The Goldsmith's Tale

'The process by which banks create money is so simple the mind is repelled' 

 John Kenneth Galbraith

As the goldsmith grows rich through the casting, storage and lending of the townsfolk’s gold, he has an idea that will destroy the very fabric of the society of which he is such an integral part. He realises that the faith of the townsfolk in his gold certificates confers upon him a special power – the ability to create money from thin air.

The Goldsmith's Tale

It is possible to complete primary and high school, an undergraduate degree in economics and a Masters of Business Administration without ever being obliged to understand the concept of money itself. Indeed, at no stage in a child’s formal or informal education is the concept of money even addressed. Given the central role that money plays in our lives as a medium of exchange, it is remarkable that there is not a single children’s book that attempts to explain its fundamental dynamics in terms that are accessible to a clever child or average adult.

Few do understand our banking system;

The global boom in asset values of the past 45 years is largely attributable to the explosion in international and personal indebtedness which has driven "growth". We don't have "Capitalism" anymore, it's become "Creditism" - a global economy based on credit creation. The US alone has printed debt at a rate equivalent to Australia's GDP, EVERY YEAR SINCE 1968, not even beginning to count the contribution the derivatives market has made to credit creation. But indebted to whom? And to whom is the rest of the world indebted? Britain, China, Germany, France, Japan; the list of debtor nations is about 95 long. 

But indebted to whom? 

The Goldsmith’s Tale - The classical 17th century European folktale that explains the fraud at the heart of the global banking system (5 mins reading time).

In a large market town in Bavaria, the central square was filled with the sounds of people shouting, the clattering of hooves upon the flagstones and the bang of the auctioneer’s hammer as the cattle were sold to the highest bidders. This was a long time ago, before electric lights or cars had been invented and when the people paid for their animals, they paid with shiny gold coins.

The gold coins were made by the town’s goldsmith. He had a coal-fired furnace he used to melt down heavy gold bars and old jewellery.  He poured the liquid gold, like chocolate, into moulds to make the shiny little gold coins. Because his workshop was very secure and he had guards to look after all the gold, the farmers and shop keepers of the town trusted the goldsmith to look after their gold too.

When the townsfolk gave him their gold, the goldsmith gave them a special certificate in return. The certificate guaranteed they would get their gold back whenever they wanted it. It even had a picture of the King’s head on it to prove it was true. Pretty soon, just about everybody had their gold safely on deposit with the goldsmith and he grew rich and very fat by charging a fee for keeping the gold safe.  

The certificates or paper money the townsfolk received in return for their gold could be used to go shopping in the market place as if they were the real gold coins themselves. Everybody was happy to take the paper money because they could swap it at the goldsmith’s workshop for the real gold coins anytime they liked. 

Now the goldsmith liked to keep his money in gold too, so it was only natural that when some of the shop keepers and farmers in the town wanted to borrow gold to buy things for their stores, or animals for their farms, they would go to the richest man in town for a loan. The goldsmith could have lent them his gold, but since everyone was just as happy with the certificates, the goldsmith kept the real gold money safe in his workshop and gave them the paper money instead. 

However, the goldsmith was lying awake one night and he had an idea. The townsfolk all seemed perfectly happy accepting his paper money instead of real gold. Everybody trusted him to give their gold back anytime they wanted. So, what if he just printed up some extra paper money to lend to the townsfolk when he didn't really have the gold to give them? Who would ever know?

Unless everyone wanted their gold back at the same time, he could print as much paper money as he wanted. Nobody would ever imagine that he didn't have the gold to give them. Now he would be really rich. Nothing beats lending gold that doesn't exist!  

Pretty soon, everybody was borrowing the goldsmith’s paper money and the market place was busier than ever with people shopping for all the expensive things they could never afford. Beautiful carriages with magnificent horses lined the streets. The townsfolk wore gorgeous silk clothing and sparkling jewellery and ate chocolate with every meal. But as the shopkeepers and farmers collected more and more money and the price of everything began to rise, the townsfolk started to wonder. 

While they had piles of paper money and they felt rich, it never seemed enough to keep up with the rising cost of everything. People began to refuse to accept the paper money and demanded that they be paid in real gold coins instead. The townsfolk started to gather in the square outside the goldsmith’s workshop. The angry mob waved their certificates in the air and demanded the return of the gold that the paper money represented. But the goldsmith looked out his window at the angry mob and slammed his workshop door shut. His guards stood in front of the building in a straight line with their helmets on and their swords raised to keep the townsfolk from entering.

For three days, the townsfolk remained outside, demanding that the goldsmith come out and give them their gold as he promised. But on the fourth day, they lost patience and broke through the line of guards to find the workshop was already empty. The extra gold the goldsmith had lent the townsfolk in the form of the paper money he printed, had never existed. The certificates people had accepted for the things they sold were now worthless and those with the most paper money, who thought they were the richest, were suddenly the poorest. 

The goldsmith had lied to everyone and nobody trusted paper money again for a very, very long time. But sure enough, people began to forget the lessons of The Goldsmith’s Tale. In fact, if you go shopping today, the shop keepers and townsfolk all seem perfectly happy to accept paper money once again, just like the people in our story. But they don’t understand that the goldsmith is just up to his old tricks again and that he will print more and more paper money until it becomes completely worthless once more.

The US Federal Reserve  

A brief and brutally simplified history

There are literally thousands of banks in the US and in the late 19th century, a few of them were getting a little out of hand and printing up their own currency without the gold deposits to back them.

Just like the goldsmiths of old.

Now, while their effect was localised, these bank frauds undermined community confidence in the banking system and commerce suffered.

By 1913, an altruistic group of bankers - Rothschild, Lazard, Warburg, Lehmann, Morgan, Loeb, Kuhn, Goldman and Sachs, to name a few, got together to propose a new Private Central Bank to avoid such scams taking place in the future.


     (Chart of US price inflation since 1800)


This chart shows what happened next.

Despite inflation being virtually zero for the entirety of the 19th century, it started to kick off from 1913.

Initially, the printed money went almost entirely into the great stock market bubble of the 1920’s.

When credit was withdrawn in 1929, the bankers of the day foreclosed on borrowers, collected their security in the form of property and shares and the game started over once more.

By 1933, US citizens were denied the right to convert bank notes to gold bullion and indeed were required to surrender what gold they did have in exchange for paper*.

By 1971, even foreign states were denied the right to convert their US dollar holdings to gold and the stage was set for an exponential growth in the printing of money.

* President Franklin Roosevelt made it illegal to own gold. On March 11, 1933, he issued an order forbidding banks to make gold payments. On April 5, Roosevelt ordered all citizens to surrender their gold — no person could hold more than $100 in gold coins, except for collector’s coins. He also made it unlawful to export gold for payment abroad, unless done through the Treasury. The penalty for defying Roosevelt was 10 years in prison and a $250,000 fine.

(Youtube “Richard Nixon Gold Window” to see him announce the “temporary suspension” of the convertibility of USD to GOLD)

YouTube Video

Now, the graph above only charts US price inflation during this period. Charting the extent to which credit supply grew would require an Al Gore “scissor lift” moment. It's difficult to exaggerate the frenetic extent to which money has been printed since 1999.

In the fourth quarter of 2007 alone, money supply doubled. In the past six years the central banks of the US, Europe, Britain, Japan and China alone have printed just under USD$10 trillion.

Here is the balance sheet of the Bank of England as point of reference:

So, the solution to the problems created by having printed such vast quantities of paper and electronic money in both the US and Europe in particular?



So, where do we stand today?


·         Unfunded liabilities in the US (Medicare, pensions, infrastructure etc) amount to perhaps $100 trillion, the good times are over and the tax base is shrinking.

·         The European “resolution” of the sovereign debt crisis amounts to a fraud allowing the banks to pretend their Greek bonds still have some value while ignoring the inevitable defaults of Italy, Spain, Portugal and Ireland. No allowance has been made for the flow-on effects of the austerity measures on government revenues, corporate or consumer solvency. In short, the solution is an 18 month bandaid at best.

·         The inflationary consequences that would normally be associated with money printing on such a scale have been distributed worldwide and hit the poorest nations hardest with rising commodity prices barely noticed yet in the west.

·         In Australia, the inflation has been channelled into asset prices for more than 40 years with property and shares in particular subject to annual compound growth in nominal values of 10% p.a. or more resulting in a massive redistribution of wealth to those who own or have borrowed against such assets from those who don’t.

·         Specifically, around half our domestic banks balance sheets have been funded with this printed cash and the majority if not all of our apparent economic growth in the past 40 years has simply been a consequence of this increasing indebtedness. During the 90’s alone, personal indebtedness doubled – new cars, granite kitchen benches, mobile phones and private schools – all on credit and people feeling ok about it as long as their super and houses go up in price at the same time.

·         We have been shielded from rising commodity prices with a strong dollar and the same currency strength has enabled us to buy China’s manufactured goods at breathtakingly low prices despite the retail oligopolies gouging us for super-profits

·         In common with the US, few in Australia would ever vote to bring living standards in line with real incomes



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Behind the GFC is an ongoing Global Currency Crisis (GCC) which is a consequence of the continued unraveling of the current global currency system that dates back to 1971. His presentations and round table discussions examine the fundamental dynamics of the modern "fiat" or paper currency system to explain the asset price bubbles of the past few decades and what we might expect to happen in the future as the world's central banks fulfil their promises to reflate asset prices and stabilise the global financial system through continued money printing.

"Armed with a better understanding of the way our system of paper currency works, participants leave better equipped to address the risks and opportunities associated with the global currency crisis as it continues to unfold".

Over the past 25 years, Daniel has provided such insights through Director and Managing Director level positions with private wealth management businesses in Europe (Switzerland) and Asia (Singapore), Deutsche Bank, VISA International, Citibank and Macquarie Bank in addition to consultancies with many other professional services firms.

He is a Bachelor of Business and holds a Graduate Diploma of Company Directorship in addition to a Diploma of Financial Services (Financial Planning) RG146.