How did the present financial system come to be?
By Faisal Amjad

A sad history of the economic system

Published in: Wealth
Date: 12 / 06 / 19

The Earth and humankind are being held hostage to the political and financial system. This system protects the interest of financial elites and is bitterly unfair towards people and destructive towards nature. This system is based on the colonization and exploitation of people, states, energy, minerals and technologies. The way global capital is being exploited is at the root of religious conflicts between people and communities. For centuries the financial system has been taken control of the world’s resources and markets, and influenced governments, mass media, education, medicine and even our food supply. A few of the world’s richest families and their corporations exert direct control over the scope of all major human activity. How could this happen? To answer this question let’s turn to history.

The history of money extends back over thousands of years. At the dawn of the human civilization, when there was no money, only hard work could give you clothing, shelter and food. Over time the main human occupations (gathering and hunting) moved to the next level and our ancestors could raise cattle and grow their own food. As a result, a surplus of goods and produce started to appear. A tribe which had a large number of animal skins but short of grain could exchange with another tribe that had a surplus of grain. This is how bartering started. As humans developed, the barter also developed and covered an even greater number of goods and services.

The most famous example of bartering in human history is the bargain of in 1626. For trinkets and beads costing $24 Peter Minuit of the Netherlands obtained the island of Manhattan. In 1993 the island was valued at $50 billion. 

Gradually people realized that carrying a bag of wheat or dozens of skins for exchange was not very convenient. By trial and error humans began using silver and gold as an equivalent for exchange. Gold and silver could not be faked or spoil, so they served as money for a long time. Jewellers began minting gold and silver coins. They needed a reliable storage for gold and silver ushering in the first safes. Soon, traders and the general population began to rent space in the jewellers safes to store their coins and valuables. So, long before credit existed jewellers began to lease shelves in their safes earning income from that business.Years later one jeweller began to understand that people never came for their gold all at once. This occurs because people were holding onto obligatory bills given by the jeweller as a proof of the stored gold. These bills were considered real money in the market instead of the gold as it was more convenient and easy to exchange. Sellers of goods accepted them as receipts for payment of goods. Borrowers began to take loans in this paper form instead of real gold. The jeweller came up with another business - he started to lend his gold at an interest. He used his own and the stored gold of the merchants and townspeople, who kept it for safekeeping. 

But since everyone never come at the same time, this business grew rapidly. The ability to give loans was limited only by the amount of gold in the safe. Then the bankers came up with an even more daring idea. Since they were the only ones who knew how much gold was in the safe they could issue obligatory bills for gold that they did not have. If all the investors would never come at the same time to collect, then who would find out? They figured out how to make money out of thin air. This was the origin of the phrase «to make money out of thin air». Jewellers who realized how to make money out of thin air are today’s bankers.

That principle became the ground of the existing financial system that began to take shape about 400 years ago. Bankers began to lend to governments, who used that money to wage wars of conquest, and to merchants, who conducted 'business' by exploiting new territories. Since the governments depended on the banks’s money, they not only allowed them to make money out of thin air but also legitimized this process by skewing the ratio making it 9 to 1. Today this is called a fractional reserve system.

Today this works in most of the worlds banks and accepted as a part of the banking philosophy. For example, if you deposit $1000 into an account, the bank can then turn around and lend someone else $10,000 in the form of credit based on this fractional reserve system - legally creating money out of thin air. 

Faisal Amjad

About the author

I am a history buff and love all things business!

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