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How did Paper Money come to be?

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How did Paper Money come to be?

It may be the most important invention ever made, and the most important article we have ever written. It tells how we are the victims of a clever, benevolent scam.

The following is paraphrased from Wright Patman's "A Primer On Money", published in 1964 by the Government Printing Office.

1. In ancient times, money was created and controlled by Kings and Rulers. It was mostly in the form of gold or silver coins which were minted under the control of the State.
2. Individuals also used raw gold or silver or privately minted gold and silver coins as money
3. Within the society during the 17th century, various individuals developed a trade which was called goldsmithing. These people, called goldsmiths, collected gold, stored it, and converted it to coins, jewelry and manufactured items. See note 3a -- bottom of page
4. The goldsmiths kept their gold in secure caves which were guarded at all times.
5. As individuals came to acquire gold through trading, they would naturally go to the local goldsmith and ask him to hold their gold for safekeeping in the goldsmith's storeroom.
6. The goldsmith would do this for a certain agreed-on fee.
7. The goldsmith would give the depositor a signed, dated receipt for whatever gold he was holding for the depositor. That receipt might say "Mr. Trader A has 5 ounces of gold deposited in my storeroom."
8. "Trader A" could then use that paper receipt more or less like the actual gold. If he, for instance, had a shipwright build him a ship for the price of 2 ounces of gold, he might write out a note which would say, "Pay Mr. Shipwright 2 ounces of gold out of my gold on deposit at Mr. Goldsmiths's storeroom." Mr. Goldsmith would honor these notes, charging a small fee for doing so. The goldsmith thus "cleared all such notes" much as the banks now clear checks.
9. Occasionally someone like Farmer A -- with a good idea and a need for gold to finance his idea, would come to Mr. Goldsmith and ask to borrow say 5 ounces of gold. Mr. Goldsmith and Mr. Farmer A. would agree to lend/borrow the gold at a certain rate of interest -- perhaps with the farmer's land as collateral.
10. But Mr. Goldsmith would then usually say, "You don't want to actually take the gold with you, do you? It would be much safer if you left it here for safekeeping and I will simply make out a note saying you have 5 ounces of gold on deposit in my storeroom."
11. That would be agreed to and Mr. Farmer A. would leave with a note that said "Mr. Farmer A. has 5 ounces of gold deposited in my storeroom."
12. Notice that the note of the depositor (see #7 above) and the note of the borrower both said exactly the same thing (except the names of the "depositor" is changed) and both could be used in exactly the same way -- to buy goods and services. Thus, these handwritten "notes" were the first paper money.
13. Over time, it developed that only a small fraction of the people with the outstanding notes ever tried to retrieve the gold in the storeroom. Most people used the notes just like they were the gold.
14. Mr. Goldsmith found out that, on the average, he could safely give out seven "one-ounce-of-gold" slips of paper for every one ounce of gold he had on deposit ! That was an "AHA! moment".
15. The only significant problem was that if everyone tried to cash in their slips at one time for gold, Mr. Goldsmith would not be able to produce the gold needed to pay off all those notes immediately. He would need some time to either call in his loans of actual gold -- or borrow gold from other cooperative goldsmiths.
16. This was easily solved by bringing the King into the deal and explaining what was going on. The conversation might have gone something like this: "Mr. King, look at this great thing I have discovered. I have 1,000 ounces of gold in my storeroom and I have been able to issue slips for 7,000 ounces of gold. People are using those slips to buy goods and services and create true wealth in the form of ships, farms and buildings, paying you taxes on all that created wealth. The only significant problem is that we can't let everybody ask us to cash in their deposit slips at once for gold. If you simply pass a law stating 'any person creating a run on the bank is working for Rival Country X and is trying to ruin our money system and should be executed forthwith' ". Such laws were passed.
17. In a way -- this was a scam -- because the goldsmith was representing that every slip of paper for one ounce of gold was really backed by an ounce of gold. But on the other hand, it was a benevolent scam, because the system really was creating wealth for the entire Kingdom and all the King's subjects.
18. Later, those laws against runs could be done away with. If all the Goldsmiths cooperated, each could quickly provide a loan to any bank which was being hit by a run.
19. Along the line, the Goldsmiths became "Bankers" and the storerooms became "Banks."
20. The original 7 to 1 ratio has varied over time and place and has historically fluctuated between 7 and 15 to 1. I think it is now almost always about 10 to 1 for very large banks. It is zero-to-one in many major countries. In the United states it is zero-to-one for banks which have deposits up to about $10 Million.
21. Elsewhere in our book, and on our website, we point out that reserves no longer matter. We have concluded they are an outdated artifact of gold-backed money. We still use the word "reserves" -- even though it apparently has no meaning in modern banking.
22. Although the Federal Reserve and, in fact, the law books use the word "reserve" to make it look like there is a limit as to how much money the Fed and the government can create -- there is no legal, recognized or prescribed limit. The Fed can create whatever amount money they think is needed to keep the economy running smoothly.
23. The system is now known as so-called "Fractional Reserve Banking".
24. Note that each word in the phrase "fractional reserve", and the entire phrase are scam words. The same kind of scam as the word "reserve" has always been -- see #17 above. "Fractional" and "reserve" don't even deserve the description "nonsense words" or "meaningless words". They are pure "scam" words because they are clearly used by the Fed and the Government (in written laws and public announcements) to mislead the public into thinking there is a reserve of some sort that either (a) limits how much money can be produced or (b) protects someone (who?) from something (what?).
25. Over time, the ownership of the banks has fluctuated between private ownership and ownership by the Government. It is now under a hybrid private / public ownership. One could truthfully and safely say it is a mishmash.
26. The government (Treasury Dept.) prints whatever amount of paper money is needed by the banks to fulfill whatever demand exists for paper money by depositors and borrowers. That money is given to the banking system at essentially no charge under orders of the Fed.
24. There is no theoretical limit to how much money can be produced because of at least four reasons -- (a) money created in one bank can be deposited in another bank and the 10 to 1 lending ratio starts again -- (b) banks can logically make loans as long as they have trustworthy borrowers -- (c) the constitution puts no limit on Congress' right to create money, and (d) when the loans are paid back, that created money is extinguished, leaving behind whatever wealth was created with the loan -- thus, the created money will not give rise to inflation. Remember -- all the loans should be covered by collateral and should be paid back in accordance with the contract laws of the nation and the nation's power to enforce those laws.
25. Whenever money is borrowed from a bank, that money is recorded as an asset in a "transaction account" at the bank. Under law, the sum of those assets -- those transaction accounts -- become the basis for the calculations of future loans, at 10 times that sum. Thus, there is no theoretical limit to the creation of this temporary money and new wealth.
26. And even that 10 to 1 ratio appears to be a hoax. We can't find a specific law that limits what an individual bank can loan.
27. We believe -- because it makes common sense -- that any bank can create and lend out whatever money is needed by a borrower who has adequate collateral and a good plan for the money.
28. Making wealth-creating loans (creating money) is what the Constitution wants the Fed and banks to do, that is their job. It would be ridiculous to set a limit if (a) they have a good borrower at hand, (b) they do not put all their eggs in one basket and (c) they check out the borrower thoroughly.
30. From primer on money dot com / martycarbone at yahoo dot com
---------- end ----------

Remember -- In the business of banking it has never been the responsibility of the bank to "back the loan". The loan is always backed by (a) the promise of the borrower to pay the money back, (b) the collateral and (c) the legal ramifications of the contract surrounding the loan. Lots of people get confused on this issue -- they somehow think the so-called reserves back the loan.


Note 3a. From: Glyn Davies:
During the English Civil War, 1642-1651, the goldsmith's safes were secure places for the deposit of jewels, bullion and coins. Instructions to goldsmiths to pay money to another customer subsequently developed into the cheque (or check in American spelling). Similarly goldsmiths' receipts were used not only for withdrawing deposits but also as evidence of ability to pay and by about 1660 these had developed into the banknote.

 

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Retired engineer, product and business developer, inventor (six patents). Currently (a) trying to completely understand our money and banking systems and (b) planning to pass that information to the American public. Photo is ca. (more...)
 

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The original paper money of the 13 colonies was ca... by Ty on Friday, Sep 4, 2009 at 11:14:18 AM
Thanks goodness you are not engineering any longe... by abe ramsay on Saturday, Sep 5, 2009 at 6:02:40 PM

 

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