Primarily because people left their gold with the goldsmiths for safekeeping, they were to become the the first bankers in early England. The first paper money were “Receipts” for those gold deposits representing the gold in storage. These were easier to carry around, and safer, thus making paper money more popular.
The goldsmiths realized, after a while, that few people ever came back to trade in their “receipts” for the gold at any one time. It was then that Goldsmiths realized they could issue more paper than they had Gold to back it up, thus leading the way to a cheated system.
They could loan out more money than they had, and collect interest on it, as well.
This was the beginning of “Fractional Reserve Banking“, or loaning out more money than there is in assets on deposit. This way nobody ever noticed their wealth accumulation.
History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance. – James Madison
Do Not Try This At Home
If you’re anyone other than a member bank of the Federal Reserve, you’ll will likely be prosecuted and sent to jail for doing this.
Fractional Reserve Banking is one huge Ponzi Scheme that allows an increase in the supply of currency available to make loans to purchase investment capital, without increasing the quantity of investment capital or real savings. The quantity of loans will be higher than the actual supply of saved resources available for investment. Investors will assume that the quantity of loans available represents real savings. This misinformation leads investors to misallocate capital, borrowing and investing too much in long-term projects for which there is insufficient demand and real savings. As investors spend borrowed currency, segments of the economy will boom. Later investors will find the prices of their outputs falling and their costs rising, leading to the failure of new projects and a bust.
Fractional Reserve Banking Explained – Modern Money Mechanics
Fractional-reserve banking is a common banking practice today of issuing more credit than the bank holds as reserves, when loaned money is used and then deposited in the same bank or a different bank. Through this process, banks in modern economies typically loan their customers many times the sum of the credit reserves they hold.
Fractional-reserve banking allows for the possibility of a bank run in which the demand depositors and note holders collectively attempt to withdraw more money than the bank has in reserves, causing the bank to default. The bank then would be liquidated and the creditors of the bank would suffer a loss if the proceeds from the bank’s assets were insufficient.
Here’s how fractional banking works…
If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100 + $90 + 81 + $72.90 + … = $1,000).
Here is how the Central Bank, the Federal Reserve creates new money out of thin air (as explained by the creators of The Money Masters) and sets up the Boom-Bust business cycle. The Fed conjures up an amount of money that does not exist, which it then spends, usually to buy Treasury Bonds from private owners such as banks who had purchased them from the Treasury Department. These bonds were initially sold to the public to fund government deficits.
Banks are then permitted to loan out 90% of this new Fed-created money once it is deposited by the sellers of the bonds. That would not be a problem, except for the fact that the borrowers almost always redeposit the money (or the people they pay with their loan proceeds do). Once re-deposited, the banks can lend it out again. This re-loan, redeposit, re-loan, redeposit, etc. scheme, authorized by the Federal Reserve Act of 1913, allows banks each time to retain just 10% of the re-deposited loan proceeds as a reserve, ultimately allowing banks to lend out 9 times the original amount deposited, and to charge interest on it as many times as it was loaned. So instead of an interest rate of, for example, 6%, the banks may be collectively receiving a total of 54% interest per year (6% x 9; usually it is somewhat less due to the lack of qualified borrowers).
Once the economy is flooded with the bank-created money 9 times in excess of the money originally created by the Fed, an expansion that increases the money supply, which reduces the purchasing power of already-existing money (including wages and savings), interest rates begin to drop (as there is more money to lend) and prices rise (inflation). The dollar begins to fall relative to the money of other countries not in this same stage of money expansion. Money begins to flow out of US Treasury bonds (due to lower interest rates and the lessening purchasing power of the dollar due to inflation). Thus ends the expansionary or “boom” part of this artificial “business cycle.” To combat rising inflation and the falling dollar, the Fed begins raising interest rates.
Then the money supply, having been stretched to the maximum, begins its contraction, usually initiated by rising interest rates reaching a point that begins to inhibit borrowing and also inflation. The economic “bust” part of the cycle begins. Loans dwindle as interest rates rise and credit terms tighten. Various segments of the economy, accustomed to easy credit, begin to contract due to higher interest rates; loans become harder to get. Home prices fall, businesses begin to fail, bankruptcies increase. This “bust” part of the cycle continues, and worsens, until inflation is “tamed,” prices stabilize, and the dollar rises relative to other currencies. Eventually, the higher interest rates begin to attract foreign money, and the Treasury then is able to borrow what it needs at lower and lower interest rates. Interest rates fall. The artificial cycle then begins anew.
This boom-bust economic cycle is the fundamental cause of the inherent instability in our economy with the inevitable results such as the mortgage crisis in 2007-2008 and subsequent government bailout of banks. It is due to too-rapid increases in the money supply due to deficit spending and then the multiplier effect of fractional reserve banking and to lenders greedy to take advantage of such a system that rewards lending with more and more interest revenue; followed by a too-rapid contraction of the money supply, necessary to combat the inflationary effects of the former phase
The major banks of this country – the ones the government is lending your money to, and from which the government bailout bill bought their bad assets, are busily swallowing up the banks in trouble in this latest bust. As after all prior bust cycles, they will emerge larger and more powerful, and fewer in number. JPMorgan Chase bought up Bear Stearns and Washington Mutual. Bank of America picked up Countrywide Financial and Merrill Lynch. Wells Fargo added Wachovia. Wealth will be even more concentrated under their control, which they will use in the next bust to further this process, until eventually no one will own anything.