The article critically explores the historical development and contemporary impacts of the banking system. It traces the origins of banking from ancient civilizations, such as Sumer, Greece, and Rome, through the emergence of modern banks in 17th-century Europe, including the establishment of institutions like the Bank of England. The discussion highlights how the banking model transitioned from a straightforward means of safekeeping and lending to a complex system driven by capitalism, profit maximization, and financial manipulation.
The piece emphasizes how practices like the “money multiplier effect” and the reliance on fiat money have created systemic vulnerabilities. It critiques how banks lend far beyond their reserves, leading to phenomena like bank runs, as exemplified by the 2023 collapse of Silicon Valley Bank. The article also examines the global ramifications of U.S. monetary policy, particularly the move away from the gold standard and the unchecked printing of dollars, which has contributed to inflation and economic exploitation worldwide.
Additionally, the article questions the morality and sustainability of interest-based banking systems from a socio-economic and Islamic perspective, proposing alternative frameworks under Sharia laws. It calls attention to the role of governments and regulatory bodies in propping up failing banks and the broader implications for public trust and economic stability.
History of Bank:
First, the history of the bank and its purpose. Second, how this banking system is killing people all over the world The word bank has been derived from the Italian word banks which means bench i.e. table crown. In Italy, moneylenders used to arrange gold and silver coins on a table and earn interest by lending these coins. In ancient times also, this kind of loan business was done in different ways. 2000 BCE, about 4000 years ago, Hindustan Sumer was a country Today in Iraq and Assyria which is present in Syria, the business of interest is prevalent. In the culture of ancient Greece and Rome, the moneylenders used to give loans sitting in temples and the Mushrikin of Arabia used to do the same thing. This is the reason that every religion in the world has declared an interest as haraam. In the 17th century, the big traders of Europe looted wealth from the countries that were their colonies at that time, and the foundation of modern banking was laid on that wealth. In this century, the first bank in Europe was established in Amsterdam and the first bank in London, the Bank of England came into existence at the end of this century. Similarly, in the 20th century, after World War 2, America linked all the countries of the world on the global level through the IMF and World Bank in terms of giving loans, which is going on to date. Now the four factors of economics, production of wealth distribution, exchange, and consumption, the bank is not linked with any of these four factors, rather it is linked with the world. It is only related to controlling money i.e. currency and in economics, the actual goods i.e. goods that have real value are transacted among themselves and currency comes only as a medium in between in capitalism, this injustice was done that instead of the transactions of goods, this currency was made the center of business and the entire banking system was designed on this.
Capitalism and the Rise of Banking:
In Europe, after Mercantilism i.e. the period of trade, capitalism started in which capital i.e. money became real. In this, there is a law of might is right that if this money is with any individual or company then he will be the most powerful. He will have control over the government, on this principle the foundation of all banking was laid and in this capitalism, profit maximization i.e. earning maximum profit.
The Illusion of Banking Safety:
This became their aim and regarding this banking, a big illusion has been created in our minds that bank is the safest place. Now whatever money is kept in it, the bank keeps it safe in a big safe and when you need it, it takes it out of this safe and gives it to you but the reality is just the opposite. For example, I deposited ₹1 lakh in the bank. Now, to keep this money safe, a ratio is maintained by the bank which is called cash reserve ratio. In America, it is 10% whereas in Pakistan it is 4 to 6%. This means that if I deposited ₹1 lakh in the bank, the bank will keep a 4% fee i.e. 4000 only in the bank and the rest will be given as a loan later.
The Money Multiplier Effect A Banking Web:
Now a bakery owner who wants to buy an oven for his bakery does not have money, so he comes to the bank to take a loan, then the bank takes my 96000 and gives him a loan on interest, now the bakery owner goes to an electric store and buys an oven with that money, then the owner of the electric store deposits that money in one of his banks, now his bank also does the same thing that it keeps 4 percent of that money i.e. ₹ 40 in the bank and further gives the remaining 22160 as a loan to a person who wants to buy a house, now the person from whom he buys the house, then the person selling the house also keeps that money in one of his banks and his bank also does the same thing, in this way this work happens again and again till that 1 lakh becomes 10 lakh, this whole process is called money multiplier effect, that is, in reality only 1 lakh is present but in the accounts it has reached 10 lakh that like I feel that I have 1 lakh in my account, similarly others also feel that I have 1 lakh in my account One person thinks that he has 96000 in his account and the third person thinks that he has 9216 in his account. Similarly, if all the loans given to others are added up, the numbers in their accounts would reach 10 lakhs, but in reality, it is only 1 lakh.
Bank Runs: A Historical and Modern Perspective:
If even half of these people come to withdraw their money from the bank, the bank collapses. This is called a bank run. Now let us understand this practice on a historical basis. In the 17th century, goldsmiths started this work in Europe, where they asked people to keep their gold, silver, and precious metals safe with them. In return, they would issue them a receipt as proof that whenever someone wants to take back their gold, he can do so by showing the receipt. The value of that receipt was made equivalent to the value of that gold. Now, if someone had to give a loan, the jewelers would make a receipt and give it to them and collect interest on it. In this way, they adopted the power of the bankers. For example, if four people took out 4 kg of gold from the bank and took out interest on it, then the jewelers would take advantage of the bank. If they had kept gold with them, they would have made four receipts in exchange for that gold. Now here a big problem arose in them, greed, to earn more profit, for which they started giving loans to people by making more receipts despite not having any gold, that is, the gold is only 4 kg but 16 receipts were made and they started collecting interest against these 16 receipts because there was no hard work required in making receipts. Now if even eight out of those 16 people come to collect their gold, then these bankers did not have enough gold to give them, so they clap. This entire action is called a bank run, that is, all the other people were cheated and all their hard work was wasted. Now this method of capitalism has risen in the countries in the form of a complete mechanized banking system, which is going on to date.
The Collapse of Silicon Valley Bank (March 2023):
Now, we get an example of this bank run recently in March 2023 from Silicon Valley Bank the Caps Silicon Valley Bank the Second Biggest Bank Caps in the US.
History This Silicon Valley Bank was one of the largest banks in America. It had money from big businesses and startups. Now the bank made a mistake by releasing the news that it has to raise capital of about 2 billion dollars and people were asked to deposit money in the bank. Now people think that the bank has run out of money and that is why it is trying to raise capital. Now this news spread like wildfire and everyone ran to the bank to withdraw their money. In a single day, about 42 billion dollars were withdrawn from the bank and another 100 billion dollars were withdrawn.
The Role of Governments in Banking Crises:
Now this situation has arisen that the amount of money that people see in their accounts is not physically present with the bank, so due to this the bank calls off the accounts. Now here the role of the government comes into play. The government tries to keep the trust of the public in this banking system. And can we have confidence that the banking system is safe because the entire banking system is running with the help of the public? If the trust of the public is lost from this banking system, then one after the other bank runs will happen which will become the cause of a big economic financial crisis.
Banks as Legal Entities and Public Exploitation:
Now here you should also be clear about the concept of the bank because a bank is actually a company. In this capitalism, if four people together form a company, then the status of that company will be of the fifth person who is called a legal entity, i.e. a legal person.
This person does not exist in reality but exists only on paper. Now if the owner of this company does any business or fraud, then a case is filed against him in the court and the result of that will be that fake person. And that fake person will be caught and this is impossible so the last limit can be that the fake person i.e. the company is closed down whereas the real owners of that company remain safe in every respect and all their associates also remain safe. Now understand this whole scenario that the bank which is not the property of the government but a few Capitalist all the interest i.e. the profit goes into the pockets of all the shareholders i.e. the capital of the bank and not in the national treasury and when the same public comes to take back their money then these banks become a victim of run and appeal to the government for the bailout and the money of the taxes of the same public is given to them and the government gives protection of their money to the public at a simple level. In Pakistan, DPC i.e. Deposit Protection Corporation has been created by the State Bank due to which the State Bank gives insurance of up to 5 lakhs only for example if you have a deposit in your bank If you have 20, 30, or 50 lakhs and the bank calls it quits, then the government can recover only 5 lakhs and give it to you. Regarding this entire banking system, Henry Ford, the owner of Ford Motor Company, says that
“It will be enough if the people of our nation do not understand our banking and financial system, because if they understand it, I am sure that the revolution will come before tomorrow morning.”
From the Gold Standard to Fiat Money:
Now another big historical atrocity was committed by America on humanity in 1971 when the then-American President Richard Nixon completely abolished gold for the dollar and declared the dollar as the real currency, which is called fiat money.
I directed the Secretary-General to suspend the convertibility of the dollar into gold and other reserve assets. First, in 1944, in the Bretton Wood Conference, the dollar was made the main currency internationally, then this fiat money, that is, the paper currency, was declared the real currency, so that now there is no idea of the existence or non-existence of gold, but A paper receipt is the real thing.
You can print it as much as you want. After this, wherever America waged war, billions of trillions of dollars were printed and injected into the market. In this way, about 840 billion dollars were spent in the Vietnam War and according to a source, about five trillion dollars were injected in the wars of Iraq and Afghanistan. Now, the more dollars you print, the more the value of the dollar will decrease, which becomes the cause of inflation.
Inflation and Global Economic Consequences:
If we understand inflation in simple words, then inflation means that if a year ago a bag of 20 kg flour was for ₹1, then next year the same bag of 20 kg flour has become 1500 rupees. Now, flour has not become expensive but the value of money has decreased. Due to this, you will have to pay more money to buy the same bag of flour. Now, since no special effort is required to print dollars in a large quantity, it is very difficult to extract gold in large quantities from someone’s ears and it is also impossible to print gold in any chemical way. Because of this gold retains its value instead of just a paper currency. Now this printing of billions of trillion dollars by America is having dire consequences.
It falls on the poor people that now they have to work harder to meet their dues and in this way, their hard work is exploited. Whereas dollar is an international currency, so its effect is not only on the American people but on the whole world. Now the cruelty upon cruelty in this is that the Federal Reserve Bank of America has the legal authority that it can print as many dollars as it wants. Dr. Richard Werner, who is a professor of international banking and finance, says that people think that banks work for the benefit of the person who has deposited money and the person who needs money. However, it is not so because now instead of being useful, they have become a means of making money themselves. Now this banking system has risen in a complex form in European countries and America.
Conclusion:
The article underscores the critical role of the banking system in shaping global economies while exposing its inherent flaws and consequences. Tracing its evolution from ancient moneylending practices to the modern banking industry, the piece highlights how capitalism and profit-driven motives have transformed banking into a system that often prioritizes wealth accumulation over societal well-being. Practices like fractional reserve banking, the money multiplier effect, and fiat money have led to systemic vulnerabilities, such as bank runs and inflation, causing economic instability and exploitation of the working class. Historical instances, such as the abolition of the gold standard and the 2023 Silicon Valley Bank collapse, illustrate the far-reaching impact of these systemic flaws. The article concludes by advocating for a reevaluation of banking practices, emphasizing the need for transparency, sustainability, and fairness, particularly under ethical frameworks like Sharia law.
FAQs:
- What is the money multiplier effect in banking?
The money multiplier effect describes how banks lend out a fraction of deposits to create additional credit, making it appear that more money exists in the economy than is physically present. This practice can lead to systemic risks, such as bank runs.
- Why is the modern banking system criticized in this article?
The article critiques the modern banking system for prioritizing profit over public welfare, relying on risky practices like fractional reserve banking, and creating economic vulnerabilities such as inflation and financial crises.
- What happened during the collapse of Silicon Valley Bank in 2023?
Silicon Valley Bank faced a bank run when news of its need to raise capital spread, leading to mass withdrawals totaling billions of dollars in a single day. This highlighted the fragility of the banking system when public trust erodes.
- How does fiat money differ from the gold standard?
Fiat money is a currency without intrinsic value, backed only by government decree, unlike the gold standard, where the currency is backed by tangible reserves of gold. The shift to fiat money has contributed to inflation and economic instability.
- What alternatives to the current banking system are suggested?
The article suggests exploring ethical and interest-free banking systems, such as those based on Sharia principles, which emphasize fairness, shared risk, and avoidance of exploitative practices like interest.