From Goldsmiths to Bankers, from Money to Currency, 5

Letting aside any criminal implications, I would rather concentrate on whether there is a common denominator, because if so, it would spare us to guess up all the possible ways to exploit such gold “backed” receipts. Not surprisingly, it can be found by adhering to basics: an inventory of the existing “gold” media of payment. The moment a gold unit and its related unit as a receipt are both circulating, that circulating “gold” unit of media of payment has doubled. Ensuing question is, as usual, who is the owner of this newly created unit the moment it gets born? Again we mention property as the legally protected right to the enjoyment of goods, including lending them at interest. So: on Example Island, first there are 100 units of media of payment in gold circulating; then there are 50 units in gold and 50 in receipts circulating against 50 units in gold deposited. Then suppose the goldsmith “uses” 40 of the 50 units of gold deposited in his vault, and therefore there are now 140 units circulating, 90 in gold and 50 in receipts, and 40 of these units of gold are yielding an interest to the goldsmith as if they were his own, which they are not. Or suppose the goldsmith does the same but divvies up the interest with the gold owner. Or suppose the goldsmith issues 100 additional receipts backed by nothing and loans them; now there are 200 units circulating: 50 in gold and 150 in receipts – with gold in his vault to back up only 50 of them – and those additional 100 receipts are yielding an interest to the goldsmith as if they were gold, or gold backed, which they are not, and as if they were his own, which they are not; and they are also allowing those who borrowed them to acquire purchasing power as if they were backed by actual value, which they are not.

By the way, that the goldsmiths are at the origin of this ambiguous type of money is supported by names: paper money is called banknote or bank note, the receipts−promissory notes issued by goldsmiths changed hands in their shops, and so it was consequential to nickname the shops banks and the receipts bank notes and then banknotes.