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The goldsmiths began with relatively modest cheating, lending ate. But because those crumbs represent billions, too, the lesser out in gold deposit certificates only two or three times the amount _ bankers rarely grumble. Rather, with rare exceptions, they, too, of gold than they actually had in their safe rooms. But they soon support this corrupt system. grew more confident and greedy, lending out four, five and even In actual practice, due to numerous exceptions to the 10 per ten times more gold certificates than they had gold on deposit. cent reserve requirement, the banking system multiplies the Fed's So, for example, if $1,000 in gold were deposited with them, money creation by several magnitudes over ten times (e.g., the they could lend out about $10,000 in paper money and charge Fed requires only three per cent reserves on deposits under interest on it, and no one would discover the deception. By this approx. $50 million, and no reserves on Eurodollars and non-per- means, goldsmiths gradually accumulated more and more wealth sonal time deposits). and used this wealth to accumulate more and more gold. To return to the goldsmiths... They also discovered that extra It was this abuse of trust—a fraud—which, after being accepted _ profits could be made by 'rowing' the economy between easy as standard practice, evolved into modern deposit banking. It is money and tight money. When they made money easier to bor- still a fraud, coupled with an unjust and unreasonable delegation —_ row, then the amount of money in circulation expanded. Money of a sovereign government function—money creation—to private was plentiful, and people took out more loans to expand their banks. businesses. But then the goldsmiths would tighten the money Today, this practice of lending out more money than there are supply and make loans more difficult to obtain. reserves is known as ‘fractional reserve banking’. In other words, What would happen? Just what happens today. A certain per- banks have on hand only a small fraction of the reserves needed to centage of people could not repay their previous loans and could honour their obligations. Should all not take out new loans to repay the old their account-holders come in and ones; therefore they went bankrupt demand cash, the banks would run and had to sell their assets to the gold- out before even three per cent had So, for example, if $1 ,000 in gold smiths or at auction for 'pennies on been paid. That is why banks . . the dollar’. always live in dreadful fear of 'bank were deposited with them, they The same thing is still going on runs’. This is the fundamental cause could lend out about $1 0,000 in today, only now we call this up-and- of the inherent instability in banking, down rowing of the economy the stock markets and_ national paper money and charge interest ‘business cycle’, or, more recently in economies. ; ; on it, and no one would discover the stock markets, ‘corrections’. The banks in the United States are . allowed to lend out at least ten times the deception. 5. TALLY STICKS more money than they actually have. King Henry I, son of William the That's why they do so well on charg- Conqueror, ascended the English ing, let's say, 8 per cent interest. But throne in AD 1100. At that time, long it's not really 8 per cent per year whic before the invention of the printing is their interest income on money the government issues; it's 80 press, taxes were generally paid in kind, i.e., in goods, based on er cent. That's why bank buildings are always the largest in the productive capacity of the land under the care of the taxpaying town. Every bank is, de facto, a private mint (over 10,000 in the serf or lesser noble. To record production, mediaeval European US), issuing money as loans, for nothing, at no cost to them scribes used a crude accounting device: notches on sticks, or 'tal- except whatever interest they pay depositors. lies' (from the Latin talea, meaning ‘twig’ or 'stake'). Tally sticks Rather than issue more gold certificates then they have gold, worked better than faulty memory or notches on barn doors, as modern bankers simply make more loans than they have currency were sometimes used. (cash). They do this by making book entries, creating loans to To prevent alteration or counterfeiting, the sticks were cut in orrowers out of thin air (or, rather, ink). half lengthwise, leaving one half of the notches on each piece— To give a modern example, a $10,000 bond purchase by the Fed one of which was given to the taxpayer, and could be compared on the open market results in a $10,000 deposit to the bond-sell- for accuracy by reuniting the pieces. Henry adopted this method er's bank account. Under a 10 per cent (i.e., fractional) reserve of tax-record-keeping in England. requirement, the bank need keep only $1,000 in reserve and may Over time, the role of tally sticks evolved and expanded. By end out $9,000. This $9,000 is ordinarily deposited by the bor- the time of Henry II, taxes were paid twice a year. The first pay- rower in either the same bank or in other banks, which then must ment, made at Easter, was evidenced by giving the taxpayer a eep 10 per cent ($900) in reserve but may lend out the other tally stick notched to indicate partial payment received, with the $8,100. This $8,100 is in turn deposited in banks which must same lengthwise split to record, for both parties, the payment eep 10 per cent ($810) in reserve but then may lend out $7,290, made. These were presented at Michaelmas with the balance of and so on. Carried to the theoretical limits, the initial $10,000 taxes then due. created by the Fed is deposited in numerous banks in the banking It takes only a little imagination to arrive at the next step: for system, giving rise (in roughly 20 repeated stages) to an expan- tallies to be issued by the government in advance of taxes being sion of $90,000 in new loans in addition to the $10,000 in paid, in order to raise funds in emergencies or financial straits. reserves. The recipients would accept such tallies for goods sold at a profit In other words, the banking system, collectively, multiplies the or for coin at a discount, and then would use them later, at Easter $10,000 created by the Fed by a factor of ten. However, less than —_ or Michaelmas, for payment of the taxes. Thus, tallies took on one per cent of the banks create over 75 per cent of this money. some of the same functions as coin: they served as money for the In other words, a handful of the largest Wall Street banks creates payment of taxes. money as loans, literally by the hundred-billion, charging interest After 1694, the government issued ‘paper tallies' as paper evi- on these loans and leaving crumbs for the rest of the banks to cre- dence of debt (i.e. government borrowing) in anticipation of the reserves. In other words, the banking system, collectively, multiplies the $10,000 created by the Fed by a factor of ten. However, less than one per cent of the banks create over 75 per cent of this money. In other words, a handful of the largest Wall Street banks creates money as loans, literally by the hundred-billion, charging interest on these loans and leaving crumbs for the rest of the banks to cre- NEXUS © 15 the deception. DECEMBER 1998 - JANUARY 1999