A Brief History of Money and Banking

For many centuries the principal means of payment was the use of metallic coins, gold, silver, copper and iron.  These were quite adequate at a time when the volume of commerce was limited and usually local in nature.  As the volume of commerce increased it was only natural that some substitute to the universal use of coins had to be found.  It was the introduction of paper money.  There had been some early experiments in China, for example, but for purposes of this summary, we will begin in the late 17th century when paper money was first introduced into the English-speaking world.

The Banking Scam and Origin of the Partial Reserve System

“Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough money to buy it back again. However, take that power away from them and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of Bankers, and pay the cost of your own slavery, let them continue to create money.” Sir Josiah (later Baron) Stamp, Director, Bank of England 1928-1941


The Goldsmiths’ Scam

Before 1640, it was the custom for wealthy merchants to deposit their excess cash — gold and silver — in the Mint of the Tower of London for safekeeping. In 1640, Charles I seized the privately owned money, and destroyed the Mint’s reputation as a safe place. This action forced merchants and traders to seek alternatives and, subsequently, to store their excess money with the goldsmiths of Lombard Street, who had already built strong, fireproof boxes for the storage of their own valuables.

The goldsmiths accepted gold deposits for which they issued receipts which were redeemable on demand. These receipts were passed from hand to hand and were known as goldsmiths’ notes, the predecessors of banknotes. The goldsmiths paid interest of 5% on their customers’ deposits and then lent the money to their more needy clients at exorbitant rates becoming, in fact, pawnbrokers who advanced money against the collateral of valuable property. They also learned that it was possible to make loans in excess of the gold actually held in their vaults, because only a small fraction of their depositors attempted to convert their receipts into gold at any one time. Thus began the fractional reserve system, the practice of lending “money” that doesn’t really exist. It was to become the most profitable scam in the history of mankind. It was also the quicksand on which the Bank of England was subsequently founded in 1694 — more than 300 years ago.


The Bank Of England’s Scam

King William’s crushing defeat by France in the 1690 Battle of Beachy Head left England with no choice but to build a powerful navy. No public funds were available, and the credit of the government was so low that it was impossible for it to borrow the £1,200,000 that was needed. In order to induce subscription to the loan, the subscribers were to be incorporated by the name of the Governor and Company of the Bank of England. The bank was given exclusive possession of the government’s balances, and was the only limited-liability corporation allowed to issue bank notes. The lenders would give the government cash and issue notes against the government bonds. In other words the bank was allowed to lend the same money twice — once to the government and again to its preferred customers — and collect interest from each. This was not the first case of paper money issued by private banks in the modern era but it was the first of great and lasting significance in the English-speaking world.

This arrangement was similar in principle to the system developed by the goldsmiths. By lending the same money twice the bank could double the interest received on it’s capital. Bankers are by nature a greedy lot. So they were not content with being able to lend the same money to two people, they began lobbying for an even sweeter deal. In the early years of the 20th century, federally chartered U.S. banks were required to maintain gold reserves equal to 25% of deposits. That allowed them to lend the same money four times. In Canada, when I was young, banks were required to maintain 8% cash reserves; so, they could lend the same money 12½ times. In recent times, with the advent of the monetarist revolution inspired by Milton Friedman and his colleagues at the University of Chicago, and the elimination of cash reserves in favour of a new system labelled “capital adequacy,” the leverage (the number of times banks can lend the same money) soared. Bank leverage in the U.S. rose from about 12½ in 1974 to 25 or 30 in the 1980s. This incredible abuse occurred because even ridiculously low capital requirements set by the Bank for International Settlements were never properly enforced.

Following the deliberately induced crash of 2007, the G20 spent most of its time trying to patch up this leaky and immoral ship on the basis of a leverage of roughly 20 to 1. The deck is still stacked in favor of the bankers as 9 years of anemic growth has shown. For some unknown reason politicians have given them a monopoly to create money. This is a total dead end. Bank-created money (BCM) is all debt – debt that has to be repaid with interest. But no one creates any money with which to repay either the principal or interest. So there is no flexibility in the system whatsoever. The only solution is a massive injection of government-created (GCM) debt-free money to dilute the ocean of debt in which both the Canadian system and the world system are currently drowning.