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The Money Swindle
Few people understand our financial system, because its basic processes are rarely discussed. Even economics graduates have never heard much of this.
Money is not a good, it is a measure. Since the introduction of paper money however, this distinction has been progressively eroded. Originally coinage, made of gold and silver, was issued by both the Crown and church authorities. The first paper money was written receipts for gold.
When the word usury is used nowadays, which is not often, it usually denotes ‘excessive interest.’ But its original and primary meaning was ‘any interest at all.’ Making money from money was illegal under church law. The Third Lateran Council denounced usury as a sin in 1179, and claiming otherwise was declared a heresy in 1312. The taboo continued for several centuries. If a fisherman needed money for a boat, he entered into a profit-sharing arrangement with a business partner; if a house was bought, a “rent” could be paid until the purchase price was reached. Compare that to today, with “interest-only mortgages” where householders pay nothing but interest and never actually own their house.
Carrying gold was burdensome and risky, so the practice arose of depositing it with people, often jewellers, who had strong-boxes. Receipts were issued and these were exchanged, becoming the forerunner of the modern banknote. The Bank of England was established in 1694 to become Britain’s central bank but even its “promissory notes” were still handwritten for the first few years. Gold was carried in the form of sovereign and half-sovereign coins until quite recently. A sovereign was worth twenty silver shillings, or £1, but gold was hastily withdrawn from circulation in August 1914 with the outbreak of World War I.
"Swindle 1: Fiat currency
The link between money and gold continued until the early thirties, when many countries gave up the “gold standard.” The Bank of England abandoned the last vestiges of it in 1931. Up to that date the bank had been legally obliged to exchange any banknote for its equivalent in gold.
The principle behind the gold standard was that it prevented the runaway printing of money. It was not the only option however. Germany in the inter-war years had almost no gold reserves, and adopted a policy of printing money according to the amount of wealth produced by its workforce. It has been suggested that the resurgence of Germany’s economy was the real provocation for the Second World War. Germany had bucked the stranglehold of debt to international financiers and thrived. The country simply could not be allowed to set an example to other nations.
With the departure from the gold standard the modern era of money began. Without the backing of a tangible asset our money became what is known as a fiat currency, from the Latin fiat, meaning decree. Money’s value is set solely by fiat; in other words, what the government says it is. Ultimately the currency is made legitimate by the fact that the government accepts these notes in payment for debts, i.e. taxes.
The principle of fiat currency bears comparison with a Ponzi scheme, one of the most basic types of financial fraud, named after its Italian originator. In such an arrangement, investments are attracted with the promise of high interest, but the interest payments are really paid by new recruits to the scheme. The original investment – the principal – is squandered to finance the lavish lifestyle of the fraudster, or squirreled away in offshore accounts. Eventually investors will ask for their money back or the fraudster will run out of new suckers to invest in his scheme.
When a government running an economy based on fiat currency gets into trouble, as it surely must, it has two options. Either it can confess its incompetence, and face recriminations for the mess; or alternatively it can print more money and carry on as before. This only delays the inevitable denouement. “I have discovered the secret of the philosopher’s stone, it is to make gold out of paper” wrote John Law, who ruined the French economy by this manner in 1720. This is likely to be repeated.
Consider the situation with government-issued bonds, called gilts. Physically they are just certificates with an ornate surround. Regarded as high grade investments, they are backed by governments, who rarely default on their debts. A government may raise money by printing these certificates and selling them to another, wealthier country, promising to repay that money after a period, typically five years, plus interest, typically five percent. The term of the debt conveniently places the repayment obligation on the shoulders of the following government.
Should a British gilt issue be undersold, that is, not enough buyers have taken up the gilt issue, it is underwritten by the Bank of England, which will print money to purchase the gilts on the same terms. This ensures that all the capital required by the government is raised. Although the Bank of England was nationalised in 1948 it remains independent, and thus can print money, lend it to the government and charge interest on it. Its equivalent in the United States is the Federal Reserve, which despite its name is a private company, and which operates under similar terms.
Thus the sale of gilts has two outcomes: either the taxes paid by British people are used to pay the interest on a loan from wealthy foreigners, making them even richer, or they pay interest to the Bank of England, who only had to print the money to lend it to the government.
‘Quantitative easing’ is just a fancy term for the instant creation of money. Money is generated out of thin air by the Bank of England to inject liquidity – ready cash – into the system. Thus in a fiat currency system the central bank can create money as a debt, and that money, which is merely an entry in a ledger or an addition to a spreadsheet, ceases to exist once the debt is repaid.
Hence we can conceive how using a fiat currency, which allows the unlimited creation of money, can lead to a system of perpetual debt. Similarly, a loan from a high street bank is not real money, it is money that has been contrived solely for the purpose of arranging debt.


Swindle 2: Fractional reserve banking
What’s the difference between a counterfeiter and a banker? Answer: The banker charges interest.
We now move down from the level of ‘fairy-tale money’ created by central banks, to the invention of more virtual money by local banks. Banks attract deposits from customers: the “chump change” of current accounts and larger sums in deposit accounts. These accumulated deposits are lent out to other customers. However, most loans made by the bank are with money which does not exist.
The fractional reserve system is standard banking practice and typically operates with a ratio of ten percent (though recently often less). That is, a tenth of all deposits are held back by the bank as the ‘fractional reserve’: the other nine-tenths are lent out.
This is why a “run on the bank” is such a disaster. True, some of the bank’s reserves will be in medium or long-term investments which are not quickly realisable, but the pressing problem for the bank is that it simply does not have the money. The fundamental assumption of fractional reserve banking – which again, is a completely normal feature of modern banking – is that all the bank’s customers will not ask for their money back at the same time. If they do, disaster befalls it. The cash held at the bank is only that which it expects to issue during the normal course of business.
Suppose £100 is deposited at a bank. Soon, £90 of it will be lent out, but that £90 is bound to return, even before the loan is repaid. The £90 will be used to purchase goods or services, and these payments eventually become deposits at banks. Of that £90 in deposits, £81 will again be lent out. Already £171 has been lent from that initial deposit of £100.
I ran a simple computer simulation to calculate what happens after ten iterations of this 10:90 rule. These iterations will take place – unless money is borrowed from a bank solely to be hoarded under a mattress, an absurd notion. The fractional reserve held by the various banks is £65, but the loans originating from that £100 deposit total £586.
We can appreciate that if a run on a single bank is a calamity, then a run on the banks is catastrophic. The money is not there: it has already been lent out, many times over. Applying the fractional reserve system and by scheduling loans and the repayments on those loans – plus interest of course – even local banks are able to generate money out of nothing.

dtucker300 Loc: Vista, CA

Audit the FED!