The history of “money creation” refers back to the famous story of the gold smiths of medieval England. The people used to deposit their gold coins with them in trust,and they used to issue a receipt to the depositors. In order to simplify the process, the goldsmiths started issuing ‘bearer receipts’ which gradually took the place of gold coins and the people started using them in settlement of their liabilities. When these receipts gained wide acceptability in the market, only a small fraction of the depositors or bearers eve come to the goldsmiths to demand actual gold. At this point the goldsmiths began lending out some of the deposited gold secretly and thus started earning interest on these loans. After some time they discovered that they could print more money (i.e paper gold deposit certificates) than actually deposited with them and that they could loan out this extra money on interest.
They acted accordingly and this was the birth of “Money Creation” or and then “Fractional reserve lending” which means to loan out more money than one has as a reserve for deposits. In this way these goldsmiths, after becoming more confident, started decreasing the reserve requirement and increasing the percentage of their self-created credit, and used to loan out four, five, even ten times more gold certificates than they had in their safe rooms.
Initially, it was abuse of trust and a sheer fraud on the part of the goldsmiths not warranted by any norm of equity, justice and honesty. It was a form of forgery and usurpation of the power of the sovereign authority to issue money. But over time, this fraudulent practice (like other practices and evils penetrated in the society) turned into the fashionable standard practice of the modern banks under the “fractional reserve” system.
How the money changers and bankers have succeeded in legalizing the “creation of money” by the private banks, in spite of the strong opposition from several rulers in England and USA, and how the Rothschild acquired financial master over the whole of Europe and the Rockefeller over the whole of America is a long story (the related books on the subjected can be seen) now lost in the mist of numerous theories developed to support the concept of “money creation” by the private banks. But the net result is that the modern banks are creating money out of nothing. They are allowed to advance loans in the amounts ten times more than their deposits. The coins and the notes issued by the government as a genuine and debt-free money have now a very insignificant proportion in the total money in circulation, most of which is artificial money created by advances made by the banks. The proportion of real money issued by the governments has been constantly declining in most of the countries, while the proportion of the artificial money created by the banks out of nothing is ever-increasing. The spiral of loans built upon loans is now the major part of the money supply. Taking the example of UK according to the statistics of 1997 the total money stock in the country was 680 billion pounds, out of which only 25 billion pounds were issued by the government in the form of coins and notes. All the rest 655 billion pounds were created by the banks. It means that the original debt-free money remained only 3.6% of the whole money supply while 96.4% is nothing but a bubble created by the banks. (derived from “The Historic Judgement on Interest”)