The Money Trick

    At some unknown, but fateful, point in medieval history, a moneylender realised that the essence of a viable money system is confidence and that, once this confidence was established, a magical and very remunerative trick could be played.

    Typically, the moneylenders were possessors of a stock of precious metals, which they would loan out into the community.

    They found that, once they gained a reputation for reliability, instead of transferring actual gold or silver they could issue a promise to pay backed by the real wealth known to be in their vaults.

    Their next discovery was that, as long as people believed in the convertibility of the promises to pay, such promises could be issued to a value considerably beyond that of their holdings of precious metals.

    If experience taught the moneylender that only one tenth of his clients would at any particular time insist on payment in actual coin or bullion, he could safely make loans totaling about ten times the value of his reserves of bullion.

    Thus was born financial credit and the principle of what we now know as fractional reserve banking, which has both allowed the community to expand the economy with unprecedented rapidity and delivered control over the expansion to the financiers.

    The important points to grasp are:
    (1) the promises to pay functioned perfectly well even though they were issued on a fraudulent representation of convertibility;
    (2) the moneylender retained discretion to vary the availability of the promises to pay and there was never an exact correspondence between the total value of the promises to pay and the overall monetary needs of the community;
    (3) the promises to pay purportedly derived their value from the bullion in the moneylender’s vault but, in fact, this value came from the actual and potential productivity of the community itself.

    While the pretence that financial credit is based on precious metals has been abandoned, all these features have survived in modem financial systems, whose function is to create the financial credit of the community.

    It should be noted that the moneylender’s promises to pay circulated from hand to hand in trade as a commodity.

    Acceptance of the principle that money is a commodity has ever since made it impossible to establish a scientific relationship between the true monetary requirements of the economy and the availability of money.

    Since money is regarded as a commodity, its proprietors undertake constantly to enhance its value. This is achieved by causing demand for it to be high, which in turn is achieved by keeping it in short supply.

    Indeed, throughout the entire evolution of the money system — which financiers have essentially been able to guide to suit their own ends — maintaining a chronic shortage of financial credit has been the key to ensuring the financiers’ dominant position in the economy.
    (Author unknown)

    Purchase back issues of Alistair McConnachie’s Prosperity money reform journal here