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Engraving by Ettienne Delaune (1518–1583) of a goldsmith's workshop in Augsburg, Germany, 1576
We trudge forward through the gracefulness of time to continue our narrative of manipulators and the manipulated. The money changers and everyone else. We continue our story of how the money changers used manipulation and exploitation to control the human population because it’s important to understand how a small group of people were able to concentrate the wealth of the world in the hands of the few. You may start to draw upon similarities in today’s politics, businesses, religions, and societal norms. This is encouraged because it takes repetition and patience to understand people who lived over 2500 years ago experienced the same problems we were facing today, and how they solved those problems to progress the human civilization and their fair treatment of individuals.
Another trend you may be noticing throughout the different topics is that the money changers are a fluid group of people throughout history. The money changers aren’t stagnant, they don’t stay in a particular group, a race, or a culture forever. So, what happens? Why do the money changers change? It’s because material factors in the wellbeing of the lower and middle classes changed so dramatically that their psychological state begins to deteriorate gradually, but noticeably, to the point of revolt. Then the money changers become the lower and middle class, who set their standards, decide their policies and run their economy. Through the revolutions started by the lower and middle classes, the conditions get noticeably better, but those conditions don’t last. They don’t last because small groups of people become greedy and realize the goodwill of others is the easiest target to prey on. Throughout our life and our ancestors’ lives, going back into time as far as you can, our compliancy and nothing else, has allowed for a small group of people to control and maneuver the population and secure their way to generational wealth excluding us. The money changers transform once again. The money changers could be senators, kings, or wealthy landowners. However, there is a common theme throughout the fluidity of the different groups. The money changers control the money, they control the assets and they control the property.
We’ve explained the examples that occurred in ancient civilization, but let’s turn our focus to medieval Europe during the period of 500 Ad- to around 1500 AD. In the upcoming section, the group of money changers was the guilds of goldsmiths. Goldsmiths existed before medieval Europe, but the environment and the experience of the goldsmiths gave them the idea of creating guilds, exclusive to people who could forge gold which transformed their ability to control the economy. Let’s get into it.
A goldsmith is an individual who specializes in working with raw gold and manipulating the metal into a form that is useable. During the time, gold was the main form of money that was exchanged in markets and to merchants, therefore making it a very important job in the community. To historians, ancient and medieval goldsmiths were some of the most talented and creative people ever. Many of the techniques they used can’t be replicated today, and their only relic is hidden inside of museums around the world. There were other important jobs in the community too, farmers needed to provide food, engineers needed to build houses, and goldsmiths were just another one of those specialized occupations that were necessary for the cities. The workers of the community slowly realized that their production and wealth could be greater if they combined their labor. As a resolution, the people in the community would form guilds. A farming guild, a goldsmith guild, an engineer guild, etc. A guild is a collection of merchants that would combine their assets, ideas, and labor to carry out actions in the community that would be in their guild's best interest. This simple idea allowed the members of the community to have a more powerful voice when it came to informal politics, law-making, and culture.
Chalice. Hungary, 1462. Metropolitan Museum of Art. Part of Nathan Rothschild's collection.
The goldsmith guilds started with large quantities of gold to begin with because they were responsible for forging the gold coins that were the standard currency in medieval Europe. As a result of them having more gold than the average community member, they became the target of thieves and robbers that would threaten or kill the goldsmiths in order to steal their assets. As a result, the goldsmiths had vaults built inside of their guilds, where they would store all of the gold that wasn’t being processed. The thieves and robbers now found it difficult to target the protected funds inside of the vaults and began targeting everyday people more and more, making it a risk to keep large quantities of gold inside your home or in your pocket. Shortly after the goldsmiths began the safe storage of their possessions, the people within the city saw that their valuables would be much safer inside of the goldsmith’s vault, so they decided to store their gold at the goldsmith’s vault for a fee. This was the first mistake, because what do we know? The people who hold and control the money, have the ability to change the money. Thus, in medieval Europe, the Goldsmiths became the money changers.
Throughout Europe, the guilds of the Goldsmiths became the wealthiest and most powerful guilds because of their control of the community’s money. Eventually, the goldsmiths realized the power they had, and they began to manipulate and change the money. People began storing large percentages of their wealth inside of the vault and the goldsmiths came up with a novel idea. Instead of having the people come back periodically to retrieve their gold, they would issue paper in place of the hard and heavy metal, making it easier to carry and transact in the market because of lightweight and standard denominations. The paper money would become commonplace to be traded in the marketplace for real goods such as food, clothing and shelter, and services. Within the guilds, the goldsmiths began to realize that the people of the community never all came to withdraw their gold at one time and as time went on the goldsmiths came up with another novel idea. They could begin lending out their own deposits to the people of the city who didn’t have gold to deposit, or needed more at that specific time and in return, the goldsmiths would charge the borrowers interest and create payment plans. As word got around and paper money became commonplace to trade in the marketplace, more of the lower and middle classes went to the goldsmith’s vault to take out loans, and instead of asking for the money in gold, the citizens would ask for it in paper money. Therefore, the goldsmiths could profit from the difference in how much it takes to write on a piece of paper, and the interest he charged on his outstanding loans. This became very profitable for the Goldsmiths because over time the interest payments far surpassed the original principal that was being loaned out.
Next, the goldsmiths had another idea. In addition to lending out their own deposits, they began to lend out the deposits of the citizens who kept their gold in the goldsmith’s vault for safe-keeping, without them knowing. After all, not everyone would ever come to the goldsmith all at once and demand all their gold. Therefore, no one would ever know that the goldsmith would be partaking in this practice and making money off of other people’s deposits to generate marvelous amounts of wealth.
For years none of the other citizens or guilds suspected anything of the goldsmiths, the guilds throughout Europe had always been a valued part of their community; creating valued merchandise, valuable services, and storing their valuable possessions. However, the goldsmiths began to noticeably display their wealth by wearing the fanciest clothes, jewelry, and accessories, living in nicer structures, and having luxurious services that the lower and middle classes did not get to enjoy. This is when the tides began to turn. Some of the citizens began to become suspicious of the goldsmith’s scheme and demanded to withdraw their money back in gold, the same way that it was deposited. In fear of becoming victim to the large crowd of people forming outside the vault, the goldsmith showed the citizens their deposits, which were all accounted for. Still questioning how the goldsmith was becoming so wealthy from his practice, some of the wealthier and more intelligent people in the community began to demand they start to earn a cut of the profits from the business practice of lending his own money. With this cooperation from the wealthy public and the greedy money changers, the fractional reserve banking system of the modern-day was created.
For the goldsmiths, or money changers, the business practice would be to take the deposits of borrowers (a loan or promise to pay back), of people in the community and pay the depositors a very low-interest rate. All the while, the money changers would loan out the depositor’s money to the rest of the public at a high-interest rate, earning the difference in profit. However, the system and business model evolved once again. After the profits of the money changers business had to be shared, they devised a plan to loan out money that wasn’t even deposited into the bank or existed at all. No one besides the money changers had access to the vaults, and they knew not everyone came to withdraw their gold at one time, so there was no way for anyone to find out about the scheme they were about to deploy. The money changers continued to earn massive profit from the demanding and expanding economy of Europe, all the while exploiting the lower class for their ineptitude and labor. It's not surprising that the population was so docile for so long after all the idea of creating money out of thin air is so radical, it's still difficult for many people to understand today.
Fractional reserve banking is defined by Investopedia as a “system in which only a fraction of bank deposits is backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending”. The limit of the lending is called a reserve requirement, and in most cases, in modern times and historically it has been 10:1, but there are times in history and certain institutions that go 20:1 or even 30:1, but for now. Let’s say the reserve requirement is 10:1. Or 10%. That means you are allowed to loan out 10x more than the money that you have in your reserves.
Let me explain it in a little more depth. Imagine a brand-new bank branch opens in your town. Let’s call it The Money Changers Bank. Let’s also say you’re the bank's very first client. The Money Changers Bank investors have put up the initial capital to ensure there is sufficient money in the bank for clients wanting to withdraw money, employees to run the branch, and the building itself. In addition, the bank has a partnership with the Federal Reserve of the United States will lend the bank money at any time if it is needed. The cash in the vault at The Money Changers Bank is usually around 5% of what the total outstanding promises to pay back the money because not everyone comes in at one time to withdraw their money. So, you go to the bank and request a $10,000 personal loan. You provide the bank with your personal information; you sign hundreds of pages of documents and they establish you as a client with an account in their system. On their computer system, they enter in that the bank now owes the client $10,000. This money does not come from the vault in the back, and they certainly don’t hand you the cash. Its digits and bites in a computer changing. So the bank now has a 10,000 credit plus interest that you will need to pay back. So, you now take the $10,000 check, which is a piece of paper and you hand it to a used car salesman and go purchase a new car. The used car salesman takes the $10,000 piece of paper and deposits the money into their bank. That bank now can hold $1,000 of that money, while loaning out the other $9,000$. So, another client walks in the door of the Money Changers Bank and requests a loan for $9000, they give him the loan, he takes it and goes to buy a new lawnmower. The lawnmower company deposits the $9,000 check into his bank and that bank can then keep $900 on reserve and loan out the other another 8,100$. This process is repeated until that initial $10,000 loan that you requested, which was created out of thin air, ultimately generates $100,000, Or 10x the amount of money that was loaned out. This is how money is created. Money is debt and we will discuss this more as the sections progress.
The money changers realized something, they could easily expand and contract the economy by making it easier or more difficult to acquire new loans. Why would the money changers make it more difficult to acquire more loans? Well, money changers would reduce the economy so severely that many people would default on their loans, having to give the money changers their real property; like their gold, businesses, and other collaterals and have to hand it over to the money changer for fractions of the price. The goldsmiths then created the business cycle that we know and love today.
After the power and greed of the money changers grew, they began to issue out larger loans, with more fake money, at higher interest, and citizens of the community were unable to pay them back. Leaving citizens in debt, impoverished, and using all of their labor to pay back interest payments. They became fed up with the situation they found themselves in. When the lower and middle classes began to withdraw, they started to ask for the real gold they deposited. Rumors began to spread that more and more people were attempting to withdraw and some of the wealthiest citizens, who had deposited the most assets, had come knocking on the door wanting to withdraw their gold. Unable to make the payments and with large crowds of people forming outside the building, begging for their gold the bank had to be shut their doors for good.
In response, it would make sense that the fractional reserve banking system would be outlawed, but instead, with the money changers influence and the wealthy citizens able to outsmart the rest of the population, they legalized the practice and put certain regulations on banking that would limit their creation of fake money to around 10x the real money in circulation. The medieval money changers became wise. They would implement a central bank that would hold large quantities of the gold, that way if a bank run were to occur on a smaller branch, the central bank would be able to replenish the gold stock of the smaller banks in the area, and all would be good and well. Unless all of the smaller branches experienced bank runs at the same time. Can you guess what happened next? You guessed it. Bank runs on all the banks occurred, all of the systems eventually collapsed and the money changers' fluidity showed itself once again.
We’ll continue next week, thank you for reading. Be sure to leave your feedback and join the cause!
