Money & Tax

THE BIRTH OF FIAT CURRENCIES

Money is a commodity like any other. It emerged from the ancient world of barter where traders needed a commodity that was small, scarce, durable, divisible, and more transportable than all other commodities to smooth out the barter process. This third commodity replaced the need for bartering. Over time, gold and silver became accepted as the best trading commodities by most cultures. Money is simply the most marketable commodity, that’s all there is to it. In all of history the marketplace decided what form money would take. But now it is decreed by government and consists of coins, paper, plastic cards and vast numbers of computer entries. Anyone who tries to use any other commodity for exchange will face the full force of the law. We live in a socialist monetary era.

The rise of paper currency some five centuries ago coincides with the discovery by European goldsmiths that they could multiply gold and silver receipts without their customers being aware of the deception. At that time goldsmiths held peoples gold and silver in safekeeping and issued special paper receipts so customers could reclaim their gold or silver on demand. Customers soon found it was easier to trade the receipts when buying and selling instead of transferring the physical gold and silver. The goldsmiths quickly learned that they could profit by issuing extra paper receipts, backed by nothing, without people knowing. These new receipts then traded at the same value as the original gold and silver receipts. Because of these extra receipts in circulation, a receipt now only represented a fraction of the actual gold and silver in the goldsmith’s safe. Thus was born the age of fractional reserve banking and paper money. Over time, goldsmiths gradually became banks. Their continual abuse of this new found power during the Nineteenth Century resulted in most governments taking charge over the issuing of receipts (money) and backing them with government owned gold. The task of monetary regulation was in turn handed over to “independent” central banks early in the Twentieth Century. Paper money during this era was simply a claim against the gold or silver in storage at a government or central bank vault. Money was as good as gold, or so everyone thought. However, governments, like banks, are run by less than perfect people. “Trust us”, they all said, “We’re the government”. In 1971, after decades of government monetary abuse of that trust, the last currency connection to gold was severed. Since then, the world has been floating in a sea of fiat currency, currency backed only by confidence in the government of that particular country.

All of this occurred at the same time as the humanist worldview was supplanting Christendom in the Western world. This parallel development is no accident. Ultimately, the history of money has been a battle between state decreed fiat money and market driven hard money. It is just another front in the never-ending battle between sin and righteousness (Deuteronomy 8:10-20, Proverbs 14:34). The ultimate issue is who is sovereign, the state or the individual under God. Does the state have a monopoly on money creation, or does it merely possess a monopoly of law enforcement against those who abuse real currency? Is money what we are told to accept by the state, or what is intrinsically valuable? A money supply that is created from nothing is an attempt to sidestep the curse of scarcity handed down to Adam in the garden (Genesis 3:17-19). A kingdom approach to monetary policy would require the state to defend its citizens against such monetary theft. Fractional reserve banking is by definition theft and deceit. It is therefore a Christian imperative to work toward a return to market-based hard currencies, gold and silver.

MONEY IS SIMPLY DEBT

Today the banking system operates much the same as it did when first devised by the goldsmiths. The new player in the system is the central bank, which functions as a bank to the bankers for the purpose of economic management. The problem with central banks is that they create money by issuing debt instruments such as bonds, so again all new money created by them is someone else’s debt. They also allow commercial banks to create money by issuing debt to you and me. It works like this, if you deposit 1,000 dollars with your local bank, this money will be deposited with the central bank. If the fractional reserve requirement is 10%, the bank is then free to lend out 10,000 dollars. Thus, 1,000 dollars deposited, puts 9,000 extra dollars into the economy, but only if people are willing to borrow from the bank. Eventually when you pay back this debt, it is extinguished and ceases to exist, repayment by repayment, all $9,000 of it. The banks keep the interest as profit on top of the $9,000. Therefore, all the money in an economy is actually just a debt and has to be repaid one day. At an average interest rate of 7.5% the money supply needs to double every 15 years just to cover the extinguishing of previous money and the interest payed to banks. However, the entire monetary system creates new currency only if people or governments continually borrow money. Consequently, if people stop borrowing, money immediately starts to drain away from the economy. For a modern economic system to work, debt has to be continually increasing. As an ongoing incentive to create as much debt as possible, many governments structure their taxation laws to encourage debt and discourage savings.

The end-result is that the complete financial infrastructure of a modern economy, indeed the entire world, is built on debt. Extra debt is the only means possible for the money supply to expand. Without a never-ending increase in debt, the money supply will begin to contract, or worse, implode as people default on loans or begin to pay back more than they were borrowing. When citizens begin to do this it is called a recession. In a typical recession the national government has to step in and borrow money into existence from the central bank plug the debt gap to stave off a debt death spiral and national disaster.

This disaster is called deflation and is the nightmare of every politician, banker and home owner the world over. Japan has been experiencing such a nightmare for the past 20 years as the debt bubble of the 1980’s is being unwound in the private sector even as the government has increased its debt to 250% of GDP in a failed effort to keep their economic ship afloat. Every year house prices drop a little more, every year the economy stagnates a little more, every year the government borrows a little more to plug the gap. If it were not for an aging population, Japan would have suffered horrific unemployment as well. This is what the western nations have to look forward to as their debt bubbles begin to implode with the end of the modern fiat monetary system that began in 1971.

When a government borrows this disaster prevention money, it can get it in one of three ways. It can borrow from its citizens, but this would shrink the money supply further as it is money they could be spending. It can borrow from overseas, and shrink another country’s money supply, probably a country in Asia, whose citizens are big savers. Alternatively, it can borrow from its central bank. When it borrows from the central bank the central bank creates this money from nothing and issues it as a debt to the government. It is simply a computer entry. Bingo, new money, new debt! In modern central bank language it is called quantitative easing, or QE.

Without this government and private debt, a central bank loses its most potent economic management tool, the ability to set interest rates on existing debt. This is called monetary policy. Government borrowing from the central bank allows politicians to manipulate an economy through artificial stimulation of economic activity. This is called fiscal policy.

All governments are reluctant to reduce national debt, even after a huge run up in debt, as this would drain their economy of money, creating a severe economic contraction. The tax base would shrink and welfare obligations rise, all in one hit. Politicians lose office during these contractions so the creation of never-ending mountains of debt and inflation is the preferable option. Nations with central banks and fractional reserve banking are forever bound to the slavery of debt (Proverbs 22:7). This explains why global debt levels continually rise. This game of musical chairs will end in global disaster sometime soon. The signs are now visible for all to see.

In the meantime, all this growing debt carries interest. For every unit of currency in circulation there is interest draining from the economy every year. This money goes to the banking system as profit. Under this financial system, it is almost impossible for all of the public to increase its wealth as debt grows. The large increases in affluence that have occurred in parts of the world over the last century have been entirely due to advances in technology and outsourcing to poorer countries that have overwhelmed this financial leakage of debt repayments, inflation and interest payments. Even with technology increases and outsourcing, real wages and standards of living often struggle to stay in front of the curve. The system does all it can to create new debt, or it will collapse. At some point in the future, debt levels will reach such a huge level there will be a massive shift in sentiment toward debt reduction regardless of government policies. This will be the end of the global fiat money system, as we know it. In the meantime, the banking community continues to grow in wealth, influence and power over people and governments.

Personal, national and foreign debt has a depressing history in the last thirty years. For example, in the 1970’s, there was an enormous influx of petro-dollars deposited in American and European banks from Arab countries experiencing an oil price boom. This spawned unhealthy lending practices to developing nations, who soon found themselves with unsustainable debt levels and billionaire dictators. What transpired was, in many respects a blatantly immoral lending practice on behalf of the international banking community. Needless to say, the political circumstances in the recipient nations were often highly questionable. A wealthy and deceitful power-elite, usually borrowed the money on behalf of their people and pocketed a portion of it. Many developing countries now labour under the burden of debts that are mathematically impossible to repay. Standards of living have decreased in at least fifty countries because of these debts to rich countries. Natural resources have had to be handed over to multinational corporations that work in partnership with first world lending institutions and governments. Tribal landowners have suffered greatly. Part of the injustice has been the staggering indifference of the church in wealthy nations to the suffering of the poorer nations.

More recently, due to the global financial crisis, we have witnessed what may transpire as the peak of debt levels in the entire western world as the fiat Ponzi scheme finally reaches its limits before collapsing. The global financial crisis has seen debt finally become a thing most people want to start paying off. In their place governments have had to borrow to plug the breach in the fiat monetary universe to keep their economies from collapse. This too has failed and the spectre of deflation of assets is now very real or has begun. The once Christian nations walked away from Biblical wisdom, worshipped mammon, debt and materialism. Now the bills are due.

In the entire Bible, more than 70 passages deal with, or allude to debt. None of these passages is neutral or positive (eg Romans 13:8). Moreover, the free use of debt personally and internationally has been traditionally frowned upon by the church throughout history. With the rise to dominance of Humanism, debt has exploded globally. Because of the dualistic mindset of Christians today, this explosion of debt goes largely unchallenged, and is actually embraced by large numbers of Christians themselves in Western countries.

There are several basic principles concerning foreign debt that we must understand if one is to think and act with a kingdom mindset. First, debt for God’s people is discussed only in terms of lending to help the poor survive (Exodus 22:25-27). It is therefore for emergency purposes only. Second, a destitute nation should borrow only from other kingdom thinking nations, whose motive is compassion (Leviticus 25:35-37). Third, these survival loans should, in theory, to be at no interest. This is now impossible in an age of constantly inflating currencies but with a gold-based currency there was no inflation in biblical times. Fourth, money should be borrowed for no longer than seven years (Deuteronomy 15:1-12). Fifth, debt is a form of financial slavery; sovereignty is lost (Proverbs 22:7). Finally, God blesses obedience to His ethical law. A nation that begins to submit to God is a nation that will begin to experience increasing dominion. Inherited foreign debt levels in such a nation will decline over time (Deuteronomy 15, 28). In fact, over time the nation would become a lender to other nations. God is the ruler and absolute owner of creation, and the only person to whom humanity should be in debt.

INFLATION

The increase in the supply of new money through debt creates what we call inflation. Inflation is simply an oversupply of currency. Fractional reserve banking introduces this new, debt-derived currency at no initial cost to the government. Excess new debt-based currency depresses the value of existing currency. When short of cash, politicians prefer this political option to the harder choice of raising taxes. During good times this extra inflated money comes through the creation of private debt. During bad times it comes through the issuing of government bonds. The money supply begins to expand and prices rise. It is a simple supply and demand problem. The public is then told their assets, such as homes are “increasing in value”, when in fact it is simply an increase in units of currency in circulation. It is just an increase in someone else’s debt. Inflation steals the value from people’s existing savings as the new money arrives. Inflation also allows governments to pay off the debts they accumulate today with currency of less value in the future. Inflation is simply state sanctioned theft. It is possible because of the system’s unlimited ability to create new fiat currency. The only way to control the creation of unlimited fiat money is through external monetary discipline. A currency that does not have a system of external discipline is equivalent to a government that never has to face an election.

GOLD IS THE SOLUTION

The Bible does not specifically advocate a gold standard. However, it does advocate fair weights and measures (Leviticus 19:36). In an era when commodities such as gold and silver were money, this is a blunt statement about tampering with a commodity-based currency. Christian thinkers must promote a gold standard simply because it restricts the will to personal power of political rulers and reduces the likelihood of monetary fraud and theft. The second, eighth, ninth and tenth commandments are currently being violated with a fiat money supply (Deuteronomy 5:1-22). Surely, Christ would want us to push for a more honourable system of exchange.

If gold is now no longer used as money, it seems odd that the central banks of the world still hold one third of all the gold in existence, some 32,000 tonnes. Their body language differs from their words. Perhaps they know gold will be needed again when the fiat money experiment collapses. Gold is the future simply because fiat currencies have an inverse relationship to gold. The more debt burdened the paper currency becomes, the more dishonest the politicians, and the more valuable gold becomes in paper terms. This is why the price of gold has been “rising” for the last decade. At some point in the next few years, more and more clever people and nations will move their liquid assets into gold. This option is already being considered in the Middle East as an alternative to accepting oil payments in US dollars. Fiat-based assets will then start to shrink as more and more people realise their precious bonds, shares, insurance policies, and all types of securitised debt instruments begin to deflate. This wealth never existed in the first place as it was only ever a computer entry or a piece of paper. There is evidence that this process may have recently begun, with the rise in the value of gold against all the world’s major currencies from mid 2000. Reserve banks around the world are currently fighting this rise by short selling increasing quantities of precious metal derivatives, such as options and futures contracts against their gold reserves. These act to artificially suppress rising prices. Central bankers really do hate gold. Gold is their arch enemy and a rising gold price is the announcement that they are losing control.

There is no nation that currently works with a gold or silver-backed currency. If people of any nation raised the possibility of moving toward a gold or silver standard, it is certain that the vested power brokers behind the banking system would use all of their considerable financial leverage to block such a move. All sorts of sophisticated sounding arguments will be used. The truth of the issue, however, will boil down to the absolute need to keep every single nation inside the fiat money camp. A crack in the dam could spread quickly. It is vital that Christians ignore these arguments. Individually and collectively we must move toward a system that honours God, not bankers, if our nations are to enjoy economic prosperity. A gold standard is not possible immediately, but when the fiat monetary system finally collapses then we must speak with one voice for a gold-backed currency to take its place. In the meantime keeping some precious metals as insurance against the coming collapse and drastically reducing debt will set keep Christians from suffering the worst of what is to come.

A gold backed currency is relatively simple concept. It requires the paper currency to represent gold held in reserve rather than just the good will of the government. A gold standard would help attract investment as people begin to trust the currency and exchange mechanisms. This would improve employment levels and reduce crime. It would curtail the spiralling need for debt. The currency would appreciate over time against fiat currencies that will eventually inflate themselves into oblivion. Economic development would accelerate. The boom-bust economic cycle would moderate. All this is possible, but by no means certain, because whoever is in charge can still corrupt the system using that original banking trick of issuing too many paper notes. This is why good honest men and women of integrity need to be running the system. Charles de Gaulle, the president of France in the late 1960’s, was one such man. He demanded the USA exchange their gold for the paper dollars that were supposed to represent gold. Consider His comments:

“Any workable and acceptable international monetary system must not bear the stamp or control of any one country in particular. Truly, it is hard to imagine any standard other than gold. Yes, gold, whose nature does not alter, which may be poured equally well into ingots, bars or coins, which has no nationality, and which has, eternally and universally, been regarded as the unaltered currency par excellence.”

Consider also the words of the former chairman of the US Federal Reserve Alan Greenspan. This is what he once wrote, before he took over the chairmanship of “the Fed”, which, by the way, is a privately owned institution controlling the supply of the world’s reserve currency, the US dollar:

“Nonetheless, once achieved, the discipline of the gold standard would surely reinforce anti-inflationary policies, and make it far more difficult to resume financial profligacy. The redemption of dollars for gold in response to excess federal government-induced credit creation would be a strong political signal…A second advantage of gold notes is that they are likely to reduce current budget deficits…A possible further side benefit of the existence of gold notes is that they could set a standard in terms of price and interest rates that could put additional political pressure on the administration and congress to move expeditiously toward non-inflationary policies. Gold notes could be a case of reversing Gresham’s law. Good money would drive out bad.” (www.prudentinvestor.blogspot.com/2005/09/greenspans-blueprint-for-gold-standard)

The most powerful man in the world knew what to do, and that is to adopt a gold standard. Greenspan didn’t do it because he knows it would be unacceptable for his fellow bankers, opposed by all US politicians and would be too disruptive for world trade. In its place, he attempted to make the US dollar as good as gold. It is up to Christians to make a gold standard happen on a smaller scale and show the world it works.

TAXATION

Taxation is all about the issue of sovereignty. The power to tax has been at the heart of the issue of sovereignty in every nation state that ever existed, and the issue of sovereignty has been a contentious issue since the rebellion of Adam. God, as usual, requires this area of economics to come under his jurisdiction as a sign of his sovereignty. When a nation taxes its people in line with the principles of scripture, it submits to God’s sovereignty. When it taxes beyond these levels, it proclaims its independence from God. As is usual when a nation rebels, the people then suffer under the burden of statism. Here is a good definition of statism: “Working the first five to seven months each year just to pay your taxes”. This is the current situation in most Western countries!

The modern issue of taxation is directly related to the topic of tithe/tax as mentioned in the Old Testament. Modern taxation systems deliver funds to carry out many of the same functions we see delivered by the apparatus of state in ancient Israel; education, welfare, law, courts and health. The tithe is God’s flat tax on all earnings to pay for the use of his earth. Everybody pays the same rate as we are all equal under God. He is our sovereign ruler. When Israel asked for a human king, it is interesting to note the one factor that God said would separate the future from the past was excessive taxation (1 Samuel chapter 8:1-21). Excessive taxation was the number one sign that the people had abandoned God, and this was with a flat tax level of around 20%! The tithe is God’s answer to statist taxation systems that would challenge the royalty of God. Its purpose was to run Israel so that the law of God could be implemented and the dominion mandate extended. Because the modern church has abandoned an understanding of God’s law and dominion, and adopted Humanist principles of law, the tithe is now just a formula for financing the local church and creating personal “prosperity”. Once again, Christians have turned a cultural mandate into a personal issue.

The Bible teaches that there are three tithe/taxes, and they functioned on a seven-year cycle. The first tithe (Leviticus 27:30, Numbers 18:21-32) went to the Levites, who then tithed to the high priest. The high priest, being a symbol of King Jesus, was the only person in the nation that did not tithe to someone else. The tithe that went to him became the temple offering. Part of this first tithe went to the priests who ran the temple. The rest of this tithe went to the Levite tribe, the tribe of priests who were forbidden to own land. They received 12 lots of 10% (120%) from the 12 tribes and gave away 12%. The Levites were a privileged people because they served God. They were the public servants and church workers of Israel rolled into one. They took care of health (Lev 13:15), worship (I Chronicles 15:16-24), education (Lev 10:8-11), and the law courts (I Chronicles 23:4, 26:29-32). This tithe was a social service payment for all the administrative functions performed by the Levites.

The second tithe (Deut 14:22-27) was a festival tithe, to be consumed at the temple during the feast of Tabernacles each year (Deuteronomy 16:13-17). It reminded Israel of their deliverance from bondage and showed surrounding nations that serving God was “cool” because of the sheer scale of festivities that went on. It was spent in a way that showed foreigners and the next generation of Israelites that it was great to fear, worship and respect God. It was a return to Eden. These days it would be the equivalent to spending money on a church camp or a holiday (which comes from the term “holy day”). For the purposes of this discussion this tithe doesn’t qualify as a tax issue.

The third tithe came in every three years (Deut 14:28-29). It likewise went to the Levites to keep them fed but they turned all the excess over to the poor. This tithe was primarily designed to stamp out poverty. Its irregularity was designed to prevent a dependency syndrome in the poor. Hence, it was given only every three years. Israel was specifically instructed to release the tithe to those in need, such as the alien, the orphan and the widow. It was a welfare tithe to serve as a safety net for the most vulnerable in society.

In the seventh year there was to be a Sabbath year (Leviticus 25:1-7). The nation was to eat only what the land produced itself. This was symbolic return to Eden. As far as we know there was no tithe in that year. It was a year of rest. From there, we go into the 50-year cycle of the Jubilee, the subject of the essay called “Super-cycles”.

The Old Testament ends with a reference to the tithe in Malachi. Firstly, the Israelites, as an entire nation, were accused by the prophet of robbing God by withholding their tithe taxes. God owned the land and they were but tenants and aliens (Leviticus 25:23). They had forgotten that truth, stopped paying their taxes and the government was falling apart. If men do not understand the enormity of their debt to God, they always cheat on their taxes. Malachi’s threat of curses for disobedience and blessings for obedience still stands today. However, it is important to note again that this was a national promise concerning an entire taxation system, not a personal instruction to individuals living in the 21st Century.

The New Testament teaches the continuing validity of the tithe/tax. The words of Christ to the Pharisees clearly indicate the soundness of tithing (Matthew 23:23-24). Jesus also told us to give to Caesar what belongs to Caesar, and to God what belongs to God (Matthew 22:15-22, Romans 13:7). This was not to mean Caesar could take what he liked, but that Caesar should only take what God has permitted, which is the tithe/tax. In an era of heavy Roman taxation this meant doing what Caesar demanded while working toward building the kingdom to the point where imperial rulers could see the wisdom of kingdom principles in all areas of life. Paul continues with the concept of the tithe/tax when teaching the Corinthian church the benefits of proportional giving (1 Corinthians 16:12). The crucial New Testament addition to the concept of the tithe/tax is the spirit of generosity toward people in need (Romans 12:8, 2 Corinthians 9:7-11).

Because of Adam’s rebellion, there exists the need for government control of sin in a nation, province or community. This essential civil role must be financed somehow. Tax, therefore, is unavoidable in a cursed world (Romans 13:1-7). Given the role of the state is negative, in that it exists to control sin, tax levels should be limited to around 10-20%. A nation working on kingdom principles will only require this level of limited taxation. The state’s role in a nation under God is only to maintain law, order and justice. The functions of welfare, education and health are the province of the family, the church or private agencies.

Wealthy nations now tax their people at rates of around 50% of income. The main uses of these taxes are for welfare, education, health, law and justice. These are the same priorities the Levites took care of. The difference today is threefold. Firstly, the state has taken the place of God in modern society. Humanism’s rise has given us a new god, the state. The state, on top of its traditional function of law and order, demands the right to address issues which are traditionally the function of the private sector or the church. Secondly, the rise of humanistic thinking has led to enormous social and family breakdown as people become more selfish. This breakdown has forced the state to shoulder many of the responsibilities previously performed by families. Up goes the tax rate. Thirdly, the church has abandoned the tithe. The tithe is no longer the barometer of legitimate tax standards. Consequently, the church has largely abandoned its responsibilities in the areas of education, welfare and health. Pockets of Christian service remain, but the vision has been largely lost and tax levels have skyrocketed. Christendom has retreated from cultural engagement and every citizen is paying a high price. The result is now onerous taxation with its bureaucratic inefficiencies, cronyism and waste. To retake dominion, the church must retake responsibility for these social functions on top of their existing taxation obligations. Over time taxes will then begin to diminish, private investment increase, and the nation prosper.

It is interesting to note that there have been a handful of countries in recent times that have adopted the Biblical principle of a flat tax. Hong Kong instituted a 17% flat tax in 1947. The result has been a near endless economic boom that has kick-started another economic boom in China. For most of those 58 years, Hong Kong had the fastest rate of economic growth in the world. It is now the world’s richest city state. More recently, in 1994, the former Soviet satellite state of Estonia instituted a flat tax regime. It has since enjoyed more growth than any of the other Soviet bloc countries. Because of Estonia’s success, flat-tax regimes have been implemented in a number of other East European states, the most notable being the recent addition of Russia itself, on a 13% flat rate. A flat tax regime allows a diligent worker to keep the majority of his or her earnings. This external incentive leads to higher economic effort by countless individuals across a nation. Wealth is attracted to these hard workers. The lower rate of tax also encourages personal savings. Capital accumulates, and a virtuous cycle of growth kicks in. At some point, these countries no longer need capital inflows to fund their economic growth. They become capital exporters. They then lend to many nations but borrow from none. Sound familiar!