Creature From Jekyll Island by G. Edward

When the coins were placed into the vault, the warehouseman would give the owner a written receipt which entitled him to 1 As quoted by Groseclose, Money and Man, pp. 43-44.

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THE CREATURE FROM JEKYLL ISLAND

withdraw at any time. At first, the only way the coins could be taken from the vault was for the owner to personally present the receipt. Eventually, however, it became customary for the owner to merely endorse his receipt to a third party who, upon presentation, could make the withdrawal. These endorsed receipts were the forerunners of today's checks.

The final stage in this development was the custom of issuing, not just one receipt for the entire deposit, but a series of smaller receipts, adding up to the same total, and each having printed across the top: PAY TO THE BEARER ON DEMAND. As the population learned from experience that these paper receipts were truly backed by good coin in the goldsmith's warehouse and that the coin really would be given out in exchange for the receipts, it became increasingly common to use the paper instead of the coin.

Thus, receipt money came into existence. The paper itself was useless, but what it represented was quite valuable. As long as the coin was held in safe keeping as promised, there was no difference in value between the receipt and the coin which backed it. And, as we shall see in the next chapter, there were notable examples of the honest use of receipt money at the very beginning of the development of banking. When the receipt was scrupulously honored, the economy moved forward. When it was used as a gimmick for the artificial expansion of the money supply, the economy convulsed and stagnated.

NATURAL LAW NO. 2

This is not a textbook on the history of money, so we cannot afford the luxury of lingering among the fascinating details. For our purposes, it is sufficient to recognize that human behavior in these matters is predictable and, because of that predictability, it is possible to formulate another principle that is so universal that it too, may be considered a natural law. Drawing from the vast experience of this early period, it can be stated as follows: LESSON: Whenever government sets out to manipulate the

money supply, regardless of the intelligence or good intentions of those who attempt to direct the process, the result is inflation, economic chaos, and political upheaval. By contrast, whenever government is limited in its monetary power to only the

maintenance of honest weights and measures of precious THE BARBARIC METAL

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metals, the result is price stability, economic prosperity, and political tranquility. Therefore,

LAW: For a nation to enjoy economic prosperity and

political tranquility, the monetary power of its politicians must be limited solely to the maintenance of honest weights and measures of precious metals.

As we shall see in the following chapters, the centuries of monetary upheaval that followed that early period contain no evidence that this law has been repealed by modern man.

SUMMARY

Knowledge of the nature of money is essential to an understanding of the Federal Reserve. Contrary to common belief, the topic is neither mysterious nor complicated. For the purposes of this study, money is defined as anything which is accepted as a medium of exchange. Building on that, we find there are four kinds of money: commodity, receipt, fiat, and fractional. Precious metals were the first commodity money to appear in history and ever since have been proven by actual experience to be the only reliable base for an honest monetary system. Gold, as the basis of money, can take several forms: bullion, coins, and fully backed paper receipts. Man has been plagued throughout history with the false theory that the quantity of money is important, specifically that more money is better than less. This has led to perpetual manipulation and expansion of the money supply through such practices as coin clipping, debasement of the coin content, and, in later centuries, the issuance of more paper receipts than there was gold to back them. In every case, these practices have led to economic and political disaster. In those rare instances where man has refrained from manipulating the money supply and has allowed it to be determined by free-market production of the gold supply, the result has been prosperity and tranquility.

Chapter Eight

FOOL'S GOLD

The history of paper money without precious-

metal backing forced on the public by government

decree; the emergence of our present-day

fractional-reserve banking system based on the

issuance of a greater amoun t of receipts for gold

than the bank has in gold to back them up.

We previously have broken down the concept of money into

four categories: commodity, receipt, fiat, and fractional. In the last chapter we examined commodity and receipt money in some

detail. In doing so, we also established certain monetary principles which apply regardless of their form. We shall now turn to the remaining two categories, both of which are represented by paper and which are at the root of almost all of modern man's economic woes.

FIAT MONEY

The American Heritage Dictionary defines fiat money as 'paper money decreed legal tender, not backed by gold or silver.' The two characteristics of fiat money, therefore, are (1) it does not represent anything of intrinsic value and (2) it is decreed legal tender. Legal tender simply means that there is a law requiring everyone to accept the currency in commerce. The two always go together because, since the money really is worthless, it soon would be rejected by the public in favor of a more reliable medium of exchange, such as gold or