A Short History of Money & Banking(1)

A financial system is theoretically designed to enable an economy to function smoothly and predictably, but political actors work to ensure that the control of the system and the lion's share of economic rewards remain in the hands of a relative few. Though the mechanics of finance - banking, paper currencies, gold-backed and fiat currencies - were first developed in Europe centuries ago, the paper fiat system became fully global only with the emergence of the United States as a world power early in the 20th century.(2)

The U.S. - the world's largest economy and the venue for the world's largest pool of investment capital - functions as the system's engine, which is fueled by the U.S. dollar, the world's reserve currency.

Currency, or money, is a store of value, a unit of account, and a medium of exchange. Money gives man instantly available savings, and a tool for planning his work while freeing him from the inefficiencies and encumbrances of barter. It is the very oxygen of a market economy, circulating via a banking system that works to take money from people who wish to save their money and gives it to those who believe they can employ those savings profitably.

All money is born of a commodity - anything tangible from grain to gold. Any asset will do, just so long as it is so scarce and so prized that others will exchange their own goods or labor for it. Gold has been the most successful and popular medium of exchange and store of value for millennia, a commodity for which men have willingly exchanged their products, whether it be for labor alone or the material result of their labors.

Government, which produces nothing of economic value, is the odd man out in the game of wealth creation. Its survival and well-being depend upon taxation, levied through directly coercive means, which if onerous enough can lead to government's most worrisome and costly problems: revolution and civil war. To avoid this, in addition to direct taxation, indirect confiscation - realized through cunning - is employed to fund the state.

When kings found themselves financially embarrassed, they would call in all coinage for re-minting, replacing 10 percent or more of the gold (or silver) with a base metal, thereby increasing the royal treasury while simultaneously picking the pockets of their subjects through the debasement of the currency. This practice increased the available amount of money, but not the amount of goods, which causes inflation. (As economists define it, "too much money chasing too few goods.") Inflation constituted the royal bonus since inflation favors debtors, meaning that debts acquired at one value for money are repaid with money of lesser value. Men of commerce added to the confusion by clipping and trimming coins, the collected shavings eventually being melted down in order to retrieve whatever precious metal the clippings contained.

As society evolved and liberty spread, both practices came to an end. The Englishman John Locke argued that money was a form of property. Since a man would lend out property - money - and, at a later date in the normal course of business, would have the property - money - returned to him, money therefore had to reflect and enduring value if justice were to prevail and commerce were to flourish. Money, Locke asserted, could not be the abused tool of kings.

The people were readily persuaded. The monopoly of minting was wrestled from the crown, and government became instead a regulator of weights and standards and banks began minting their own coinage in accordance with government-mandated standards. The practice of clipping and trimming coins was eliminated when minters put a milled edge to coins.

Overall, both man and freedom profited. Having the issue of taxation front and center before the citizenry ensured the public's natural desire to retain as much of its wealth as possible in a form that maintained value worked as an evolutionary stimulus for notions of responsible government and as a break on the state's natural inclination toward the grandiose and the despotic. The most successful episode of this political evolution was the American Revolution, which began as a protest against unfair taxation and ended with the idea of "the consent of the governed" triumphant.

Yet despite that victory of citizen over state, the problem of an ambitious, nonproductive and ever-enroaching government not only remains, but looms ever-larger and more menacingly over Americans today.


Government's success in usurping citizens' liberties and privacy lies in having seduced the public into returning to it the monopoly of money creation through central banking. In contrast to a privately run system, central banking evolves always into a system that breaks the link between money and gold, thereby giving to the state the power of issuing unlimited debt.

Central banking is not the beginning, but the culmination of the industry's development, which began as a warehousing service. By definition, banking is a magnificent opportunity to deceive. However, honest and dishonest bankers alike are obligated to be seen as trustworthy in order to establish their businesses. Consequently, the trick of unsound banking is at the heart of the banking business.

The first bankers were gold warehousemen whose clients were storing their wealth - gold - for a fee, an arrangement known as deposit banking. Over time, an honest warehouseman's receipts came to be traded in lieu of any depositor's actual gold, and such receipts were, in effect, the first paper currencies which were financial instruments denoting value, or wealth (gold).

Loan banking developed next. Instead of paying a storage fee, depositors began to lend their gold through the warehouseman, thereby receiving a fee (interest) from the borrower minus the warehouseman's middleman cut. Competition among warehousemen insured that the fee for such labor remained modest.

The essential difference between the two transactions defines sound banking. Deposit banking secures a savers' wealth (gold), but no earnings accrue therein and storage fees are incurred. At a loan bank, the saver, in essence, was extending a commodity contract so that the goods he has forsworn - through the act of depositing his gold rather than exchanging it for goods he himself would consume - could be used by a certain borrower who was willing to pay interest for the depositor's abstention, as expressed by his deposit of gold, for a mutually agreed upon period of time.

In other words, it is a loan banking system which liberates and organizes savers ' accumulated wealth to become a community's or a nation's investment capital. All parties to the contractional relationship of loan banking benefit from the transaction; the banker gets his fee and maintains his business, the saver gets his interest payment and is thereby rewarded with increased wealth for his abstention and the borrower gets the opportunity to create wealth. And all members of the community benefit from the increased choice of goods, services and opportunities that result from each individual's economic development or wealth creation.

In both deposit and loan banking, the number of gold deposit tickets is equal to the amount of gold on deposit. So far so good, and were it not for gold's fungibility(3), we'd still be innocent as lambs.

Alas, a banker is a thinking creature. Knowing that no depositor wanted the exact same gold coins in return for his deposit ticket, the banker also came to notice that under normal demand not everybody came to get their gold at the same time, and further, fewer and fewer wanted to withdraw actual gold. They were all too busy trading banker's gold receipts.

So why not print up some additional gold deposit receipts and lend them out for interest? This mischief is, of course, simple counterfeiting - the essence of unsound banking.

Counterfeiting additional gold deposit receipts creates two problems. The first is a legal one: two claimants to one asset. Classical economist Hans-Hermann Hoppe notes sardonically that fake deposit receipts can be thought of as "titles in search of property" and asks: "What if an increase in demand for automobiles were to be satisfied by printing more titles to automobiles, but the number of cars remained unchanged?"

The second problem is economic, and is known among classical economists as "malinvestment," which means that more business investment is stimulated than what is warranted in light of actual savings. (Who hasn't noticed the unfinished skyscraper standing cold and silent for many a moon, the marginal coffee shop or hair salon that was shuttered almost as quickly as it opened?)

When the banker counterfeits, he is, in effect, stating that he has possession of gold (savings, or investment capital) that he does not have. Therefore, no one is forsaking the goods that the banker is, in fact, fraudulently leasing to the borrower! Further, the entire community or nation is deceived because the banker's counterfeiting allows a community or nation access to money without the concomitant forswearing of resources, thereby violating the essential rule upon which sound banking is based.

When the accumulated investment errors are inevitably corrected by the hard reality of the lack of resources to sustain the excess investment the banker's counterfeiting stimulated, a community or nation is confronted with the dreaded "bust" of the "business cycle."

(1) Source of above excerpt and footnotes 2 and 3: THE FED: How your money - and life - are controlled by America's banking system by Anne Williamson. Full article available at http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=21872

(2) Fiat currencies are paper currencies made legal tender by the fiat of a government, but not based on, or convertible, into gold and whose intrinsic value derives from government sanction (also known as "token money").

(3) Fungibility is when a quantity of a good can easily be substituted by a quantity equal in value to that of the same good, such as grain or refined sugar

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