of the stewards. People with expertise in the value of coins, called moneychangers, also were experts in lending money to businessmen. The businessmen would put this borrowed money to what they hoped would be profitable uses. They took on debt in order to finance projects that they would not otherwise have been able to afford. They became part of a pool of borrowers. If one of them failed to make a profit, and he defaulted on his loan, the banker would not lose all of the money he had loaned out. The banker had converted uncertainty into risk. He was better able to manage this risk because there was a large pool of borrowers.
Bankers are specialists. They possess specialized information about debt markets. They profit from this specialized information. This is what all profit-seeking businessmen do. This information is not obtained free of charge. It involves the use of specialized mathematics. In the days of Jesus, this mathematics was computed in Roman numerals. It continued to be computed in Roman numerals in the West until the fifteenth century. Lenders had to calculate rates of interest. They had to monitor repayment. They had to have collection techniques to use against borrowers who delayed payment. None of this was common in society. These were specialized techniques that were available only to full-time experts in the field of lending.
In order to gain leverage for their knowledge, bankers began to take in deposits from rich people who had money to lend. They would guarantee a rate of interest on these deposits. They would then leverage their information regarding reliable borrowers. They could lend to far more borrowers because they had taken in deposits from nonspecialists who wanted to increase their wealth at a steady rate. The rate that the bankers paid to depositors was less than the rate that they collected from lenders. They made their profits from the difference between the rate of interest charged to borrowers and the rate of interest paid to depositors. This was the “spread” between interest rates.
Specialized information has to be paid for. A common person with money to lend does not have this information. He is not a specialist. If he does not wish to reinvest the money in his own business, he has the opportunity of investing a portion of that money in making loans to other businessmen. For someone who wants to increase his wealth on a more passive basis, he can search out bankers who will put his money to suitable use. At the end of the period of deposit, the depositor will receive back more money than he had deposited.
There is risk. A bank may go bankrupt. By using multiple bankers in the community, a depositor (lender) can decrease the impact on his net wealth by the failure of a single bank. He diversifies his investment portfolio by having multiple sources of income.
Because of banking, businessmen are able to focus on what they do best in their particular markets. They can leverage their profits by borrowing money. They increase the amount of production goods and labor services they control in order to meet future consumer demand. At the same time, the banker leverages his opportunities by taking in money from depositors and using this money to lend to a larger number of businesses. This reduces his risk of loss from the failure of any particular business. It also enables him to make loans to businesses in more than one segment of the economy. This reduces the likelihood that he will not be repaid. Businessmen are debtors to bankers. Bankers are debtors to depositors. The system enables a higher rate of return for depositors, who are the original sources of capital. They gain steady income at a lower risk than would have been the case if they had attempted to become bankers themselves.
2. Consumer Credit
In Chapter 29, I discussed the difference between present-oriented people and future-oriented people. The difference in these mindsets regarding the value of time is manifested in the willingness of present-oriented people to borrow money, and the willingness of future-oriented people to lend money at a rate of interest that borrowers are willing to accept. A transfer of wealth over time takes place from present-oriented people to future-oriented people. This is part of the dominion process. The present-oriented person is governed by this outlook. “The dogs have big appetites; they can never get enough; they are shepherds without discernment; they have all turned to their own way, each one covetous for unjust gain. ‘Come,’ they say, ‘let us drink wine and liquor. Tomorrow will be like today, a day great beyond measure’” (Isaiah 56:11–12). It is not illegitimate for people with money to lend to people who want immediate consumption. This has accelerated around the West and around the world since the 1920s. Consumer debt has become a major source of profits for banks.
The first major industry to become dependent on consumer debt was the automobile industry. Beginning in 1919, General Motors began lending money to consumers who wanted to buy General Motors automobiles. General Motors replaced Ford Motor Company as the major producer of automobiles in the United States by the end of the 1920s. This success was imitated. It revolutionized modern retail selling.
Long-term mortgages became common in the United States, beginning in 1934. The federal government established an agency which guaranteed that deposits made in building and loan associations would be guaranteed by the power of the federal government. This subsidized the creation of long-term mortgages with low down payments. Beginning in 1946, following World War II (1941–45), consumer credit began to become widely used in the United States. The development of the credit card, beginning in the mid-1960s, accelerated the use of consumer credit.
Credit card debt is unsecured debt. This means that the debt is not collateralized by an asset that can be repossessed by the creditor for nonpayment of the debt. It is not like an automobile debt or a mortgage debt, which are high-value assets. In the case of a high-value asset, a creditor can take a person to court and gain ownership of the collateralized asset that undergirded the loan. But this is not possible with the kinds of expenditures made by people who use credit cards to buy consumer goods and services. So, the risk of default is higher with these loans. Therefore, the rate of interest paid by borrowers is higher than it is for secured loans.
For centuries, the Catholic Church opposed all interest from loans. This was a misinterpreted reading of the Mosaic laws prohibiting interest on charitable loans. There was no biblical injunction against interest on business loans. The church always ignored Jesus’ parable of the talents. The medieval church maintained the early church’s misinterpretation. The second Lateran Council of 1139 issued this statement: “We condemn that practice accounted despicable and blameworthy by divine and human laws, denounced by Scripture in the Old and New Testaments, namely, the ferocious greed of usurers; and we sever them from every comfort of the Church, forbidding any archbishop or bishop, or an abbot of any order whatever or anyone in clerical orders, to dare to receive usurers, unless they do so with extreme caution; but let them be held infamous throughout their whole lives and, unless they repent, be deprived of a Christian burial.”
The premier historian of the Catholic Church’s position on usury/interest was an American judge, professor, and distinguished Catholic historian, John T. Noonan. His Ph.D. dissertation was published by Harvard University Press in 1957, The Scholastic Analysis of Usury. It remains definitive. In 1999, he wrote this summary of the Church’s shift in views. The article appeared in the Catholic magazine, America. “Beginning about 1150 the moral rule was laid down that it was wrong to make a profit from a loan. ‘Lend freely, hoping nothing thereby,’ was papally interpreted as a commandment. Popes, councils, bishops, theologians joined in the condemnation of usury, understood as anything added to the principal of a loan. In the 16th century, as the economy of Europe became more commercial, profitable alternative ways of extending credit were recognized by theologians engaged in a fierce battle with curial conservatives. By the 18th century the old usury rule was a shadow, formally maintained by the papacy, ineffective in practice. By the 20th century, investments in banks were commonplace for popes, bishops and ordinary Christian folk. What had been prohibited had become lawful.”
Within Roman Catholic circles, there is a tiny minority of social commentators who are not economists, and who still oppose all taking of interest. They want the Pope and the church’s courts to return to the view held in the twelfth century. They have no influence in the church.
Another group of obscure anti-interest non-economists is the remnant of a late nineteenth-century American fringe political movement known as the greenbackers. These people were defenders of the United States government’s issue of unbacked green paper money during the Civil War. From 1874 to 1889, there was a Greenback Party. It promoted the idea of government-issued fiat money as the basis of interest-free loans to the American people. The intellectual heirs of this political party reprint books attacking interest that were published in the 1930s by obscure Catholic theologians and pastors. I deal with this movement and its ideas in my short book, Gertrude Coogan’s Bluff, published by the Mises Institute, which is an updated version of a private paper that I wrote in 1965 for my father-in-law, R. J. Rushdoony. I have published a detailed critique of the most prominent modern greenbacker, Ellen Brown, on my website. (http://bit.ly/BrownCritique)
There is no biblical prohibition on commercial banking. Banks perform an important service: serving as intermediaries between depositors who want to lend money and borrowers. Bankers evaluate the creditworthiness of potential borrowers. This reduces the uncertainty associated with default. By lending to a broad base of borrowers, banks diversify the risk of default. Bankers are able to perform this service because they possess specialized information of credit markets in general. Individual depositors do not have this information. Banks make their profits from the difference between interest paid to the banks by borrowers and interest paid by the banks to depositors. The crucial service here is the transformation of uncertainty into risk.
Fractional reserve banking is not the same as biblical banking. I discussed fractional reserve banking in Chapter 26.
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The complete manuscript is here: https://www.garynorth.com/public/department196.cfm