A Brief History of Money

Contrary to popular belief, when banks make loans, they are not lending out money that people have deposited with them, but are instead creating completely new money, out of nothing. Absurd as this may seem, the fact is that 97% of our current money supply is created in this way – by private banks, out of nothing.

What’s more, in order to make a guaranteed profit, the banks create money out of nothing, lend it to us at interest, and then demand we pay back more money than exists! Collectively we are left in the impossible situation of always owing more money than actually exists.

Instead of telling the banks where to go (by creating our own money systems based on collective mutual advantage and reciprocity), we then scramble to the banks and beg them to lend us more money. This situation is utter madness.

Money for nothing.

Creating money out of nothing first emerged in the 13 century, at goldsmiths’ benches (or bancos) in Italy, when receipts issued for deposits of gold, goldsmiths’ “tokens of promise to pay”, began to be used for trade because they were much easier to exchange than the gold itself. Goldsmiths soon realised that depositors would never try to retrieve all of their gold at the same time, and so cleverly, or perhaps deviously, began to issue tokens (i.e. create money) for gold they didn’t have (i.e. out of nothing).

This was the beginning of both western “promise to pay” paper currencies and of the so-called “fractional reserve banking” systems that persist today – “fractional reserve banking” being the fancy name given to the process that enables banks, like the goldsmiths before them, to create more money than they hold, out of nothing.

Money and War

The ability to create money out of nothing inevitably gave bankers, and the banking system as a whole, a significant amount of power – a power that was increased substantially during the 17th century when “a deal was struck between the governments and the banking system. The banking system obtained the right to create money as “legal tender” in exchange for a commitment always to provide whatever funds the government needed” – Bernard Lietaer, Future of Money

This power was first granted to the Riksbank in Sweden (then called the Bank of the Estates of the Realm) when in 1668 the crown needed urgent money to fund a war against Denmark. Similarly, the Bank England was founded in 1694 when King William of Orange needed an extra £1.2 million to fund a war against the French.

At Bretton Woods, 250 years later, war was again instrumental in the shaping of today’s global economic (dis)order. A year before the end of World War II, on July 22nd 1944, the Bretton Woods Agreement was signed in New Hampshire, USA and the US dollar became the de facto currency of the world. Under this agreement, 44 countries “had to fix their currencies to the US dollar, and the US committed in counterpart to keep its dollar convertible into gold upon request from any central bank at the fixed rate of US$35 per ounce of gold.

A new institution – the International Monetary Fund (IMF) – was created to police the system…(and it) worked well for over two decades until President Johnson introduced his “guns and butter” strategy during the Vietnam War…This triggered an unprecedented dollar outflow from the US … (and) it was these substantial dollar holdings in the hands of foreign central banks that were to force President Nixon in 1971 to renege on the convertability promise of dollars into gold” – Bernard Lietaer, Future of Money

Thus, when Britain and France wanted to convert dollars into gold, and Nixon said “no”, dollars – the linchpin of global economic system – were no longer backed by a fractional reserve of gold, but by nothing. Since that time, the dollar has represented a promise from the US government to redeem the dollar with – another dollar. This further increased US influence in global monetary policy and, with currency exchange rates left to the whims of the market, inaugerated an era of unprecedented monetary instability; today’s “global casino” of international trade, completely dominated by speculation, had been born.

So, under the present banking system, we allow banks to create money out of nothing, so long as they hold a fractional reserve, not of gold, but of money previously created out of nothing. This is a pretty clever a trick (more devious even than the Italian goldsmiths), but it’s still only half the picture: modern banks don’t just create money out of nothing, they create it by lending it to us at interest, insisting that we pay back more money than actually exists! – we have to pay back what we’ve borrowed (i.e. the money we’ve allowed the banks to create out of nothing) plus interest (i.e. money that doesn’t even exist).

Paying back more money than actually exists is, of course, impossible – unless, that is, more money is created, by issuing more loans and creating more debt. This “debt imperative”, the perpetual need for more money to pay back our ever-expanding and constantly spiralling debt, leads in turn to a “growth imperative”, the need for perpetual economic growth. Unfortunately, we now know conslusively that perpetual economic growth is neither possible nor desirable.