William Bramley/The Gods of Eden/21/218

The injustice of this system is obvious. If for every sack of gold the smith had on deposit people now owed him the equivalent of four sacks, someone had to lose. As public debt to the goldsmith increased, more and more true wealth and resources were owed to him. Since the goldsmith was not producing any true wealth or resources, but was demanding an ever-increasing share of them because of his paper notes, he easily became a parasite upon the economy. The inevitable result was the enrichment of the careful goldsmith-turned-banker at the cost of the impoverishment of other people in the community. That impoverishment was manifested either in the people's need to give up things of value or in their need to toil longer to create the wealth needed to repay the banker. If the goldsmith was not careful and his monetary bubble burst, the people around him suffered anyway due to the disruption caused by the collapse of his bank and the loss of the value of his notes still in circulation.

Such was the birth of modern banking. Many people feel that it is an inherently dishonest system. It is. It is also socially and economically destabilizing, yet all of the world's major monetary and banking systems today operate on a close variation of the system I just described.

By the 17th century, the Medici banking house of Italy had come up with the idea of using gold as the commodity upon which to base all paper currency. Gold was touted as the perfect basis for paper notes because of the scarcity and desirability of gold. This was the beginning of the "gold standard" in which all other goods and services are valued in relation to gold (and sometimes silver). The gold standard was certainly a terrific idea for those people who owned plenty of gold and silver, but it created an artificial reliance on a commodity that is not nearly as useful as many other products. To base an entire monetary system on a single commodity is better than basing it upon no commodities at all, but even under a gold standard paper notes will far exceed the metals used to back the notes. The best solution is to root a money supply firmly in a nation's entire valuable output so that the money acts as an accurate reflection of that output.