Tuesday, 2 October 2012

Amazingly unoriginal new theory: “Endogenous Money”.

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.


  1. 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.

    1. If 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.

      But 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:



      P.6 here: http://blog.turgot.org/public/documents/Selgin_Goldsmiths.pdf

  2. 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!


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