Fiduciary vs Fiat Notions of Money

From P2P Foundation
Jump to navigation Jump to search


Raymond Aitken:

"Anthropological research has already exposed the myth of barter as the origin of money. No doubt many more monetary and economic myths are still taken as gospel. Perhaps one is the Fiduciary origin of modern banking and money, which is rooted in the particular evolution the European (Western) model of banking, which first arose in the early Renaissance Italian city-states of Florence, Venice and Genoa, to facilitate international trade.

The most powerful fallacies are always predicated on distorted truth. The goldsmith story of banking does not seem to take account of earlier banking systems, such as the international banking system based on deposit transfers, between the European-Middle East network of Templar Knight Commanderies.

However, there is no harm in continuing with the prevalent story, in order to expose the fallacy of “full reserve banking”. At that time of the early Renaissance Italian city-states, gold was used as a means of exchange for international trade, and merchants would deposit their gold for safe keeping in the secure facilities of goldsmiths, in exchange for a receipt so that the merchants could reclaim their deposited gold, less charges for its safe keeping.

In due course, merchants used the receipts themselves as a means of circulating payment (money), which led to the goldsmiths performing many of the functions now regarded as part of banking, including; currency exchange, and making loans at interest. This development of banking spread from northern Italy throughout the Holy Roman Empire, and in the 15th and 16th century to northern Europe.

It was predicated on the legal basis of a Fiduciary relationship between the goldsmith and the merchant, whereby the goldsmith undertook to always return the monetised gold to the merchant on demand, thereby making the goldsmith’s receipt equivalent to the gold deposited in the goldsmith’s safe, and thereby a creditworthy means of payment, i.e. a monetary instrument.

The expansion of international trade in Europe during the Renaissance period, and in the lead up to the industrial revolution, soon exceeded the amount of gold available to mediate increasing demand for economic exchange. The resulting mismatch between the growing trade demand, and limited availability of liquidity, in terms of gold, created profitable opportunities that induced goldsmiths to issue loans(credit) in the form of receipts for gold as a means of payment, which were far in excess of the actual amount that was deposited with them.

The use of deposit receipts by merchants as a means of payment meant that only a small fraction of depositors at any given time would demand their deposit back. This tempted goldsmiths to break their Fiduciary obligations to their merchant depositors, and practice what later became known as “fractional reserve banking”. However, the rumour or suspicion that a goldsmith had broken his Fiduciary undertaking, led to an early form of bank-run”, when merchants raced one another to recover their deposits before the goldsmith's cupboard (safe) became bare.

The exploding demand for economic liquidity, which could not be satisfied by physical gold (or by "full reserve" circulating paper claims on it), led to European States (monarchies at that time), becoming the enforcers of a private Fiat banking model (the Bank of England being the first “successful” international model), whereby the purchasing power of legal paper claims (“fictitious capital” - as Marx called it), were in excess of the actual deposits (reserves) of physical gold held in the bank. This signified a transition from a fiduciary based payment system to a fiat based one, whereby the shortfall in gold reserve deposits was securitised on the credit of the productive human capital of the nation, through the agency of taxation and legal tender laws.

Unlike the previous Spanish empire, the emerging British one did not have to waste time, energy and resources on finding and plundering physical gold from other nations. Human capital in the age of expanding technological development represented an exponentially growing source of monetised credit (liquidity).

The key question for the financial charlatans who had co-opted the sovereignty of the crown (The City of London) , was how to syphon the growing economic surpluses (and therefore political power) to themselves, without the victims (the people) being aware of it?

Hence the pantomime of bank reserves, deposits and banks as intermediaries in the recycling of accumulated liquidity (savings), instead of the reality that all so called bank loans are allocations of monetised credit, illegitimately appropriated from the credit commons as an asset of the banking system.

The recent computerisation of the payment system has started to expose, more publicly, the hidden reality of bank loans being credit allocations, mostly for non-economic purposes, i.e. not for real economic production, but for speculative rentier shenanigans in the unreal financial economy, as well as for the funding of armed forces, intelligence agency black operations and the political corruption/control necessary to maintain the usurious system of debt peonage.

Obfuscation of the “new reality” continues in form of psyop transference of the blame to the concept of “fiat money” (money defined by law). However, the real problem is not money is a creature of law, the real problem is that the law has been hijacked and corrupted to justify and conceal a privatised monopoly of credit counterfeiting that is enforced by the co-opted State.

Unfortunately, well intentioned calls for the solution of “full reserve banking” can only serve to maintain the delusion that financial capital is something extrinsic to the human being. Something vital that can only be sourced from the wizards of Chrematistic finance.

The reality is that human creative ability applied through productive work in the real economy is the ultimate real capital. See:

[1] Raymond Aitken (September 2014): Capital is not a thing, but the activation of our innate ability -

[2] Raymond Aitken (November 2014): A new way of seeing Capital -

As the economist Mostafa Moini exposed in his last paper, the only solution for the future of Humanity is a banking system based on the transparent and honest accounting of the social balance sheet. See:

[3] Mostafa Moini (2001): "Toward a General Theory of Credit and Money" -

We need to re-establish the original noble purpose of what today we call banking and finance; which is the activation and mobilisation of people’s innate abilities towards the common good (the needs of society), in a way that allows each one to realise their full human potential through a meaningful livelihood (both materially and spiritually), as stewards of nature and precursors of the destiny of our descendants." (email, August 2015)