How Modern Banking Was Born:
“In days gone by, bartering was the order of the day. If you had corn and wanted wheat, and I had wheat and wanted corn, we would decide how much of one commodity was equivalent to the other and make an exchange on this basis…exchanges of goods would be facilitated if people used something less cumbersome as a medium of exchange such as gold or silver. If I grow wheat, by exchanging my wheat for gold this permits me to obtain other things conveniently when I want them. Thus hard to find metals like gold and silver became widely used mediums of exchange.
Once people started using precious metals to trade goods, the need to transform these metals into standardized amounts became necessary. This led to the development of rudimentary coins; whereby a ruling authority would weigh out various amounts of these precious metals and stamp them as to purity and weight. Once this practice became common, it was only a matter of time before coins took on their characteristic disc shape and were impressed with a mint date and the likenesses of important officials. With the development of coinage, a person could exchange the fruits of their labor for coins and use them to obtain other things when convenient. During good times, some people ended up with more coins than they needed. Thus they had to find a safe place to keep them. This brought the goldsmith into the picture.
Goldsmiths worked with precious metals and as a result, needed a safe or strongbox within which they would keep their supplies. Having this capability, it made sense for people to take their excess coins to the goldsmith for safekeeping. Upon doing so, the goldsmith gave them a written receipt for the amount of coins being stored. Soon people realized that instead of trading coins for the things they needed they could conveniently trade the receipts instead. Thus paper currency was born and this blessing freed people from carrying bags of bulky coins when they went to market.
This rudimentary monetary system worked well in small agrarian economies, but as villages turned into towns and towns into cities, a need to borrow money developed and who was better positioned to loan money than the goldsmith. Not only did he have his own money on hand, but he also held other people’s money which was sitting in his coffers doing nothing. Of course, if the goldsmith was going to loan other people’s money, he needed to share some of the interest he earned with them. This was the start of modern banking. The goldsmiths were our first bankers. People would entrust their money to the banker/goldsmith and instead of paying for this service, he would pay them a share of the interest he received from loaning their money to other people. From a depositor’s or borrower’s perspective this made sense, was beneficial, and appeared reasonable. However, appearances can be deceiving.
If people are going to borrow money from a goldsmith, for obvious reasons, it would be far more convenient if the loan was made in paper demand notes instead of coins. However, the demand notes presently in circulation were for all the coins held by the goldsmith. How could the goldsmith issue demand notes on coins which he did not have? Being a clever fellow, the goldsmith solved his quandary by reasoning as follows: It was a rare occurrence when someone retrieved all the coins they deposited with me. Therefore, if I issued demand notes for more coins than I had, the chances are that I would always have sufficient money on hand to cover the notes which were redeemed by one or even several of my depositors. This line of reasoning made sense, so our enterprising goldsmith went out on the limb and adopted this practice. Upon so doing, fractional banking was born.
No one would be injured or hurt by this practice unless there was a run on the goldsmith’s strongbox. Aside from this possibility, this development was a blessing to society. However, unknown to everyone else, it was a greater blessing to the goldsmith. In fact, it was so much greater that the goldsmiths became far wealthier than an average citizen. For every loan made by the goldsmith, the borrower had to pay the goldsmith not only the interest accrued by the loan, but also the total amount originally borrowed and this was true for every loan the goldsmith made. The borrower was happy because he was able to obtain something he wanted before he earned the money to buy it. The fact that this privilege also cost him the interest he agreed to pay did not dampen his enthusiasm. On the other hand, the goldsmith was far happier than the borrower. He was reaping huge returns from his loans and he was loaning money to every borrower in town. This state of affairs made the goldsmith very wealthy and it was this unconscionable wealth which positioned the goldsmith to hold sway over the institutions of society and in time, even over governments.
It is not right for one person to reap huge returns from someone else’s labor while doing virtually nothing themselves to earn the money they receive. This is why usury was a crime many early societies. In some places, the punishment for usury was death. While it is true that the borrower benefited from his loan, it is also true that until the loan is paid off, the borrower was an indentured servant to the lender. The lender owned a piece of the borrower’s time and efforts. In effect, this made the borrower a part time slave to the lender. In olden days, such a state of affairs was considered to be wrong and immoral.
Throughout history, knowledge about the nature of debt and its creation was a mystery to most everyone. The bankers took great pains to keep things this way. They knew what a tremendously good thing they had going. Therefore, their first order of business was to insure nothing upset this applecart. This is why most governments have never addressed or come to grips with this extremely unfair situation. The bankers were always there and more than willing to use their great wealth to persuade those in positions of authority to help keep their secret. Thus, concurrent with the advent of modern banking, we also have the advent of government corruption. These two things are inseparable and you cannot have one without the other. No one can honestly posture that central banking by a private bank is a good thing for the citizens of a nation. However, many people do and because they do, it necessarily follows that either they are complete fools or feathering their own nest. There are no other possibilities.”
Next Part Three : Central Banking, gold standard vs fiat money, fractional banking