The Goldsmith's Secret: How Banks Conjure Money from Thin Air

Introduction: The Most Important Secret in Economics

If someone asked you, “Who creates the money in our economy?” what would you say? If you're like most people, you'd point to the government or the central bank. A recent survey confirmed this, finding that a staggering 84% of people hold this common-sense—but completely wrong—belief.

This article's purpose is to reveal one of the most important, yet deliberately obscured, secrets in economics: the vast majority of money in circulation is created not by governments, but by ordinary commercial banks. We will demystify this "taboo" concept by traveling back in time to uncover its fraudulent origins and then breaking down the simple, legalized accounting trick that makes it possible today.

1. A Tale of Gold and Deception:

The Origin of Modern Banking

To understand modern banking, we must first become detectives and investigate a story that begins with the goldsmiths of 17th-century England. Their evolution from simple artisans to the world's first bankers happened in four distinct steps.

1. The Trusted Guardian: Goldsmiths worked with precious metals and, out of necessity, had the strongest vaults and best security in town. This made them the natural choice for wealthy merchants and citizens to deposit their gold coins for safekeeping. In return, the goldsmith would issue a paper receipt for the gold.

   
   

2. The Paper Trail: Soon, people realized it was far easier and safer to trade the paper receipts than to constantly withdraw and transport heavy, risky gold. These receipts began circulating as the first form of paper money, representing a claim on the gold held in the vault.

   
   

3. The Quiet Realization: The goldsmiths, being observant businessmen, noticed a crucial pattern: depositors almost never came to redeem their actual gold. The paper receipts were so convenient that they circulated indefinitely, while the gold itself sat untouched in the vaults.

   
   

4. The Great Deception: This was not just a clever idea; it was fraud. When a borrower came asking for a loan, the goldsmith would simply write them a brand new paper receipt—a claim for gold—even if there was no gold deposited to back it up. The goldsmith was issuing a receipt confirming a deposit of gold that had never occurred. The borrower, now holding what everyone believed was "money," could go and spend it, and the system of creating money from nothing was born.

   
   

This simple act of fraud by the goldsmiths became the blueprint for modern banking, sparking a century-long debate among economists about what banks truly do.

2. The Three Competing Theories of Banking

For over a century, economists have debated how banks actually work, resulting in three main theories. As we'll see, the one taught in nearly every classroom is provably false, while the correct one has been dismissed as a conspiracy theory.

Theory

Core Idea

The Verdict

Financial Intermediary Theory

Banks are just passive middlemen. They take existing money from savers and lend that same money to borrowers.

Incorrect. This is the dominant theory taught in most textbooks but is definitively rejected by empirical tests. It's a myth.

Fractional Reserve Theory

An individual bank is an intermediary, but as banks interact within the system, they collectively create new money through a "money multiplier."

Incorrect. This theory is also rejected by empirical observation.

Credit Creation Theory

Banks have the unique power to create brand new money "out of nothing" (ex nihilo) every time they issue a loan.

Correct. This is the only theory that passes empirical tests. It was once dismissed by mainstream economists as a "crank" idea but is now proven to be the factual mechanism.

The key insight here is profound. The first, and most widely taught theory—the one you'll find in nearly every university textbook—is the Financial Intermediary Theory. It is also completely wrong.

The correct theory,

Credit Creation, is the least known. Economist Richard Werner was the first to conduct an empirical test that definitively proved that individual banks create money every time they grant a loan.

So why is this truth so well hidden? The pattern of obscuring it is historical. Over time, establishment figures like John Maynard Keynes progressively "regressed" in their theories, obscuring the role of banks more and more with each successive publication. The US Federal Reserve itself was established through "sneaky" political maneuvers, with a vote intentionally scheduled on December 23rd when most of Congress was away for Christmas. This deliberate deception is essential to hiding the immense power that the banking system wields over society.

3. The Modern Magic Trick: How a Loan Becomes New Money

The fraud of the goldsmiths has been formalized and legalized through modern accounting. Here is a step-by-step breakdown of what really happens when you take out a loan from a bank today.

1. You Provide the Security When you sign a loan agreement, you are creating a legally binding debt instrument—an IOU. The bank's first action is not to "lend" you money, but to purchase this security from you. This is a crucial legal distinction: banks are in the business of purchasing securities, and your signed loan agreement is the security they are buying.

2. The Bank Invents the Money The bank does not take money from a saver's account or pull cash from its vault to pay for your IOU. Instead, it simply credits your bank account with the loan amount by typing numbers into its computer system. This act creates "net new purchasing power that is being created and added to the money supply." The money is invented at the very moment the loan is issued.

3. The Accounting Sleight-of-Hand This is the core of the trick. The bank owes you money for the IOU it just bought from you. But because banks are exempt from the "client money rule," they are allowed to take this 'accounts payable' liability and relabel it on their books as a 'customer deposit'. In that instant, the bank's debt to you is magically transformed into your money. This is the legalized accounting trick at the heart of modern money creation.

But this legalized accounting trick is far more than a technical curiosity; it is the engine that determines the shape of our entire economy.

4. Conclusion:

Why This Hidden Power Changes Everything

The vast majority of money in the modern economy is created by commercial banks when they make loans, a fact obscured by mainstream economic theory. This system began with the fraudulent practices of ancient goldsmiths and continues today through a legalized accounting trick.

Understanding this changes everything, because it reveals who truly directs our economy. Since banks decide who gets loans and for what purpose, they effectively decide where new money flows and which sectors of the economy grow. This power has three primary outcomes for society:

• Asset Purchases: When banks create credit for real estate or financial assets, it inflates asset prices. This is a Ponzi scheme: "it works only as long as the banks continue to create more credit for others to join the game." The moment the credit stops, asset prices collapse, wiping out bank capital and triggering devastating, recurring banking crises.

• Consumption: When banks create credit for consumer loans, it adds more money chasing the same amount of goods, which can lead to consumer price inflation.

• Productive Investment: When banks create credit to fund entrepreneurs and small businesses, they finance the production of new goods and services. This is the only form of credit creation that leads to real, sustainable economic growth and widespread prosperity.

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For decades, central banks and regulators have actively encouraged banks to lend for unproductive asset purchases. This policy concentrates wealth into the hands of asset owners, creates destabilizing boom-bust cycles, and effectively wages a "war on the middle class" by starving small, productive businesses—the largest source of employment—of the credit they need to grow and create jobs.

Understanding that banks create money is not obscure trivia. It is the first and most crucial step to critically analyzing economic news, government policy, and the true drivers of wealth and crisis in our world.

We must not just recognise this fraud, but we must stop it! Almost every piece of information we are fed is a LIE! We know this however due to the threat of loss of ability to participate in the echonomic world we have, and the threat of the system stopping you from moving, working, transacting and so forth, we all scurry down the path doing as we are told. Its a joke and its completely unlawful.

Ill be interested to see who jumps on this topic and cares enough to engage. We are working daily to produce the real living documents which will not only free you from all this but will put you where you belong... in the creditors position.

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