The first five books of the Bible are common to the religious heritage of three monotheistic faiths: Judaism, Christianity, and Islam. For believers, these five books record history from Earth’s beginning to the death of Moses. With reliance on one god, monotheism overcame the duplicity of polytheistic faiths where strife was accepted as deceptions of man caused by differences among the various gods.

Deuteronomy is the fifth book of the Bible. Scholars have different theories on the timing and purpose of Deuteronomy. It was written after the Jews escaped slavery in Egypt and before they reached the Promised Land. By the time the book was composed, settlements of anatomically modern humans existed on every continent.

Coming from slavery and having wandered the desert for a considerable time, one can imagine the level of strife and debate within the Jewish tribes over how to treat each other in the face of competition for scarce resources. Deuteronomy seems to be a kind of treaty that lists specific behaviors that followers of Moses required of each other. It let them live in peace while seeking the greater society that was yet to come.

The book is an early statement of the rule of law. Some admonitions (e.g., one requiring that a woman’s hand be cut off if she defends her husband by grabbing the genitals of an enemy) seem unique to a tribal community with a need to procreate. The book’s definition and preclusion of fraud, however, is enduring.

Deuteronomy mandates that followers apply only one measure in their homes and trade. That precludes the use of two measures—that is, duplicity, the core of all fraud. It equally prohibits use of a small measure when a large one is proper (e.g., when selling bread) and use of a large measure when a small one is proper (e.g., when buying wheat).

Deuteronomy dates to somewhere between the twentieth and seventh centuries before the common era denoted by the Gregorian calendar. Precluding the use of two measures is recognition that society has an interest in preventing the threat that fraud poses to peace and prosperity. This side of the rule of law is summed up in the Silver Rule of earliest theology and philosophy: “Do not do to others what you do not want others to do to you.”

The Golden Rule, which emerged around the world near the start of the common era, inverts that proposition. It calls for affirmative individual action: “Do to others as you want others to do to you.”

The Golden Rule creates an individual obligation to step forward and make peace. The Silver Rule creates a collective obligation to preserve peace by avoiding specific behavior. All financial crises are founded in fraud. Precluding fraud will not end duplicity, so the law in Deuteronomy cannot assure financial stability. Precluding fraud is essential to financial stability, however, since it provides a standard toward which we can aspire and measure actions. It is only by disclosure and affirmative support for good transactions (explained later) that society can identify and undo fraud in a manner that sustains stability.

Punishing fraud is necessary to minimize the gotcha effect, or the sudden ebbing of confidence that surprises markets and triggers financial crises when unsuspected fraud is exposed. Instability begins when confident investors lend money to (or otherwise entrust) intermediaries that prove unworthy of trust. Fraud breaks that trust. It hides speculation until the duplicitous activity generates losses or inquiries that lead to discovery, but that generally occurs only after the entrusted money is gone.

When significant or systemic fraud is discovered, trust is shattered (along with fortunes) and is very hard to regain. Revelations of fraud trigger the spikes in credit spread that create crises. When confidence returns, spreads fall. When the cost of Adam Smith’s great wheel falls substantially, however, financial intermediaries perceive a need to hide speculation so that smaller margins can be collected on a larger base.

To do this, it is inevitable that some institutions will stoop to using two measures for investment. Speculation will determine that firm’s actual investments but will not be disclosed. The duplicity of secret speculation benefits managers at the later expense of investors. The use of off-balance sheet finance, discussed later in this book, is a prime example of this behavior. That is what makes such practices a moral hazard problem.

When the fraud fails, investors have no apparent source for repayment, as illustrated by the tiny recoveries in the $7 billion fraud committed by Allen Stanford. As investors rush for the exit, they drag good institutions down because investors lose trust in all institutions and markets contract in synchronicity.

Financial institutions, moreover, can be expected to lose customers when a competitor invades their territory and uses duplicity to permit managers an edge. When fraudulent savings and loans (S&Ls) used accounting gimmicks to hide speculation and undercut the practices of responsible commercial bankers in Texas during the 1980s, the biggest casualties were honest Texas banks that faced the choice of match or die. It is in good times, therefore, that regulators must insist on one measure for all.

Along with preventing fraud, vibrant private markets are also essential to assuring financial stability.

Ancient Rome certainly understood the power of controlling money in the first century. Cicero labeled the unlimited financing of coinage and taxation by a state monopoly “the sinews of war.” From ancient Rome to today, governments have used banking schemes (often supported by armies) to create and force acceptance of their currency. The government that exercised this power most carefully, in turn, was the winner of almost all wars in history.

Rome controlled the Mediterranean world by dominating money, through its ability to create currency and collect taxes for its support. Temple priests in Jerusalem used the conversion of Roman money and their control of Temple money to fund their work free of Roman interference. To them it was obvious that their currency exchange and pricing practices would not survive in an open market outside the Temple.

In the United States, disputes over banking started in part because Thomas Jefferson despised central banks as much as he despised the priests and kings who controlled them. The history of money and its control, however, links to just about everything evil and good in every society, because banking is the mirror image of the rest of society. The assets of banks (loans) are the liabilities of the rest of society and the liabilities of banks (deposits) are the assets of the rest of society. Because production and finance are intertwined in this manner, banking is both supremely important and utterly frustrating. As we discuss later, the world of finance can be explained using the image of a large water balloon. Whenever the balloon is pushed from one or more sides, an equal and opposite reaction must occur somewhere else. The key to financial stability is understanding the precise places where each push will generate a response.

In the four millennia between Deuteronomy and the eighteenth century, death was a likely end for anyone who dared to challenge those who controlled people by controlling money. Chinese emperors, the Incas of Peru, European despots, and religious tyrants all monopolized the processes of finance to control the money and thoughts of their subjects.

There is little evidence that these despots had much regard for the well-being of individual subjects. It is only as independent central banks emerged after the Dark Ages that we begin to see free and open debate between the critics and proponents of banking. Only then do we begin to see suggestions for how to use money and banking for the general welfare of citizens.