We use money every day but most of us do not know its history and evolution. In this episode, Merrill Chandler talks about the origins of money and how paper money and credit has taken over the original intent for which money was designed – going through the Roman times into the medieval times, the Renaissance, and into modern banking. He also deep dives into the lender’s playbook. Don’t miss this episode to understand where it all started.
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The Banking Game…Have You Been Lied To?
Insider Secrets to Money, Leverage, and Fractional Reserve Lending
In this episode, we’re going to go back. We’re in the way back machine. We’re going to be talking about the origins of money and how paper money and credit has taken over the original intent for which money was designed. I’m a history major and this was the most fascinating thing that I learned in the ancient world and as we went through the Roman times into Medieval times, the Renaissance and into modern banking. We’re going to do a deep dive into the lender’s playbook. This is where it all started.
This episode is so much fun for me and I’ve got so much to talk about that I’m thrilled that we finally get to go here. We finally get to start addressing some of the roots of our modern banking world. As a two-part series. There’s the insider secret to the lender’s playbook or banker’s playbook. We’re going to be talking in another episode about the insider secrets to the credit bureaus and how they dominated the marketing, the list generation and all the data that is used to take advantage of our ignorance if we don’t know what we’re doing or we know how to play their game because we know what their next move is. Let’s get started on the money game.
The Banker’s Playbook
Insider secrets to the money game. What is the banker’s playbook? First of all, there are a couple of principles I want to set up here. I’ll tell a story about this. I’ve shared this story once before, but I’ve done many episodes that bears repeating. Back in the day when I was probably 11 or 12, we’d go to certain family reunions and they loved playing Monopoly. My uncle, who’s only a few years older than me. My mom is the second of fourteen kids. I had age peered uncles. We love playing Monopoly and he said, “We’re going to do a little different take on the game. We’re going to charge interest. You can borrow money from the bank. You don’t have to just get money by collecting rents or otherwise. You can borrow money from the bank. I’ll be the banker because I know how this process works.” I’m like, “Okay.” He said, “This is what real life is all about.” He plays the banker and he always won the game.
In some conversation years later, we were at the funeral of one of our older kinfolks. I asked him why did he always want to play banker and why did he always win the game. He said, “There are two kinds of people in the world. There are those who earn interest and there are those who pay interest. If you pay interest, you will always end up giving everything of financial value in your life to those who charge interest.” I didn’t know I was going to end up being in the fundability optimization and designing all this awesome tech and creating this back when I was a teenager. What I found was that the truth of what he taught me was so profound. To this day, it still reverberates. You can either earn interest or pay interest or both. For those who only pay interest and without earning it, you’re going to end up giving all your money away to the others. That’s why he always won the Monopoly game.
Standards Of Money And Trade
I’ll give you the formal dictum here. I have it written down. Over time, borrowers of money at interest will eventually lose everything they own of material value to lenders of money at interest. Lenders will accumulate and we will turn it all over to them. How does this work? Back in the day, let’s start the way back machine. In the early civilizations, everything was by trade or barter. You’d have five chickens equaled one cow. Certain rare stones like red stones were used in some indigenous communities. Unfortunately, the tusks of boars, rhinos and elephants were all worth something above and beyond. The more scarce it was, the more valuable.
Nothing has changed now. The more scarce it is, the more valuable it is. The thing is, as predicted by lots of great smart minds over the last few decades, knowledge is now becoming the most powerful and most rare asset. Having the right knowledge like what we call insider secrets is a game-changer for everything that you’re doing in your life. In the history of money, first of all, we start out with the shell games and precious or things that naturally occurred in the earth. That turned into precious metals like gold, silver and even bronze. The original coins were made out of these smelted metals. The more and more people started collecting these special metals, the more wealth they had.For those who only pay interest and without earning it, you're going to end up giving all your money away to the others. Click To Tweet
Over this time, these standards of money and the standards of trade have always been highly influential in every community. The problem between the Babylonians and the Assyrians or the Egyptians and the Hebrews or the Assyrians and all the ancient world was that the standard became precious metals. The Egyptians might think a particular lapis lazuli stone was more precious than everything, but it was only valuable inside of Egypt. It didn’t translate. They have these means of transferring wealth between these different civilizations. At some point, as merchants began moving between the different civilizations, remember Egypt owned the entire middle East and enslaved everybody. Babylonians owned the entire middle East and slaved everybody else. The Assyrians enslaved everybody and owned all the natural resources.
The Greeks and the Romans then came, and then the Europeans. This is only in the Western and Northern hemisphere. Over the long haul of our civilization, everybody has been a ruler and everybody has been a slave to somebody. It is the barbaric nature of when we conquer something, we enslave the people. During these periods, every single civilization scattered their influence. Regardless of what was viable, meaningful and valuable inside of each of the separate cultures, gold, silver and bronze became the means of deploying, investing and transferring wealth.
Over time, every one of these civilizations had monarchies or kings and queens so that they could standardize what wealth looks like in each civilization. They would imprint either a god or a goddess. They would imprint the king’s face. Darius of Persia was infamous for having his face on coins in antiquity. Everybody would create their coin of the realm. That’s where that term comes from, “What is the coin of the realm?” Every realm had its own version. When these great civilizations butted up against each other, then and only then did they have to start weighing out the purity of gold. Way back in the day, they had assayers as they did in the Gold Rush of 1849. They would determine the purity of metal and then weigh it. That’s what would happen. These were all on the borderlands between all these civilizations.
Wealth and conquest were based on taking over another kings or realms treasury. Kings would collect from their people. This is a simple explanation. We’re not going into every civilization and the various nuances that they did. As long as kings and queens existed, they had treasuries. Those treasuries and the natural resources that they had like the rivers, woodlands, ore deposits, those triggered wealth-building activities we called conquest. Every single civilization was about conquering the next civilization to take over what they had already curated, all of the gold, silver, goblets, diamonds and precious stones. Every kingdom would curate out of their natural resources these things for the treasury and possession and ownership of the monarchs.
If you could win a war, you gained their treasury. All this is going to come into bear in modern banking. Think of it this way. Now we call it a book. All of these assets like gold, silver, precious stones and all of the natural resources would be the equivalent of having a book. You want to merge or acquire a hostile takeover of another civilization. Every time these happened, there would be a homogenization. Everybody would adopt the best practices of all the other kingdoms. If you go through your history book, the Egyptians adopted the Hebrews, the Hebrews adopted the Babylonians, the Babylonians adopted the Assyrians. The greatest copycats of all time were the Romans copycatting Greek culture. It was prolific.
What Money Is
Why is this meaningful? When you look at your dollar bill or your debit card, you need to understand what money is. There have been a lot of people saying a lot of things about money. I’m a history major, so I have read and studied a lot what the best practices of the ancient world and even the modern world were. What’s fascinating is money is a stored work. That’s the bottom line. The only thing a human being has is time and abilities to use that time. The more abilities you have, we call them talents, skills, etc., the more you can leverage your time. I’m not talking just book smart knowledge, I’m talking about inside secrets to be able to leverage your time. Where’s the knowledge color? Is that the black color? I don’t know of a term for it, but knowledge isn’t just power anymore. Applied knowledge is a superpower, but money is this stored asset. It’s stored work. Back in the day, all we had was the ability to break our backs doing a job. We learned more and merchant class began to arise later on.
We were able to leverage our time and available resources. Think of this stored work because every time you use your debit card or your credit card, this is what you’re doing. Moving from the antiquities, we moved from Egypt, the last great Southern Mediterranean empire into the Northern Mediterranean empire of Greece, which took over the universe of the Mediterranean world and Western culture. It lasted 1,000 years and then Rome took its place and copycatted the same deities, the same things that they worshiped and changed their names. Instead of Aphrodite, it was Venus. Every single one of these great cultures had a means of storing their work and the work of their people.
All of this was based on conquest or an aggressive acquisition of another’s wealth, human resource and natural resources. While the king may have had gold and silver mines, which added to the treasury, that took a lot of work to do so. The quickest way to do that is to conquer somebody else’s. The other thing that was popular, especially as we move through the Greek and Roman empires, was through colonization. The Romans went all the way from England, the Germanic tribes, Persia. This colonization expanded the reach of whoever was in charge of this thing. The further out from the Mediterranean you went, the less and less structured. It was more tribal.
The same thing happened in the Eastern hemisphere. The further you went away from the more developed civilizations of China and/or Japan, the more tribal it became and the less developed. The cultures in East and West followed the same route. Everybody went further and further out into the world to find more and more resources. That’s what happened. That’s why we have the stories of Columbus, Cortez and all those guys. They were representing at the time post-medieval Europe. They were going out to the New World, trying to find faster ways to get more from the East Indies, etc.
Where this comes into play is that one of the greatest dots that I’d connected ever was where did the Renaissance come from? It smacked right out of the Dark Ages or the Middle Ages. You’ll be able to do the math that when Spain and Italy are all going to the Americas, they’re raping, pillaging and plundering an entire another civilization, the remains of the Incas and the Aztec empires. They’re bringing home all of this wealth through conquest. Once we bring all that here, you have gobs, tons and mad quantities of assets and gold, which they can now mint and put as the coin of the realm and you have all this money available.
The tide raises all ships. All this money coming in the name of the kings and queens of Europe, the entire European continent was lifted to a higher standard of living. More and more people began to do more and more trading. This is what was fascinating. Different people who are following different money lines have subtly different dates. If you watch my podcast and if you read my book, I say all the time that the lenders have been playing by the same rules for over 500 years. Technically, it’s 10,000 years if you want to go on how money’s been treated forever. Where modern banking started was back in Germany where a number of goldsmith class began shaping all of these money flooding in from all over the world.
The goldsmiths were crafting it into coin of the realm. There were a couple of kingdoms and monarchies that had their own in-house, but many times they use the goldsmiths and the silversmiths to transfer the raw or the gold bars or otherwise into a usable coin. The goldsmiths ultimately became the first modern bankers. This was exacerbated by the fact that a merchant class had come up and they needed to be able to go from country to country. Let’s focus on Northern Europe. All of us don’t have roots in Northern Europe, but it’s what I’ve studied. Everything that I’m saying here does have an analog in South America like the Aztec empire did the same thing in conquest.There are some wonderful strategies to help you save money and still be in the funding game. Click To Tweet
The Indonesians from island to island is growing and expanding their culture. China, Japan, and all had similar analogs using conquest to acquire this and how they transferred and move that wealth around their respective continents. I’m going to focus on Europe for a moment. What would happen is it became costly and dangerous to pack up all your gold, put it on your horse and try and make it from Versailles, France to Paris, or from England and take a boat to go to Amsterdam. Those were dangerous journeys. There began to be a guild of goldsmith and they became a banking guild.
There are a number of different versions of this. I’m going to use an example of the goldsmith because what happened was, they began to set standards like weights and measures that would cross lines. When I learned this, it was fascinating because what I discovered was for the first time in the Renaissance world, money became independent of any monarchy. Up until then, everybody had their own deal going. Everybody had their coin of the realm. The wealth was established as part of a realm. From the Renaissance on and later, money and banking began to transcend state lines. It began to transcend countries and it became independent.
You may be aware that the Knights Templar were one of these banking facilities. Their original mission was to take over the crusades. They set up outposts all the way throughout Europe so that people would have refuge and be able to feel safe in their pilgrimage. They also began to collect and store money so that someone could take a piece of paper that said that this Knights Templar branch would give you money so you can take out gold out of the next Templar branch. You don’t have to take the gold on the road. The Knights Templars weren’t the only ones.
Those of us who may know Friday the 13th think it’s a bad day, but it’s because King Philip of France owed tens of millions of dollars to the Knights Templar and wasn’t paying his debts back. As we all do, he set up a justification for him to be able to conquer the Knights Templar. They purged the Knights Templar and took over all of their banks and assets in France over the course on Friday the 13th. That was where that bad luck day comes from. The more important point is that the Knights Templar were one of these outfits that had branches that you could put your money in, take a piece of paper and then take money out of a different branch of the Knights Templar. The goldsmiths, the banking guild had this exact thing. This is being standardized completely outside of the monarchies. Monarchies were borrowing from the banking guilds.
Once the weights and measures were established, they began to introduce what we now call hypothecation. This is hypothecation in principle. An ancient bank, the goldsmith, the Knights Templar, whatever, they discovered that let’s say there’s $10 million in gold being stored in their vaults. At any one time, there was no more than 10% of that being written in this paper. They’ve been called chips. They were more like claim checks. It’s called a script. Imagine you’re traveling 100 miles to another city and then showing your claim check and pulling your coat out. Except instead of coats, we’re talking gold and/or silver.
They would store this money in the vault. It’s never more than 10% was out in circulation. It’s the first time the word was used back then. The early bankers found that they could give out loans for more money than they had in the bank because it’s never more than 10% of the actual depositors come and pick up their gold. That means they could give the paper script or paper redemption coupons or paper claim checks out as loans, then collect interest on those loans and all was backed by the gold that was in the vault. This was very localized. When we say, “In 1913, we left the gold standard,” the gold standards started here in the localized village and town vault by members of the banking guild.
What we need to understand is that lenders do now what they did then. The Federal Reserve is the chief vault and you borrow money from there and you only have to have a percentage of the deposits to cover the loans that you have, hypothecation. We won’t get into the details but look up Basel III. All the international banks are setting a standard for how much you need to keep so that we don’t have the banking debacle of 2008. Those are only recommendations. The Basel Accord is not enforced by anyone. They’re accord about how to keep the world banking systems solvent.
Paper money was being lent out representing gold that was sitting in a vault. All the depositors keep their vaults there. Whether you put in two shillings worth or 20 pounds of gold, it didn’t matter. You usually had a paper out on that gold and the gold stayed in the vault. It’s like the modern-day analog, you may have money in a checking account, but you don’t take that cash around generally. You take the debit card because we’ve moved to plastic. For us old-schoolers out there, we’d take the checks and we would go and move those checks around and it would go back to the bank vault or our checking account and redeem those checks.
The system has only been more and more refined. With all the information that we have, we can shore up more and more against fraud, theft, etc. Most banks are zeros and ones. It’s all code. There are many other things that we can go into here. I want to move more into the secret of modern lending practices because this hypothecation of money is simply lending 5 to 9 times. If you have $10 million in gold, you can lend $50,000 to $100 million in gold-backed paper and make money coming back into that vault because most people aren’t going to move the gold out of there. Everybody can say that it is gold-backed.
The problem is of all the paper out there representing this same gold bullion, it’s only backing 10% to 20% of it. That’s also known as Fractional Reserve Lending. People who earn interest and people who pay interest become the have and have not over time. Let’s look at an example of this. It’s funny as hell. Let’s say you put $1 million on gold deposit and the bank is giving you 2% paid to you as a depositor. You’re going to make $20,000 on that $1 million that year. We take that same $1 million and you lend paper money of $10 million. Let’s say you charged 10%. We’re not even going to talk about the 15%, 20% and 22% of credit cards.
Let’s say we charged 7% loans times 10. That means that the interest paid by borrowers is $700,000 for all that money that was lent. The gross profit for a bank is on that same $1 million gold bullion is $700,000 minus the interest paid to the depositors of $20,000. That’s $680,000 net to the bank. We’re not talking about operating costs or anything, we’re just talking the cost of money. The hypothecation process creates money out of thin air because that $10 million doesn’t exist anywhere except on the paper that’s backed by the $1 million. That’s the rules of the game. When I talk to you in my bootcamp and my book about learning the rules of the game, that’s the first one you want to know.
Modern-Day Applications Of Hypothecation
Let’s look at some modern-day applications of exactly how this works. Let’s talk about what happens to a mortgage. All of this is based on hypothecation, 10% reserves, ten times that being lent out, backed by these same reserves. Most of us aren’t going to collect all of our money in cash from our bank. Let’s look at a mortgage. In a mortgage payment, and this depends on amortization schedules and on the interest rate, did you know that on a 30-year fixed mortgage you are paying, because mortgages are amortized, that means out of $1,000 first payment, you’re paying mostly 80% interest and 20% principal. On the last payment, you’re paying 80% principal and 20% interest. There’s a crossover. One goes higher and the other one goes lower.The system is not bad. It's just that you're not playing the game. Click To Tweet
That simple interest is let’s charge 7% per year. It’s a four-year loan. Let’s charge all that interest and then we’ll make even payments. The same amount of payment is interest and the same amount of the payment is principal. That isn’t how mortgages work. It’s the name of the game. Through the first year, an average of your $1,000 payment, 80% of your payment goes to interest. Through year three, 79% of every payment goes to pay interest. Through year five, an average of 78%. It goes down after that. In the first five years, somewhere above 70% of every payment you make goes to interest.
Here’s what’s interesting, most of us don’t keep a loan for 30 years. After five years, the refinance rates on mortgages is 80% over the 3 to 5-year period. That means 70% plus 80% of every payment, every time you refinance, there’s interest. The only reason why this process works is because there’s commonly and regularly an appreciation in the value of the home. Our win when we refi, we get to either have a lower payment over time or we get to take money out. That keeps feeding the game. It’s the same thing. Financial profiteering is built into every single mortgage because they’re not simple interest. They are high yield interest.
When somebody says, “I got a 7% interest loan,” I’m like, “You didn’t. You got a 78% interest loan. Through five years, you’re paying 78% interest on average.” There are much better ways to do this. My friend, George Antone, has a great program on becoming the family bank, etc., and making sure that you’re paying yourself all of these interests rather than somebody else. There are some great things out there. His thing is Fynanc.com. There are some wonderful strategies to help you save money and still be in the funding game.
Credit Card Debt
Let’s talk about credit card debt. It’s not just credit card debt. This is another way that without us knowing and through our ignorance, most people don’t tell us what these are. Let’s say that you have a $5,000 credit card that you’ve maxed out and I’m going to pay minimum 18% per year. If you pay the minimum monthly payment of 4%, it takes you to 12.5 years to pay off that $5,000. You’re going to pay a total of $8,000, three of that are interests. I just played small. If you have $12,000 or $20,000 and you’re making minimum payments, there are 27-year repayment processes that we’ve run into with our students and clients. It’s insane. That’s why in our fundability bootcamp, my book, and even the other podcast, we teach you to keep minimum traffic on the personal side so that you can leverage the goose that lays the golden egg and then work out any of the balance carrying things on the business side.
I also want to share with you one last section of how hypothecation works. The biggest vault of all is the Federal Reserve. Let’s say a bank borrows, and we’re going to play the consumer level. A bank borrows $500 from the Federal Reserve. Because it’s backed by the 10%, that lender can now lend you a credit line of $5,000 like magic. It’s created on their computer systems. They say this $500 is earmarked for that $5,000 credit card. Here’s what’s interesting. Have you ever wondered why lenders offer $0.50 on the dollar, $0.20 on the dollar even for a $5,000 credit card? They’re saying, “We’re going to hook you up. We’ll give you $0. 50 on the dollar as an offer. You pay me $2,500 and I’ll write-off the other $2,500.”
How much money do they have up against this $5,000 credit card? It’s $500. It is real cash that is backstopping that $5,000 credit card. When they offer you what you think is a smoking deal of 50% off, there’s still 500% return on their money, plus whatever you paid over 2, 3, 5 years of making payments, all that interest at 18% to 22%. This is why when I say the principles of fundability, I’m talking about nurturing the goose that lays the golden egg. It’s taking specific care about how to create a personal profile and the corresponding borrower behaviors that are going to make you look smoking to a lender.
Part of that is knowing how much money is on the line, how much to not get in debt on the personal side. Absolutely, we can run into problems. We got the car fixed out with a credit card. That’s the only thing we’ve got. I get it, but I’m trying to sensitize you. You’re counting on me to speak the truth and to hammer home how this funny game is played. We need to understand that if you get a $5,000 credit limit, they got $500 on the line. If you get a $25,000 credit limit, they may have $2,500 or maybe $5,000 on the line. Any settlements above that are profitable to them because you’ve also paid interest before you defaulted or otherwise.
This is one of my favorite subjects. The reasons behind what we do, whether we’re back in Egypt minting coins with Osiris’ image on it or we’re using a debit card to make purchases and transactions, the banker’s playbook is to leverage their money for profit. The banker’s playbook in every way is that they are going to have a little bit and then they’re going to lend a lot of it. We need to understand that that’s their motivation. I don’t make them a pariah. I don’t hate them for it. This isn’t about a revolution. It’s saying, “What are the rules of the game? Let me play by this game. Let me start using my credit to leverage at multiple times.” That’s why I end on this as I do over and over again.
Remember how we talk about getting a business line of credit and how it’s different than a loan like a business loan. In a business loan, you go through the application process, get approved, use the money and then pay it back. A credit line is exactly what lenders are doing. We have put our financial reputation on to backstop that $50,000 credit line. We have our financial reputation and our borrower behaviors. We have created a confidence in a lender to give us this $50,000. What are we leveraging that we get to do a deal and pay it off? They raise it to $60,000, do another deal and pay it off. That’s a renewable resource. We get to 5x or 10x our credit lines. I want you to get this. The system is not bad. It’s just that you’re not playing the game.
We want to get credit lines and then every time we pay it off, we look so good to these guys. They keep raising our limits and we get to use it and pay it off. That is a different version of leverage. That’s a different version of the hypothecation of money. You have a $50,000 credit line and you’ve done $500,000 worth of deals over 1 or 2 years or 3 months or whatever your pace is. The system is not bad. Thank funding gods that the system is this way. They’re hypothecating money. You also get to hypothecate money. Don’t dwell on your sorrows, just get on the right side where you’re turning your profit using the same $5,000 credit line once to six times. Now you hypothecated that financial instrument from $100,000 line to $1 million worth of deals.
This is what it’s all about. While I took you out a little magical mystery tour of the history of money, the point is, don’t hate the system. The system is only playing you because you don’t know how to play it. It’s dunking on you because you don’t know how to play this game. Let’s play this game well. Let’s get our own instruments and let’s hypothecate those as well. Let’s use them a dozen times so that a $100,000 credit line, we’d take down $1.2 million worth of deals. That’s twelve times your money. I love talking to you. This is my favorite thing. Thank you for joining me.
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