As a part of their business, the goldsmiths loaned money. Christians were not allowed to charge interest by church edict, so the goldsmiths got into the business of loaning money at interest. Because the gold and silver based money had intrinsic value, it was considered legitimate to charge for its use based on the time that it was borrowed.
But the goldsmiths found that they could loan receipts, instead of the precious metal itself. When, as the economy grew, and there was insufficient gold and silver to back all of their potential loans, they began loaning more receipts than the gold and silver in the vault. Since not everyone usually wanted to redeem their receipts at the same time, this system usually worked, and the goldsmiths, now bankers, became wealthy and powerful as a result of their ability to create money ex nihlo - out of thin air. Since Christians forgot their injunction against usury, they have also gotten into the banking business.
This is where seigniorage entered the picture. The money created over and above the value of the gold and silver in the vault was seigniorage money.
Our banks are the descendents of the goldsmith bankers. Our present banking system can best be described as a kind of casino, with the "too big to fail" banks representing the House, local banks taking the part of contract table operators, and members of the Main Street marketplace - you and I - the rest of us - being the customers of the casino.
However in this case the casino's chips - our money - are created by a private monopoly resulting from the Federal Reserve Act of 1913 that requires everyone to be customers of this casino in order to pay our taxes and trade with other members of the economy.
As time went on more of the money in circulation was not backed by precious metal. In 1973, President Nixon, on recommendation of the private bankers, removed the option to redeem dollars for gold, and since then, our money has been a pure accounting system.
Commitment under the present money rules
So where does the commitment that comes with the creation of seigniorage fall in this case? When bankers, create seigniorage money, their only commitment is to see that the commitment of the borrower is kept, while they manage the repayment of the loan. The bankers have accepted the right to create seigniorage money, but have not made a commensurate commitment. However to enforce their system, they still require temporary ownership, a lien, on some specific item, or the general wealth of the borrower, until the loan is paid.
A case can be made that it is the market that backs our money just as in the case of the credit clearing system. Implicitly it is our commitment to repay loans and trust that the value of our money will be sufficiently stable that we can accept it and later use it without losses that justifies our continued use of it. In addition, the market is also committed to backing the issue, as evidenced by taxpayer banking bailouts. When the banking industry has gotten in trouble, who bails it out? The taxpayers - its user market - us.
The banking system has effectively externalized any commitment, placing that commitment on the market that uses their issue. It is for this reason that trust in the money system is tenuous, because the banking system has successfully internalized profit, while externalizing losses.
It has to be understood that this set of money rules has been justified as a part of the neoconservative agenda, by concentrating on the importance of freedom, without recognition that with freedom (rights) comes responsibility; for one's community, the larger community of man, and the earth.
Interest and unearned income
This brings us to a discussion of interest as a part of a seigniorage money system. Despite the fact that costs of creating seigniorage money are nil, and the money has no intrinsic value, for their services of administering loans, and putting back reserves to cover possible bad loans, the banks still charge interest.
Interest is a poor measure of the value produced by the banks. The result is that in the present 'freedom to profit' milieu, large amounts of unearned income have accrued to the banking industry. This unearned income is a private tax on the market, payable to the finance industry. The banking system's private welfare tax system is a source of much of the inequality in our economy, and the justification of unearned income in general. We have to understand that no income is unearned. The question is whether the earner receives it, or someone else appropriates it for their use.
An additional problem, under our present money rules, is that when a loan is issued, only the principal is created. Additional money to pay the interest is not created. Interest is created only as a debt to the bank making the loan. So interest has to be paid out of money already in circulation. If there is no growth in the economy, not enough money is available for the use of the Main Street trading community to pay both principal and interest when they both come due to the banking industry, as more money is owed than was created.
So as time goes on, the productive economy has to grow continuously at an exponential rate so that there is sufficient money to pay all of the interest due to the banking industry. This built-in growth imperative is the underlying reason why Economists insist on the need for growth in the economy. If the money supply doesn't continually grow, the money system will break down. With the limits of growth before us now, this is a crisis that has no solution under the present rules.
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