Thanks to
Philip Pilkington for explaining how our monetary system works: in particular
the fact that private banks create money. However he rather suggests the latter
idea is new.
Advocates of
full reserve banking actually worked out long ago that private banks create and
destroy money. For example Irving Fisher (an advocate of full reserve) said in
the 1930s in his booklet “100% Money and the Public Debt” that, “At present our
nation’s chief money is at the mercy of the mob rule of 15,000 banks. These are
tantamount to 15,000 private mints independently creating and destroying the
nation’s money every day, while the Government looks on helplessly at this usurpation
of its prerogative.”
And the
London goldsmiths who in the 1700s issued receipts for non-existent gold
doubtless realised they were creating money, as did their customers.
However
there are plenty of economics text books that have not cottoned on to what is
going on here, and Philip Pilkington is right to point to the deficiencies of
those text books.
London Goldsmiths who issued receipts for non-existent gold were liable to find themselves asked to deliver it to the purchaser of the note and, if they were lucky, end up in gaol.
ReplyDeleteIf a goldsmith had issued a receipt to someone depositing gold, and then failed to deliver the gold when asked to do so by the depositor, then the goldsmith would have been in serious trouble. That’s true.
DeleteBut the point is that goldsmiths knew percetly well that it was highly unlikely that every depositor would turn up at once. It wasn’t even likely that half would turn up at once. Goldsmiths could thus safely issue receipts / money to any creditworthy person wanting to borrow money. As long as they didn’t lend too much in that way, they were safe and made a nice living out of the process.
The following sources confirm that that’s what goldsmiths actually did:
http://en.wikipedia.org/wiki/History_of_banking#Goldsmiths_of_London
http://www.moneyreformparty.org.uk/money/about_money/history_of_money.php
P.6 here: http://blog.turgot.org/public/documents/Selgin_Goldsmiths.pdf
According to Michael Rowbotham (in "Grip of Death"), plenty of goldsmiths went bust. We should not be surprised, since they were the forerunners of fractional reserve bankers and as you yourself have pointed out, under fractional reserve, banks go bust!
ReplyDelete