Posted by: seanmichaelbutler | March 4, 2010


Dear R. Max Gold, LL.B.,

Thank you for your recent letter informing me of my outstanding debt to NCO Financial Services Inc. (formerly Financial Collection Agencies), authorized agents for Citibank MasterCard. I really do appreciate the diligence you have shown in reminding me of the money I owe. Without the industriousness of yourself and your colleagues, I should surely have forgotten all about my obligation by now.

Your conscientiousness stands in stark contrast to the state of neglect in which I have left our correspondence. By way of reparations, let me humbly offer an explanation for the tardiness of my payments. Simply put: I never borrowed any money.

Being a lawyer, Mr. Gold, you may not be as familiar as your client no doubt is about how money is created in our society. To best explain this process, permit me to back-up a few hundred years. 

The practice we now call banking started in several different places and times. But for illustrative purposes let’s take the case of the English goldsmiths of the 16th and 17th centuries. In those days gold coins were one of the main forms of money. When people accumulated many coins they would often deposit them with the local goldsmith, who tended to have a secure vault. In exchange for their coins the goldsmith would issue them a paper receipt showing how much had been deposited. People soon found that, instead of withdrawing their gold to make a purchase, it made a lot more sense to simply sign over an equivalent amount of these receipts to the seller. Once the goldsmiths caught on they facilitated this by not making their receipts out to any one person, but simply to the bearer. Whoever held the receipt was entitled to the gold. The Bank of England later refined this further by issuing notes in standard denominations, each worth a specific value in gold. And so paper money was born.

At first, depositors only wanted their coins back when they presented their receipts. This was because coins were often tampered with by shaving or “sweating” small portions of the gold off, or recasting them with less precious metals. But when Sir Isaac Newton was put in charge of the Royal Mint, he developed a coin that rang at a certain pitch when struck. Any adulterations to the coin would result in it being out of tune – it quite literally would not ring true. With the value of all coins now assured, goldsmiths could lump all their deposits together into a common sum.

Seeing this vast pool of gold all in one place got some of the more enterprising goldsmiths thinking: most of the time, their vaults were full of gold. Sure, in theory all their depositors could simultaneously demand their gold back and empty out their vaults. But barring a wide-scale panic, it wasn’t too likely.

Sensing a business opportunity, the goldsmiths began loaning out, at interest, some of this surplus gold sitting idle in their vaults. Of course, instead of loaning the actual gold, it was much more convenient to simply loan out more of those handy paper receipts.

In so doing, the goldsmiths crossed a crucial line – they issued more receipts for gold than they had gold in their vaults. With each new loan they made, they increased the amount of these paper receipts circulating in the economy, thus creating more money.

No one went without so that others could be loaned this money; no depositor’s receipts were taken away and given to a debtor. Completely new receipts were printed, in addition to the old ones, with both old and new promising to pay the same gold to the bearer on demand. It was, in essence, a vast game of musical chairs. The only thing holding the goldsmiths back from issuing unlimited amounts of paper money was the fear that there might be a run on their bank, and they’d have to redeem all those receipts at the same time and go bankrupt.     

Except for a hundred-odd year interval during the 19th and early 20th centuries when the world towed the British Empire’s line and adhered to the gold standard – which enforced a one-to-one ratio of gold to money – we’ve pretty much stuck to this same system of money creation through debt. The old goldsmith’s fear of a run on his bank has been replaced with government-regulated “fractional reserves”, but these only require banks to possess a small fraction in assets of the total amount of money they loan out.

So just like back in Elizabethan England, when I “borrow” money from a bank these days, that bank conjures new money out of thin air and makes the numbers appear in my account as electronic impulses.

Since this money was not previously owned by anyone, including the bank, it cannot be considered as “borrowed”. It simply appeared, like some immaculate conception, in my bank account. If this money has a creator it is surely I, and not the bank, since it was by my will that this money came into existence. The bank was merely my instrument.

I’m sure you’ll now agree with me that I should be under no obligation to hand over my money to a financial institution in repayment of a loan that – when viewed properly – never even existed. Rather, in light of these revelations, may I respectfully suggest that you should in fact thank me for my noble display of generosity in assuming the awful burden of money creation through debt and spreading the resultant wealth far and wide.     

Sean Butler

Copyright Sean Butler 2004


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