The last half dozen articles I have written have dealt with the question: What is Money? The conclusion was that over the past two hundred years our concept of money has slowly changed. Cash has become a concept and not a commodity. No longer do we think of money as a bar of gold or silver from which we peel off enough shavings to fulfill the requirement of the balance scale. We instead, fancy money as simply a credit or debit stored in the memory chip of a computer and backed up solely by confidence.
The money system has morphed into what it is because of our demand for convenience, and it is based strictly on the confidence that someone else will accept our ethereal numbers from the computer to satisfy what we owe. There is now no such thing as gold or silver to back up the value.
Here is a confession: I actually went back and read again what I had written about money. My question was: Why did I write that material as if I were an economics professor delivering a lecture in front of a classroom?
I am one of the diehards who still wholeheartedly believe in the power of story. We usually understand best through story. If we are to understand:
- our fractional reserve system of banking,
- how and why the Federal Reserve System exists without control of the US government or the banks,
- how the phenomenon of inflation takes wealth away from you like a thief in the night without the necessity of even one vote of congress,
it will be absolutely necessary to understand some very simple and basic facts that will probably not be gleaned from an economic lecture.
So, please indulge me to try to utilize the power of story to explain in the next set of writings how all of this works together in the real world of money and finance:
The story of banking begins with the ancient goldsmiths. When “Barney Businessman” was fortunate enough to accumulate a sizeable amount of gold or silver as a result of his business dealings, he was then confronted with the problem of keeping it safe from those who had intention of forced wealth redistribution, i.e., thieves and robbers.
Because “Gaffney Goldsmith’s” business was that of dealing in precious metals, he had been forced to construct a thief-proof vault. It was only natural then that Barney Businessman would go to Gaffney and request of him space in his vault to store his accumulated gold. In fact, Barney was willing to pay Gaffney a fee for the “safekeeping” of his gold.
Of course, when Barney deposited his gold into Gaffney’s vault, he requested and received a receipt of deposit which he had to present whenever he wished to reclaim his gold. Other people in the community began to realize that Gaffney Goldsmith’s vault was an extremely safe and convenient place to keep their gold. In fact, Gaffney’s vault became somewhat of a warehouse for gold.
Gaffney was pretty intelligent and he had taken mostly honors classes in school, so it didn’t take him long to realize that on any given day, eighty to ninety percent of the gold in his vault simply sat there collecting dust. He became convinced that there would never be a day when everyone would come to his vault and want to withdraw all their gold at the same time. Any daily withdrawals of gold would be offset by that day’s receipts of gold. And since gold is gold and gold is gold, no one seemed to care whose gold he received when he wanted to make a withdrawal.
Therefore, Gaffney usually made all of his transactions out of the few bags of gold in the front of his vault while all the bags in the back sat there collecting dust and taking up a lot of valuable vault space. Gaffney realized that he had a good thing going. And his books always balanced!
* LIABILITIES &
ASSETS * NET WORTH
GOLD $2000 * RECEIPTS $2000
The gold was an asset to Gaffney, because it was under his control. The receipts were a liability to him, because they represented the owner’s claim on the gold, and sooner or later, he would be called upon to return the gold.
Question for next week: How was it possible for Gaffney to keep his books balanced and at the same time create more money in the community?
(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)