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People are not used to think in terms of coins as fiat money, but that is exactly what they are. What we are used to see as fiat money is paper money. Fiat paper money is equally fake as fiat coin money. The only difference is in its origins.

While fiat coins evolved from commodity-based coins, fiat paper evolved through different related an un-related processes. Historically speaking, we can trace the origins of fiat paper money to mostly three different circumstances or methods:

  1. Warehouse receipts
  2. Promises to pay
  3. Blackmail and threats

We will now briefly go over them.

Warehouse receipts

This type of fiat money evolved naturally from commodity-based money. Initially, people were carrying their gold or silver coins with them. They usually had them in a purse. Hence, the robber’s claim: “your purse or your life”. They were not talking about a women’s purse (as we understand it today), but the purse where all precious metal coins were carried.

Small amounts of coins could be carried safely, but what about larger amounts? What about longer distances? It simply was not safe. Hence, enter banks.

Banks were created for a number of reasons, one of them lending money. But banks also offered another service. They realize that people worried about carrying coins with them or keeping them at home. Banks began to offer a safekeeping service. Banks would take your precious coins and give you a paper receipt for them. They would do this for price, of course. In this manner, you had your wealth secured by professionals and had now paper receipts that were “as good as gold” simply because that’s exactly what they were. They were warehouse receipts. Banks would exchange those receipt for gold coins on demand.

And so, there was no reason to carry large amounts of gold coins, when a simple receipt would do.

However, banks soon realize that most people never bother redeeming their gold coins. Why would they? They were using those warehouse receipts as gold. It only made sense. Why going to a bank to retrieve your gold coins to purchase something and having this gold returned to the same bank by the seller, when you could just hand over the receipt and be done with the transaction!

What banks realized, was that the redemption rate (i.e. how much gold was actually taken out of the bank) was a low percentage. Something in the order of 10%. In other words, they only needed 10% of their entire gold stock to fulfill daily demands. The other 90% was just sitting in their vault doing nothing.

The problem for the bankers was that warehousing gold was not a very profitable business. Lending money for a percentage was much more profitable. And so, bankers started to issue more receipts for gold than the amount of gold they actually had in their vaults. In other words, they were debasing the receipts.

This is one process through which fiat paper money was created. Those warehouse receipts had value precisely because a banker said there was gold to back them up. The banker said that they were redeemable on demand. The banker could say so, because he understood that for as long as he kept 10% of the original gold in the vault, he could cover any normal gold demand. This is the origin of what economists call a “fractional reserve system”.

This type of fiat paper money became widespread over time. All banks did it. However, they did not do it to excess. They fully understood that the whole scheme was based on the belief that there was gold. It was based on the arbitrary decree, sanction or order from the banker. If this belief would to evaporate, there wasn’t enough gold to pay off all receipts. And so, bankers kept this practice within certain limits.

Eventually, as it always happens, the government got into the action. How would a government resist creating money out of thin air using a new-and-improved method? They could not. The many early examples of government printing these receipts and calling them money, ended in disasters of gigantic magnitudes. Remember that if one bank failed to redeem, only its customers were harmed. However, if a government bank failed to redeem, all citizens were harmed (not to mention the hyperinflation that preceded the debacle).

This is one of the origins of fiat paper money: printing warehouse receipts for gold that never existed.

Cui bono? (who benefits?) Governments (this is to say politicians and bureaucrats) and “friends” of governments. And the rest of us? Thank you very much!

Promises to pay

A second method through which fiat paper money originated is as a promise to pay. For whatever reason governments found themselves in need of paying large amounts of money due to people that would not take no for an answer (usually mercenaries). Since they did not have gold, they issued I.O.Us or “pagare” in Spanish (literally meaning “I will pay”); they were what in the financial sector is known as promissory notes, i.e. a “promise to pay”. These were notes, i.e. written or printed papers, where the government promised to pay (usually in gold) at a future date.

Then again, governments realized that a “promise to pay” is not the same as a payment. However, they could still buy the same goods and services with a promise. And then again, they started to print these notes as if hyperinflation was just around the corner… which it was and it did happen. Again. Gigantic debacle of monstrous proportions

This is another origin of fiat paper money: promissory notes for gold that governments never intended to pay.

Cui bono? (who benefits?) Governments (this is to say politicians and bureaucrats) and “friends” of governments. And the rest of us? Thank you very much!

Blackmail and threats

This type of fiat paper money is the easiest to understand and the most modern. Any government wishing to control the issuance of money (i.e. the creation of fake money out of thin air), must first ensure people will use this money. Since it has no real value whatsoever and people instantly recognized it for what it was i.e. printed paper, governments resorted to blackmail and threats.

First, they wiped out the competition by declaring “unlawful” any other type of money, particularly gold and silver based. Then, they created organizations of people with guns and badges who would go after anybody breaking this “law”. Then, they forced the use of paper fiat money under different threats and blackmail. These varied from country to country, starting with the always popular in antiquity: beheading and down to only accepting this money for tax payments or sales to governments.

All these blackmails and threats were used and everything in between. Eventually, people just gave up. How could they not? Who can confront the awesome power of the state?

Then, “Phase 2” started. This phase involved the systematic brainwashing of the people through government “education” and/or mandated educational curriculums. At higher educational levels, governments hired legions of economists to justify what they were doing. Governments succeeded in wiping out all theoretical competition from all schools of economics. They came full circle.

They started imposing fake money against the will of the people, and then they manage to convince people that not only it was in their best interest, but it was the “natural” way things ought to be.

This is yet another one of the origins of fiat paper money: notes that promised nothing and were worth noting but were forced upon people.

Cui bono? (who benefits?) Governments (this is to say politicians and bureaucrats) and “friends” of governments. And the rest of us? Thank you very much!

Note: please see the Glossary if you are unfamiliar with certain words.

 Continue to Fake money for a fake economy - Part 3


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