The Creature - Part III

Topic: My Story - The History of Money

May 02, 2022

When is the last time you thought about where money comes from? Why do we even need it? What was its origin? If everything is all about the Benjamin’s, who authorized the Benjamins in the first place?

It turns out that understanding the nature of money has completely faded from public consciousness and nobody even bothers to ask the question anymore, but perhaps that was by design and we need to start educating ourselves again.

The main function of our Federal Reserve System is to regulate the supply of money, but what does that even mean? How do we define money supply? Is it just the amount of cash in our pockets or the balance listed on our online banking statements? Does it include the equity we build up in our home or the debt we rack up on our credit cards?

Or is the money supply translated simply into just purchasing power?

In the most basic sense, money is anything accepted as a medium of exchange. The Creature from Jekyll Island book breaks it down into 4 categories:

Commodity money - Any material item that has value
Receipt money - an IOU
Fractional money - our cash when it was backed by gold
Fiat money - pure paper that governments declare are a legal medium of exchange, a.k.a. our current cash

For the purpose of developing a good understanding on the history of money, let’s go back one step further. Before there was money, there was bartering. Barter can be defined as that which is directly exchanged for something of like value. Have you ever traded baseball cards? That’s bartering… trading material items of a perceived equal value.

Commodity Money

Precious metals were the first commodity money to appear in history and ever since have been proven by actual experience to be the only reliable base for an honest monetary system because precious metal, like gold for example, has an intrinsic value that can be weighed and then quantified. When the medium of exchange is based on something of intrinsic value like gold, it limits the power of man to manipulate the value of said medium. Rather, the value is regulated by the free market or the natural element of supply and demand.

Receipt Money

Receipt money was issued for simplicity’s sake. When people accumulated more gold coin than was necessary for a daily’s purchase of goods, they needed somewhere to store their excess gold coin… thus the emergence of primitive banking through goldsmiths. A goldsmith who was already handling large amounts of precious metals in their trade business had already built sturdy vaults to protect their own inventory, so it was easy for them to offer vault space to their customers for a fee. When the coins were placed into the vault, the warehouseman would give the owner a written receipt which entitle him to withdraw his gold at any time. At first, the only way the coins could be taken from the vault was for the owner to personally present the receipt. Eventually, however, it became customary for the owner to merely endorse his receipt to a third party who, upon presentation of said receipt, could make the withdrawal. These endorsed receipts were the precursor to today’s checks.

Finally, the goldsmiths started issuing not just one receipt for the entire deposit, but a series of smaller receipts, adding up to the same total, and each having printed across the top: Pay To The Bearer On Demand. As the population learned from experience that these paper receipts were truly backed by good coin in the goldsmith’s warehouse and that the coin really would be given out in exchange for the receipts, it became increasingly common to use the paper instead of the coin… thus receipt money came into existence. The paper itself was useless, but what it represented was quite valuable. As long as the coin was held in safe keeping as promised, there was no difference in value between the receipt and the coin which backed it.

Fractional Money

In addition to the goldsmiths who stored coins, there was another class of merchants called “scriveners” who lent coins. The goldsmiths reasoned that they too could act as scriveners but do so with other people’s money. They thought it was a waste for all that coin to just sit idle in their vaults. Why not lend it out and earn a profit which then could be split between themselves and their depositors?… put it to work instead of merely gather dust. That’s just smart business, right?

From experience, they had learned that very few of their depositors ever wanted to remove their coins at the same time. In fact, net withdrawals seldom exceeded 10% or 15% of their stockpile. It seemed perfectly safe to lend up to 80% or even 85% of their coins. And so the warehousemen began to act as loan brokers on behalf of their depositors and the concept of banking as we know it today was born.

Most borrowers wanted paper money rather than bulky coins, so when they received a loan, they usually put the coins right back into the vault for safekeeping, but this is where it gets complicated and shady. The original depositors had been given receipts for all of the bank’s coins. But the bank now issued loans in the amount of 85% of its deposits, and the borrowers were given receipts for that same amount. These were in addition to the original receipts. That meant there was 85% more receipts than coins so the banks created 85% more money and placed it into circulation through their borrowers. In other words, by issuing phony receipts, they artificially expanded the money supply. At this point, the certificates/original receipts were no longer 100% backed by gold. They now had a backing of only 54% (100 units of gold divided by 185 certificates is 0.54), but they were accepted by the unsuspecting public as equal in value to the old receipts. The gold behind all of them, however, now represented only a fraction of their face value… thus fractional money.

Fiat Money

The American Heritage Dictionary defines fiat money as paper money decreed legal tender, not backed by gold or silver. The two characteristics of fiat money, therefore are (1) it does not represent anything of intrinsic value and (2) it is decreed legal tender. Legal tender simply means that there is a law requiring everyone to accept the currency in commerce. The two always go together because since money really is worthless, it soon would be rejected by the public in favor of a more reliable medium of exchange like gold or silver. Thus when governments issue fiat money, they always declare it to be legal tender under pain of fine or imprisonment. The only way a government can exchange worthless paper money for tangible goods and services is to give its citizens no choice. Sound familiar?

In Conclusion: The Steps To Manipulating The Money Supply

In the beginning, the banks served as warehouses for safe keeping of their customers’ coins. When they issued paper receipts for those coins, they converted commodity money into receipt money. This was a great convenience, but it did not alter the money supply. People had a choice of using either coin or paper but they could not use both. If they used coin, the receipt was never issued. If they used the receipt, the coin remained in the vault and did not circulate.

When the banks abandoned this practice and began to issue receipts to borrowers, they essentially became money magicians, creating money out of nothing, but we can take that one step further. They actually created money out of debt. Obviously, it is easier for people to go into debt than to mine for gold, and now money no longer was limited by the natural forces of supply and demand. From that point in history forward, it was to be limited only by the degree to which bankers have been able to push down the gold-reserve fraction of their deposits.

Final Thought

What we have come to know as our current monetary system, a.k.a. the Benjamins, used to be backed by gold, but in 1971 President Richard Nixon basically put our monetary system out of its misery by removing us completely from the gold standard. This was the final nail in the coffin that led to what we’re seeing happen today with unprecedented amounts of inflation that eventually we won’t be able to keep up with. Overnight, our fractional money turned into fiat money making our current Benjamins completely worthless pieces of paper.