I am grateful for having a great education, and I have several degrees that are supposed to demonstrate my learning. I did always like a good story and that's what still appeals to me about history. I learned the history of Canada, the history of Rome, the history of the global navigators, and the history of the world, but nobody ever taught me the history of money. I did underline an explanation in John Kenneth Galbraith's wonderfully entertaining book, "Money: whence it came, where it went" when I got my copy in 1976. It occurs in the same chapter as his famous line, "The process by which banks create money is so simple the mind is repelled", but I never really understood what he meant. Bernard Lietaer in his second chapter writes the first story of money that has ever hung together for me.
He tells that the earliest writings we have come from 3200 BC Sumeria . These records describe bank deposits, transactions in foreign currencies, and loans with and without collateral...apparently such concepts were already fully understood. The earliest examples of paper currency instead of metal coin arose in China in the 9th century, and by the end of the 13th century, Kublai Khan's paper money was accepted from China to the Balkans. Paper money took another 4 centuries to displace gold, copper and silver coin in Europe.
In 13th century Italy, goldsmiths had strongboxes and would issue a receipt for storing your gold and charge a small fee for the service. You could present your receipt for the gold coin when you needed it, but since there was considerable danger of being knocked on the head for your coin, wise practice became to pay with the receipt instead. Thus paper as money made its way to the West. It became so unusual for the gold to be removed from its safe nest, that intelligent goldsmiths began to "loan out extra gold"...actually, who could tell whether the gold belonged to the smith or to some depositor? The smith was supposed to be a sober reliable sort- when he loaned you gold, and issued a receipt for it (with the usual service charges), he was pioneering the fractional reserve system.
This same system, still practiced by our banks, found our financial institutions with their hands in the cookie jar during the meltdown of 2007-2009, even though no actual gold is now involved. It is also the magic in how banks create money. (After 5 years of Latin study, I can confidently translate "fiat" as "make it so", per Captain Jean Luc Picard of the Starship Enterprise.)
The individual goldsmiths of 13th century Italy coalesced into the earliest bankers, while the feudal powers coalesced into national states. Rulers and banks worked out a mutually satisfactory arrangement, whereby the bank got the privilege of issuing "legal tender" in return for a promise to always make available sufficient funds for the needs of the government. This is the system universally in effect to this day. (The king of Sweden needed the money for his wars and was the first to work out the details to everyone's liking in 1668.)
In the US, it is the Federal Reserve which is the central bank. Treasury bills are requests for a loan from the Federal government. The Republic offers to pay you interest on your money, if you will please provide a loan. This interest is of universal satisfaction, and thus US treasury bills are considered a worthwhile investment by the domestic investing class, as well as by foreigners having money to store. If any treasury bills remain unsold at auction, they must be purchased by the Federal Reserve as part of the deal. The government deposits its checks from the Federal Reserve (and from everyone else...Goldman Sachs, me, your pension fund, and the Chinese government) It pays its employees, who in turn deposit the pay wherever they bank.
Every bank is allowed to issue loans to you and me, based it is hoped, on our demonstrating an ability to repay the loan. The key, however, is that they don't need to already "have" the money at all. They create it magically, out of nothing, just by saying that it exists, and because the bank says it's there, it shows up as a credit in your account. Recently, we know, they got carried away, and started giving out loans whether or not people could pay, (because they were craftily passing the risk along through innovative financial derivatives...but that is another story)
Now, isn't that worth knowing? Do check out the website. Everything idea I wanted to share from the book, as I began to understand it, is found there. I'm going to keep writing anyway, for the sheer pleasure of it! For everyone to understand : "Make it so!"
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