Chapter 15 - The Story of the Goldsmiths of Amsterdam

This is a fascinating little story:

The Goldsmiths in Amsterdam had vaults to keep their gold. They would allow members of the public to deposit their gold in their vaults for safekeeping for a small fee. The Goldsmiths issued respectable looking receipts for the gold deposited in their vaults. The public found it easier to pass these the receipts to sellers as payment rather than paying in gold. The receipts had become paper money. The system worked well and the receipts were 100% backed by gold. The receipts became known as Running Cash Notes

The goldsmiths noticed that only a small portion of the public came to collect their gold. The goldsmiths started to issue more Running Cash Notes than there was gold in the vaults. They issued Running Cash Notes that were not backed by gold. The system still worked well. The procedure by which they issued unbacked Running Cash Notes is less talked about. The best I can infer is that people would come to the Goldsmith and ask to borrow money. Money in this scenario means gold. The Goldsmith would lend the gold at interest, which in reality means that the Goldsmith gave a gold receipt to the borrower and wrote in a ledger the amount the borrower owed. Interest would be added to the borrowed amount. So after one year the borrower owed gold +10% or thereabouts. If the interest rate were 10%, interest owed would accumulate as follows: 10.00%, 21.00%, 33.10%, 46.40%, 61.05%, 77.16%, 94.87%, 114.36%, 135.80%, 159.37%, 185.31%, 213.84%, 245.23%, 279.75%, 317.72%, 359.50%, 405.44%, 455.99%, 511.59%, 572.75%. Well, you may claim that this is fraud. It is only fraud if it is illegal. So handsome are the profits, that it is worth persuading the politicians by all means possible to make it legal.

I say to you "How dare you call this fraudulent." This is a perfectly legal practice in the modern world. We call it modern banking, although in the modern system the Running Cash Notes have been replaced by digital entries in a bank account. I shall rewrite the story in the next chapter interwoven with the modern banking system.

Graph of the goldsmiths lending of gold.

And thus, the practice of modern banking had been invented. Money was created from nothing. The money went into circulation as Running Cash Notes.

The goldsmiths charged interest on the loaned money that had been created at no cost. There was more gold owning than there was gold. The clients had to pay back more of the Running Cash Notes or gold than had been lent out, which put the lender in a position to gain possession the real wealth and assets of the clients. The system is classic usury. Unpayable debts had been created in an Impossible Contract. Almost nobody was bright enough to work out how the lenders became unbelievably wealthy and powerful. They became the hidden rulers of nations.

This era of modern banking ushered in spectacular advancement, spectacular wealth for some and spectacular wars. Modern banking spread to most nations and then became established internationally in the form of privately owned international banks including the privately owned World Bank, the IMF and the 'Bank for International Settlements' (BIS)