Part 2 of 5: From "Our Country, Then and Now" Chapter 2, "Money and Banking"
Introduction
This is Part 2 of a 5-part series that reproduces, with the cooperation of Clarity Press, Chapter 2, “Money and Banking” of my recent book, Our Country, Then and Now. This chapter explains how government debt and usury, two of the most evil and destructive elements of today’s economic life, became built into the very fabric of governance in the United States, and by extension, all other nations of the Western world. The system actually originated in its modern form with the Bank of England that destroyed the indigenous monetary system of the British Isles. Of course usury goes far back in history to the days of the ancient empires, including Rome, which it destroyed. Our Country, Then and Now may be ordered directly from the publisher here. This chapter of the book is being reproduced and distributed because of the urgent need to replace today’s usury-based system that benefits only the monetary elite with a new form of money-creation and distribution. The information contained herein is of special importance as the new Trump administration attempts a complete overhaul of the U.S. economy.
Note: Editorial comments are bracketed […]
Gold and Silver
Again, money in the US has always been a problem. The scarcity of gold and silver obviously limited the quantity of coins in circulation and made mining for gold and silver a lucrative occupation, where fortunes could be made overnight.
With the discovery of gold in the West, particularly in California in 1848, the amount of circulating coinage skyrocketed. The same thing happened with the mining of gold in Montana in the 1850s and 60s, in the South Dakota Black Hills in the 1870s, and in the Yukon and elsewhere in the world during the late19th and early 20th centuries, when the mining of precious metals became more industrialized.
The richest bonanzas came with the exploitation of the South African gold mines by the British, after they defeated the Dutch settlers in the Boer Wars from 1880-1902. It was South African gold and diamonds, exploited mainly by Cecil Rhodes and the Rothschilds, that propelled Great Britain to world dominance by the end of the 19th century.
Gold and silver must be minted into coinage to become an effective medium of exchange. The first US Mint was established in Philadelphia in 1792. Individuals possessing gold or silver could take their holdings to the Mint to be stamped into coins. Congress established a value ratio between gold and silver of 35:1.
But this coinage would be far from adequate. Obviously, a scarcity of money in a developing economy limits commerce to the point of economic crisis as populations grow and industry evolves. With the California Gold Rush, a second US Mint was established in San Francisco in 1854. Still, it was not enough.
During an age that viewed the only real backing for money to be specie, or precious metals, the national currency continued to stand on shaky ground. This is where banking began to creep in. As stated earlier, an apparent solution to the shortage of ready money has always been printed paper. During colonial times, paper money was issued by brokers for hogsheads of tobacco and by government agencies, such as the Massachusetts and Pennsylvania Land Banks, where loans were made using real estate as collateral. But the paper money we know today is bank-issued, i.e., Federal Reserve Notes.
There was no bank-issued paper money in America until the Revolutionary War, when the Bank of North America was set up in Philadelphia. Yet paper notes of credit had long been in use in the western world to support trade. Throughout history, including at times in our own day, merchants or manufacturers also paid their obligations in “scrip,” a type of paper note redeemable in goods or services at the issuing business location.
Scrip could circulate within a community and be bought and sold as a commodity, either at face value or a discount. Use of scrip becomes common during times of economic hardship, such as the Great Depression, and in modern times, as reflected in the “local currency” movement. “Cryptocurrency” like Bitcoin is a kind of “scrip.” But it’s an inferior form of money because it is not legal tender and cannot be used to pay taxes unless purchased with authorized currency. It can also be attacked at will by the government [or speculators].
Fractional Reserve Banking
It’s “fractional reserve banking” that can make the problems with paper money explosively worse. The practice of fractional reserve banking had been institutionalized in Europe going back to the Middle Ages by allowing a broker, a bank, or a gold merchant or goldsmith to lend paper promissory notes in excess of the amount of gold or silver held as deposits by the business’s customers.
The money supply could thereby be multiplied many times over the original value of gold on deposit. Such multiplication can easily lead to inflation and default by whomever is unlucky enough to hold the notes when a crash comes—as it always does.
Despite its obvious disadvantages, fractional reserve banking became predominant in the western world. Some even say it allowed Europe to conquer the globe, given its capacity to expand Europe’s purchasing power far beyond its tangible backing, i.e., its real value in specie. Obviously, this power to issue paper money not only had the potential of making those so doing the richest people in a nation but also the controllers of princes and kings, who depended on such loans in furtherance of their internecine wars or colonial expansion.
True, the money was usually redeemable in gold, or possibly silver by the issuing bank, which was fine, as long as all the holders of paper did not show up at the same time seeking redemption. Such a “run” on a bank would result in bankruptcy and collapse. Throughout history, this has often happened. When it does, individuals may lose their entire lifetime savings.
Back in the day, the bankers could even be prosecuted under the law, sometimes even be put to death. But today, if a bank defaults, it simply goes out of business. The bank’s owners may then start a new one [or sell the business to a competitor]. Bank deposits now have limited protection from default through the Federal Deposit Insurance Corporation, established in 1933 as one of the key reforms of the New Deal. Prior to that, people like my grandfather kept their money under the siding inside the garage and similar hiding places. While the practice has often been mocked in cartoons and elsewhere, it wasn’t without wisdom.
Paper money created “out of thin air” has been made “legal tender” by government decree. This, combined with charges against loans levied by a bank through interest has made it easy for sober-minded people to declare bank lending a thing of the devil.
Over time, governments began to require that a certain ratio be observed in the amount of money a bank could lend vs. the amount it had to hold back in reserve as customer deposits but formerly as gold kept in a vault, in an effort to prevent defaults. This “reserve ratio” has been pegged at about 16% in today’s US banks but has varied historically, running up to around 25% or even 50%. Incredibly, there have been times when the reserve ratio has been zero, including in the US since 2020.[i]
With the coming of electronic funds transfer in the late 20th century, the reserve ratio could easily be manipulated, but we’ll come to that later. Today, the power of banks to issue interest-bearing loans is virtually unlimited. But it’s where most of the circulating currency in the modern economy comes from. This is why it’s said we have a “debt-based” financial system.
Eventually, the financial system based on fractional reserve banking became the basis of economic relationships in the US and all other countries. This was because it was the easiest way for the monetary system to keep up with modern industrial growth while delivering profits to the system’s controllers and to the politicians whose legislation the controllers need to enforce the obligations of their debtors. Accordingly, government today devotes most of its efforts to protecting the wealth of the creditor class.
Money “created out of thin air” could and would eventually be used for all manner of financial speculation, including purchasing entire businesses that are then stripped of assets and which shed debts by declaring bankruptcy. If you think such practices are morally criminal, you are right.
Moneylenders’ methods of enforcing debtors’ obligations have varied, but they are always severe. In Shakespeare’s Merchant of Venice, the money-lender Shylock demanded his “pound of flesh.” While this was metaphoric, at that time debtors could be cast into prison. Debtors’ prisons became established institutions in England, Western Europe, and America by the seventeenth century. In England, a lender could have a debtor imprisoned without trial for a fee of one shilling. By 1628, 10,000 people were imprisoned in England for debt, many dying in prison before a friend or relative bailed them out.
Even though both the federal government and the states eventually outlawed imprisonment for debt, the practice has been revived in recent times. Today, people can go to jail for debt for many reasons, especially if they are too poor to pay court fees or fines. Fathers who fail to pay child support are routinely jailed for “contempt of court.”
[i] <https://www.federalreserve.gov/monetarypolicy/reservereq.htm>