In Part two we looked at how an isolated community may establish a currency, in this blog we look historically at money.
Many countries in olden times had chosen gold or silver as coinage, the reasoning being that the rare metals held their own value in weight. One down side of this was that people chipped away sections of the coins as part payment and even some governments would do the same as a way of collecting taxes.
As time went on many started to replace their gold / silver coins with cheaper metals (known as debasement). One of the concerns was that the coins no longer held the actual physical value in precious metals, so how could they be trusted in trade with other countries?
It was the International Merchants that noticed that one person’s debt held value and could be traded or transferred as paper money, an IOU or promise to pay. Merchant families became clearing houses, the trusted middle man, so rather than gold coins being physically moved between traders and countries, the paper IOU’s could be moved easily instead. Overtime this made these families very wealthy and very powerful, hobnobbing with royalty and governments.
The goldsmiths saw this happening and wanted in on the action. The goldsmiths who held the gold coins on behalf of the people, realised that they could loan out the coins to those who wanted them, so long as the coin owners had a note to state that their coins were safe and secured with the goldsmiths, they were free to issue notes of loan to others based upon this held value. Early forms of Banks were also getting on board and competing with the Merchant notes.
The rulers of the countries started to lose grip steadily as this function passed to the banks, so much so that Wars were being funded by the banks and merchants in the form of government bonds creating sovereign / country debt.
1694, The Bank of England was born, like many banks of the time the issued notes were backed up by the Gold held in the countries coffers. After the world wars and the Wall street crash, the US issued an order to buy up the people’s gold at a low set cost and started to buy up other countries gold distributing $’s worldwide. The $ becoming the world stable currency with other countries pegging their currencies against the $ as it was now backed by ½ of the worlds gold reserve!
In the 1960’s countries started to debase their currencies, foreign nations had had enough of the US printing excessive $ discovering that they held more dollars than the US had in gold, so they started to demand their $ value in Gold.
In a move to halt this Nixon severed the US currency from the gold standard, backing the $ now against Trust!
The inflationary model of currency devalues money every year, year on year, the US $ has devalued 96% of its original value!
Money held in the bank becomes the banks property to what they want, e.g. you deposit $100 into the bank, they can then lend out $97 to someone else based upon their promise to pay it back, the money stays in digital form in the bank. $94.09 of this can be loaned out, and again, and again, so the $100 turns into $3333? Money is magically generated based upon debt and trust to repay, known as fractional reserve banking.
If everyone wanted their money out there is only 3% of their money physically held in the bank, as such there wouldn’t be enough cash available. Scary hey!
In Part 4 we will finally start to look at Crypto currencies.