As continued from before, there are four types of money. We have only discussed two of them so far; Commodity money, receipt money. We briefly spoke of fiat money. Here are all four. 1. Commodity money 2. Receipt money 3. Fiat money 4. Fractional money.
How do banks come into play here? You might be asking yourself? If you have read this far hopefully you are asking that. We left off with the Goldsmiths how they could have evolved into a bank. To be a bank, the bank really had to have a deal with the government. Again it can be hard to convince people that the paper they are printing is money and so the government comes in and helps with that. There are recorded instances through history of the laws in place, fines and other such things for not accepting the bank’s paper as money. Threatening to fine someone for not accepting something as money is an easy way for a bank to prosper.
A bank needs a charter to get started, to save you some time of looking up a charter. A charter is simply a document allowing a bank to begin business as a bank. The charter is granted by the government so it comes with all the guarantees the government can give.
A bank began in the same place the Goldsmith began, for a small fee they could safely and securely store your money. Over time the bankers realized there was far more that could be done to turn a profit. Receipt money, the slips of paper that were handed out for place value of your money, was not enough, and eventually they moved into fractional money. This was easier to sell because you could more easily convince people that your money was being given out as a loan but you can always bring it back and redeem your receipt for gold or silver. And at first it was in small amounts the bank may only give out money 3 to 1. This ratio was more comforting than later amounts of 100 to 1. So for every dollar the bank had in the vault they would only lend 3. Fractional banking!
Some would say that the bank was making money out of nothing but the more appropriate way to say it is the bank was making money out of debt. Just like any business you have to have assets and liabilities. The great and LEGAL thing about a bank is that debt is both. You see if you have 3 dollars lent out its a liability, but if you are charging interest it’s also an asset, and this is done simultaneously. The name of the game then becomes create as much debt as possible.
This is what most banks in history have done and it went so backwards with money it imploded. The cycle looks like this, literally through history, a bank stores money, it lends money, it gets into fractional banking, the money inflates, it becomes worthless, the currency implodes, and the bank becomes insolvent. Either the government has stepped in to bail them out or people lost their money. The 1500, 1600, 1700, 1812, and then finally the Federal Reserve in 1913. There was close to 100 hundred years in between each one, it was about a life time. That is because after you lose everything you never trust a banker again, after that generation dies off they try it again. This brings us to inflation.
Most people have a general understanding of inflation, but what most people don’t understand is that it’s done on purpose. So inflation is when the money becomes less valuable so it takes more money to buy the same goods. Prices don’t go up the money goes down in value. This is what happened in colonial times the money inflated terribly and everyone learned their lesson. But when the war of 1812 came upon us we allowed another charter of a bank and began printing money again. During the presidency of Andrew Jackson he “killed” the bank and for 100 years the country did not have a central bank. It’s an interesting story.
Inflation is done on purpose did you catch that, crazy right? Think about it if you are amassing a large amount of debt like the kind a government can raise you want that money to be of far less value when you pay it back. It’s a hidden tax, the government can’t levy a tax on the people that would come close to what inflation is. This brings us to the Federal Reserve, but that is for next time……………………
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