Part I of Monetary History examined the ancient roots of the modern monetary system. This important foundation looked at barter, mediums of exchange, and the subtle but important distinction between currency and money. The rise of standardized coinage and the world’s first true money were also explored. Prosperity followed the creation of sound money initially but soon greed and corruption set in, resulting in the fall of the Athenian Empire. This installment in Monetary History will continue tracing the genesis of the modern money system through the advent of paper money and the emergence of banking.
Money Changers Continued
Like Athens before it, Rome in the second and first centuries BC had its own struggles with the money powers. The highly informative documentary film Money Masters summarizes:
“Two early Roman emperors had tried to diminish the power of the Money Changers by reforming usury(1) laws and limiting land ownership to 500 acres. They both were assassinated.
“In 48 B.C., Julius Caesar took back the power to coin money from the Money Changers and minted coins for the benefit of all. With this new, plentiful supply of money, he built great public works projects. By making money plentiful, Caesar won the love of the common man. But the Money Changers hated him. Some believe this was an important factor in Caesar’s assassination. One thing is for sure, with the death of Caesar came the demise of plentiful money in Rome. Taxes increased, as did corruption.
“Eventually, the Roman money supply was reduced by 90%. As a result, the common people lost their lands and homes… With the demise of plentiful money and the loss of their property, the masses lost confidence in the Roman government and refused to support it. Rome plunged into the gloom of the Dark Ages.”(2)
Two thousand years ago when Jesus Christ walked the earth, the only occasions when He used physical force during his ministry were when He ‘cleansed the Temple’. The Lord did this not once but twice – once at the beginning of his ministry and once at the end. The first episode occurs in John 2:13-17:
“The Passover of the Jews was near, and Jesus went up to Jerusalem. And He found in the temple those who were selling oxen and sheep and doves, and the money changers seated at their tables. And He made a scourge of cords, and drove them all out of the temple, with the sheep and the oxen; and He poured out the coins of the money changers and overturned their tables; and to those who were selling the doves He said, ‘Take these things away; stop making My Father’s house a place of business.’ His disciples remembered that it was written, ‘Zeal for Your house will consume me.’”(NASB)
The second Temple cleansing occurs in Matthew 21:12-13, just after the Triumphal Entry during the Passion Week:
“And Jesus entered the temple and drove out all those who were buying and selling in the temple, and overturned the tables of the money changers and the seats of those who were selling doves. And He said to them, ‘It is written, My house shall be called a house of prayer; but you are making it a robbers’ den.’”
Why exactly was Jesus so upset? Money Masters’ William T. Still explains:
“When Jews came to Jerusalem to pay their Temple tax, they could only pay it with a special coin, the half shekel of the sanctuary. This was a half-ounce of pure silver, about the size of a quarter. It was the only coin around at that time which was pure silver and of assured weight, without the image of a pagan Emperor. Therefore, to Jews the half-shekel was the coin acceptable to God.
“But these coins were not plentiful. The Money Changers had cornered the market on them. Then they raised the price of them – just like any other monopolized commodity – to whatever the market would bear. In other words, the Money Changers were making exorbitant profits because they held a virtual monopoly on [the Temple coinage]. The Jews had to pay whatever they demanded. To Jesus this injustice violated the sanctity of God’s house.”(3)
Fast forward a thousand years to medieval England where goldsmiths where the first to perform functions we now associate with modern banking. For a fee goldsmiths began storing other peoples’ gold, in addition to their own gold. They could then loan their own gold at a rate of interest higher than the interest they paid out for the gold they were storing. The owners of the stored gold benefited from this arrangement because the goldsmiths provided safe storage for their precious metal, granting them piece of mind.
Though gold is very valuable, it is also quite heavy in large amounts. To make things more efficient, gold-workers began to issue paper receipts of deposit in place of physical gold. They did so, of course, at interest. The paper notes became an acceptable medium of exchange used to conduct commerce in the marketplace. People had confidence in the paper because it was backed by real gold being safely held in a real vault. Soon the goldsmiths noticed that people did not come in all at once to redeem their receipts and they dishonestly began to issue paper receipts in greater quantities than the gold actually being held. Why they did this is simple – it allowed them to collect more interest. Thus they increased their personal wealth and used it to acquire more gold.(4)
The goldsmiths’ scheme just described is the essence of Fractional Reserve Banking. Today the Reserve Rate for larger U.S. banks is 10 percent.(5) This means that banks are able to loan out 10 fictitious dollars for every 1 real dollar they have in an actual vault. So if the interest rate for a loan is five percent, the banks are not making merely five cents on the dollar, they are making 50 cents on the dollar because they can loan out the same dollar 10 different times (5¢ x 10 = 50¢). For smaller banks the Reserve Rate is three percent or even nothing at all!(6)
By the 14th century true banks (as they are presently conceived) began to pop up from Barcelona to Venice to Damascus.(7) People began going to bankers to store their coins (for a fee) and to have them valuated. (Valuation was a needed service due to the diversity of foreign coins that existed at the time.) The Venetian bank Banco della Piazza del Rialto was forbidden to make loans at interest (usury). It made money “solely from fees for coin storage, exchanging currencies, handling the transfer of payments between customers, and notary services.”(8) The results were highly positive. G. Edward Griffin, author of the seminal work The Creature from Jekyll Island explains:
“The formula for honest banking had been found. The bank prospered and soon became the center of Venetian commerce. Its paper receipts were widely accepted far beyond the country’s borders and, in fact, instead of being discounted in exchange for gold coin as was the usual practice, they actually carried a premium over coins.”(9)(emphasis in original)
Because of the diversity of coins already mentioned, the valuation process was complex and required an expert. The value of the steady Venetian note, on the other hand, was readily known and saved the bankers time and energy in facilitating financial transactions.
Most European banks however did not show the discipline and restraint demonstrated by Banco della Piazza del Rialto (which did not issue loans at interest). For the money masters, the short-term potential for profits proved too much to resist. These banks inevitably failed and profound political and economic instability was the result. Unfortunately for the Venetians, the model state of affairs didn’t last. The money establishment convinced Venetian politicians to lift the lending restriction, and in so doing they inexplicably took the racket to the a whole new level. G. Edward Griffin writes:
…the Venetian Senate eventually succumbed to the temptation of credit. Strapped for funds and not willing to face the voters with a tax increase, the politicians decided they would authorize a new bank without restrictions against loans, have the bank create the money they needed, and then ‘borrow’ it. So, in 1619, the Banco del Giro was formed…(9)
This is an important development – Banco del Giro was creating “money out of nothing for the purpose of lending it to the government.”(10) This is crucial. First of all, creating money out of nothing means that the paper was not entirely backed by gold, only the amount equivalent to what today would be called the reserve requirement. And second, lending currency to entire governments is far more profitable than merely lending it to the general public. What is more, whether intended or not this arrangement created a cozy relationship between the financiers and the political class. Financiers benefited because they earned interest on the money they created (the majority of it from nothing). Interest money earned over time could then be used to influence key politicians. The politicians in return would ensure the political and economic survival of Banco del Giro, even if it meant harming the average person. Fortunately for the Venetian people, Banco del Giro was just one bank amid a network of other banks who were not a part of the obscene racket just described.
But the shrewd bankers would eventually become monopoly men and the unholy alliance between bank and state would be institutionalized. Part III of Monetary History will examine the Bank of England and its pivotal role in the evolution of the monetary system.
1 In the Bible and in the ancient world usury was defined as any lending at interest. The modern definition of usury is lending at exorbitant interest.
2 Money Masters. Directed by William T. Still; Written by Patrick S.J. Carmack and William T. Still, 1996.
5 Federal Reserve Monetary Policy, Reserve Requirements http://www.federalreserve.gov/monetarypolicy/reservereq.htm
7 G. Edward Griffin, The Creature From Jekyll Island, pg 171. (American Media.)
8 Ibid., 171.
9 Ibid., 172.