"Some even believe we (Rockefeller family) are part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure---one world, if you will. If that's the charge, I stand guilty, and I am proud of it." - David Rockefeller

The birth of fiat currency, fractional reserve banking, and the hidden tax known as inflation.

The goldsmith decided he would continue to print out paper receipts without any gold backing them! It would be known as a fiat currency - money backed by nothing.

The goldsmith knew he could get away with it as long as his depositors never withdrew all their gold at one time. If this were to happen, there would be a "run" on the bank, and eventually cause a depression.

This is exactly what would eventually happen.

At first depositors would deposit their gold for paper. Just to keep things simple, lets say one piece of paper equals one ounce of gold. 100,000 ounces of gold in the goldsmiths vault is represented by 100,000 pieces of paper money within the towns money supply.

The goldsmith would then keep illegally printing paper money which was not backed by any gold. So, lets say after 5 years there is now 200,000 pieces of paper in the money supply, and to keep things simple, there is still exactly 100,000 ounces of gold in the vault. What happened next is the local marketplace would see an increase in the money supply and the businesses would raise their prices on everything! Because the goldsmith defrauded the town by printing more money than is backed by gold the town would experience inflation on goods and services, which is the same thing as saying that the town has experienced devaluation of their paper money. Look at the example below:

100,000 paper money notes / 100,000 ounces of gold = Each paper money note is worth 100% of it's value.
200,000 paper money notes / 100,000 ounces of gold = Each paper money note is now worth half it's value.
400,000 paper money notes / 100,000 ounces of gold = Each paper money note is now worth a quarter if it's value.

Inflation of the value of goods and services equals deflation of the value of money.

The citizens of the community eventually saw that the goldsmith was making more money than feasibly possible. The citizens soon become suspicious due to the deflation of their money, and soon later they began redeeming their paper money for their tangible gold.

Because the goldsmith had created more paper receipts than there is gold coins, he obviously did not have enough gold to redeem all the paper receipts his depositors wanted to trade in. This led to something called a "run on the bank." The first few depositors to trade in their paper for gold got their gold back. The others, they lost all their savings. Remember, 400,000 paper money notes backed by 100,000 ounces of gold equals one quarter an ounce of gold backing each paper note. The goldsmith was robbing his people. As long as only a fraction of his depositors redeem their paper for their gold, no one notices the fraud. If everyone redeems their paper for gold, only the first 100,000 pieces of paper can be redeemed for it's promised equivalent value of one ounce of gold per one paper note. The other 300,000 paper notes owned by the remaining citizens become worthless and the people go broke.

This became the birth of fractional reserve banking. The "gold vault keeper" had finally evolved into a "banker."

The reason why fractional reserve banking was not outlawed during the gold standard is because there was huge demand for credit, and there was not enough gold to back all this credit. That is not to say the same for today. Since we do not use gold anymore, we do not have the same problem that gold created, and therefore we can easily remove the fractional reserve part of our monetary system without any huge increases in inflation or deflation. This is explained in the following pages.

Today in 2008 the dollar is worth approximately $0.04 of what is was worth in 1789. From 1789 to 2008 the total cumulative inflation rose 2,320.6%. In today's dollars $24.21 equals what $1 was worth in 1789, or a one $1 bill from today would equal $0.04 pennies in 1789 value. As of today, if the dollar was to revert back to the gold standard, the American dollar would be backed by only $0.04 cents.

Related Pages:

Inflation | Introduction to money | The birth of usury | Fractional reserve banking | Debt as money | How gold can manipulate inflation | There is hope | Conclusion

Main Pages:

Home | How banks make money | Petrodollars | Inflation

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