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How did Paper Money come to be? And how has it changed from
privately issued money partially backed by privately owned gold to
government-issued money backed by all the wealth of our Sovereign Nation,
and all the nations that trade with us.
Paper money may be the most important invention ever made, and the most important story ever told.
It tells how we are still the victims of a clever scam that is no longer completely benevolent.
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.
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 private 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 private “Bankers” acting on behalf of the King and the storerooms became “Banks.”
20. When we switched to government issued paper money which was backed by (a) the nation’s legal tender laws and (b) all the wealth of our Sovereign nation, there was no need for gold reserves to back paper money or paper reserves to back paper money. Apparently that fact was not noticed by anyone to this day (12/3/09) and we continue to use the words “reserves” and “fractional reserve banking” in our laws even though they make no contextual sense and have no functional meaning
21. Elsewhere in our book, and on our website, we point out that gold reserves no longer matter -- now that we no longer use gold to back privately issued paper money. We have concluded “reserves” are an antiquated artifact of gold-backed, privately-issued, paper money. We still use the word “reserves” -- and “fractional reserve” banking even though they apparently have 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 of money they think is needed to keep the economy running smoothly.
23. The system is still known as so-called “Fractional Reserve Banking” although the reserves or the fractions have absolutely no relevance in modern 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 can truthfully and safely say it is a mishmash that prevents the checks and balances between the three branches of our goverment which are explicitly mandated by our Constitution. Why do we allow this nonsense to continue?
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.
27. There is no theoretical limit to how much money can be produced because of at least three reasons -- (a) banks can logically make loans as long as they have trustworthy borrowers -- (b) the constitution puts no limit on Congress’ right to create money, and (c) 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.
28. 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 for very large banks, at 10 times that sum. Small banks use a “required reserve ratio of zero % .Thus, there is no theoretical limit to the creation of money and new wealth for small banks.
29. And even in the case of large banks, 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. Plain old common sense tells us that there should be no limit to what a bank can loan -- except the ability of the borrower to be capable of paying the loan back under the terms of the contract and the ability of the borrower to create wealth with the loan.
30. 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. It would be ridiculous if that common sense was overuled by weird regulations.
31. 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 with due diligence