Modern financial banking system based upon a simple but genious idea of goldsmith.

In the old days gold was minted into coins and those coins, along with
silver coins, formed the nation’s curhttp://wemustknow.wordpress.com/wp-admin/post-new.phprency. Goldsmiths had strongboxes
and vaults in which to securely store the precious metal with which
they worked. It was natural enough then that other people took to
asking the goldsmith to store their gold and gold coins in his vault
and to pay the goldsmith for the service. A merchant (for example)
would entrust to the goldsmith £20 worth of his own gold for
safekeeping. When he handed over his gold, the goldsmith would provide
him with a receipt or note promising to hand back the gold (pay the
bearer on demand) whenever the depositor returned and presented the
note. The receipt held by the depositor was in fact as good as gold
because he could exchange it for his £20 worth of gold any time he
chose. But the note was easier to carry around than heavy and bulky
amounts of gold and easier to conceal, so the depositor was often
content to leave his gold in the goldsmith’s safekeeping for long
periods. In fact when the time came to pay for some commodity with his
£20 of gold, instead of returning to the goldsmith, exchanging the
receipt for the gold and then using the gold to pay for his purchase,
it was more convenient for him simply to hand over his receipt to the
seller. The seller was happy to accept the receipt in lieu of actual
gold because it was more convenient to carry around and he knew that
should he present it to the goldsmith, £20 of gold would be handed
over to him.

Thus those gold receipts began to circulate and became the first paper
money. People were happy to exchange them back and forth rather than
the cumbersome gold they represented. The receipts had value because
people were confident that in the goldsmith’s vault lay the gold,
which they could redeem at any time.

Eventually the goldsmiths noticed that the gold left by depositors
remained in their vaults for longer and longer periods. People turned
up wishing to exchange their receipts for gold less and less often,
and that the receipts they had issued to depositors circulated in its
stead. It seemed a shame to have that gold just sitting there doing
nothing. Why not lend some of it out for a while? If it just sat there
for year after year the owner, the holder of the receipt, was not
going to miss it if it were loaned to someone else for a period. As
long as there was enough gold in the vaults to satisfy anyone who did
turn up with a receipt, then no-one would be any the wiser. So
depositor Joe would leave £20 of gold with the goldsmith for
safekeeping and depart with his receipt which he would then use as
money in lieu of the gold and it would circulate. It might be years
before anyone turned up with that £20 note asking for £20 of gold.
Meanwhile Tom would turn up at the goldsmith’s asking to borrow £20 of
gold and the goldsmith would lend it to him, demanding that it be paid
back after a certain period at a certain amount of interest. But
instead of lending Tom actual gold, the goldsmith would draw up a £20
receipt, just like the one depositor Joe had been given. Tom was happy
to take the receipt in lieu of the gold because it was more convenient
to carry around and people were happy to accept such receipts in
payment for things.

So Tom went off with his £20 note, content that through it he was now
in temporary possession of £20 of gold. But unbeknownst to Tom, Joe
also has a receipt representing that gold. In other words there are
now two notes in circulation representing the same £20 of gold!
Clearly the goldsmith’s issuance of two receipts for the same amount
of gold is fraudulent – particularly when Tom repays the gold he
believes he has borrowed in real gold. As each receipt promises to
hand over the same £20 of gold on demand, the goldsmith is making a
promise he knows he cannot keep. Several things are clear at the
moment the second receipt was issued and entered circulation: new
money has been created out of thin air; that new money has been loaned
into existence; as the loan has interest charged upon it, then a debt
has been created out of nothing that is greater than the amount of new
money created.

And another thing: Tom will eventually return to the goldsmith and
repay his £20 loan, say at 10% interest. He will therefore hand the
goldsmith, £22 in real gold. In other words, the goldsmith, in
creating that bogus receipt and lending it to Tom, is creating for
himself, albeit after a delay, real debt-free gold worth more than the
new money he loaned into existence! It gets worse. After a while the
goldsmith, seeing that his fraud is working pretty well, thinks that
if he can issue two £20 receipts against the same £20 of gold, then
why not two, three or even four? So Joe deposits £20 of gold and the
goldsmith gives him his receipt. In time four other people turn up at
his shop wanting to borrow that £20 of gold. The goldsmith obligingly
lends it to each of them at interest, giving each a receipt purporting
to represent that £20 of gold. There are now five receipts in
circulation representing the same deposit of gold, one for the
original depositor and one for each of the four borrowers. For that
deposit of £20, £80 (4x £20) of new money is created merely by writing
on a fancy piece of paper. If (say) £2 of interest (10%) is charged on
each loan, at the same time that £80 of new money is created out of
thin air, a debt of £88 is also created out of thin air.

Property is held as security against these loans so if the borrower
fails to repay with real gold the fraudulent piece of paper he
borrowed, the goldsmith takes his property. Each time the goldsmith
lends £20 of bogus gold he charges 10% interest on the loan. By
lending out £20 four times over and charging £2 interest on each loan,
the goldsmith makes a whopping 40% (four times £2) in interest on the
£20 “reserves” that were not even his to begin with! The goldsmith
cannot lose and soon begins to amass a fortune from his fraud. It is
the greatest get-rich-quick scheme ever invented. And it is, in
essence, the basis of the modern banking system. The goldsmiths of
yesteryear became the bankers of today and although paper money and
latterly electronic money took over from gold, essentially the same
fraud is being run.

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