Will our banking system bring us to our knees?

When you deposit money in your account, no doubt it gives you a kind of peace of mind. Although you are no doubt well aware that banks do not just take your deposit, write your name on it, and then lock it away in a secure vault until you come and pick it up, together with interest, there is probably a part of you that thinks that, having handed over your money, it is now “safe.” And so you go away with some feeling of security. Yet as the modern banking system continues to unravel, the feeling of security that people once had with their banks is being eroded pretty quickly.

One of the major problems with modern banking is the Fractional Reserve System, under which banks throughout the world universally operate. Under this system they are only legally obliged to keep about 10 percent of the money you place with them in their reserves. Although the amounts kept or loaned out may well differ from bank to bank, this means that most of your money is loaned out to someone else. There is nothing wrong with banks loaning money out to others, of course, but under the Fractional Reserve System at the same time that up to 90 percent of your reserves are being loaned out, you are still able to buy goods using your check book or cash card as if all the money were still sitting there in the bank’s vault.

You see the catch? The bank loans out your money to someone else, yet operates as if all the money still resides with them. Effectively what this means is that they have managed to “create new money out of thin air.”

This creates at least two big problems. First, it means that with every bank in the system operating in this way, money is created without any connection to a dependable standard of value. Second, it means that although people are led to believe that their money is safe, it is only safe provided a minority of depositors withdraw funds on any given day. If all or even most depositors attempt to take out their money on the same day, they will quickly find to their surprise that the money simply isn’t there. This system is—as the great economist Murray Rothbard believed—inherently insolvent.

Now you might respond by saying, “Yes, I understand that if everybody who has deposits at my bank tries to take their money out on the same day, you would get a run on the bank. But in reality, this is highly unlikely to happen.” So you think your money is safe?

Even leaving the Fractional Reserve issue aside, once upon a time you may well have had a point. But in March this year, something happened that may have changed everything. It may not have any effect on you or your bank for a long while, but something happened that fundamentally changed the nature of the relationship between banks and their depositors, and the question of who actually owns your money. That something took place on the tiny island of Cyprus.

Under normal circumstances, many politicians and bankers are very careful to hide their craftiness, dressing it up in a velvet garb of smooth jargon words. Every once in a while, however, they forget themselves, and in a moment of madness, end up proposing something which is so self-evidently wrong that even the most apathetic people can see it clearly.

This is what happened in Cyprus. The nation’s banks were bankrupt and—according to the highly questionable wisdom of our day—apparently needed a bailout. So the politicians and bankers got together and came up with a plan, which was basically to impose a levy of 9.9 percent on all deposits over 100,000 euros and 6.75 percent on deposits under 100,000 euros. This was at the behest of the European Union, who were reluctant to bail out Cypriot banks because of the vast sums deposited there, allegedly by Russian money launderers. Apparently they didn’t want to bail out a bunch of crooks. Ironically, the Russian money launderers turned out to be against the scheme for precisely the same reason!

If they could have gotten away with it, they would have gone through with it. But unfortunately for the Cypriot government, the scheme didn’t exactly please the people, who for once realized that the state was about to partake in a particularly brazen form of daylight robbery. Of course, governments do this sort of thing all the time through taxation and inflation, but this method was so in-your-face that no one could be in any doubt what was going on.

So it was back to the drawing board and a week later they unveiled Plan B. It was in many ways remarkably similar to Plan A, in that there was a hefty amount of theft going down, but it differed in one crucial respect: the theft would only be levied at the “wealthy.”

The first part of the plan involved closing down Cyprus’s second largest bank—Laiki. All deposits under the 100,000-euro government insured amount were moved into a restructured Bank of Cyprus while deposits over 100,000 euros were moved into a so-called “bad bank.” These 100,000+ euro deposits, together with all deposits over 100,000 euros at the Bank of Cyprus, were then frozen by the Cypriot government before being used to raise the 5.8 billion euros needed to qualify for the EU bailout. Early figures suggested that depositors might lose around 30 percent of the balance, but later this figure was revised to anywhere between 40 percent and 60 percent.

Pause there for a second and consider the audacity of this. The Cypriot government, at the bidding of their European Union masters, passed legislation which allowed them to lop off something like half of a depositor’s savings. This sort of thing is sometimes referred to as a “haircut,” but if you ever see a barber offering this type of haircut, know for sure that his name is Sweeney Todd and give his establishment a wide berth.

Unlike the hated Plan A, Plan B seems to have passed without too much fuss. These days we have all been told that “the rich” ought to be paying their “fair share,” and although I’m not entirely convinced that having 60 percent of your savings confiscated falls into the “fair share” category, I have little doubt that many of the people who protested against the injustices of Plan A did not feel quite the same indignation about Plan B.

Now what does this mean for you? Possibly nothing, but then again, possibly an awful lot. In one fell swoop, the government of Cyprus, with the backing of the European Union, has effectively decreed that the money held in banks belongs to them and not to those who deposited it there in the first place. But this is by no means the end of it. There have been hints from the EU since all this was done that they may well take the same steps in a future crisis. We have no reason to disbelieve them. If Plan B passes off without much incident and is deemed by them to be successful—in other words, if they can get away with it—then nothing exists to stop them from doing it again.

Other governments around the world with similar banking problems will be watching carefully to see what happens. The argument that it couldn’t happen in a country like the U.S. won’t wash. As Steve Forbes points out, “Don’t put it past our politicians to try it in a financial emergency. The breaking of contracts by the U.S. government, unfortunately, has happened before, and what’s under way in Cyprus shows that feckless politicos will continue to try such things.” Nor is it enough to say that because the U.S. can print its own currency, unlike Eurozone countries like Cyprus, it could never happen. As the economist Robert Wenzel says, “During the financial crisis, the Treasury did not come to the rescue of Lehman Bros. or Bear Stearns, but did come to the rescue of Citigroup and Goldman Sachs. In the Eurozone, we see that Cyprus bank deposits were treated differently and more harshly than deposits of Greek banks. In other words, if in the future you see a certain bank’s deposits being protected in full, don’t assume that the same will be true for your bank.”

Christians need to seriously begin thinking of ways around all this. The whole system is unstable, and we don’t know how long it will be sustainable. Maybe it’s time to start thinking about opening Christian banks—banks run on a Biblical ethic. Maybe someone out there with a bit of capital, a lot of savvy, and the Word of God as their regulator can begin planning how to do this. Maybe a banking equivalent of Samaritan Ministries is a possibility. Maybe, maybe not. Think on these things, pray about these things, and see what you can come up with.

All in all, the Cypriot crisis, together with the system of Fractional Reserve, could well bring the banking sector to its knees. What I suggest is that it’s high time that Christians did just that: bring the banking sector to its knees—on our knees before God, that is. He is the Lord of everything, banking included. Maybe if we start to bring this issue before Him on our knees, He will begin to deliver us from the chaos of the sickly modern monetary system, and bring something wonderful in its place.

Rob Slane lives with his wife and five home-educated children in Salisbury, England. He is the author of The God Reality: A Critique of Richard Dawkins’ The God Delusion, contributes to the Canadian magazine Reformed Perspective, and blogs on cultural issues from a Biblical perspective at www.theblogmire.com.