Money As Debt Page #2
- Year:
- 2006
- 47 min
- 112 Views
the depositors demanded that the goldsmith, now their banker,
cut them in by paying them a share of the interest.
And that was the beginning of banking.
The banker paid a low interest rate on deposits
of other people's money that he then loaned out at a higher interest.
The difference covered the bank's cost of operation
and its profit.
The logic of this system was simple.
And it seemed like a reasonable way
to satisfy the demand for credit.
However this is NOT the way banking works today.
Our goldsmith/banker was not content with the income remaining
after sharing the interest earnings with his depositors.
And the demand for credit was growing fast,
as Europeans spread out across the world.
But his loans were limited
by the amount of gold his depositors had in his vault.
That's when he got an even bolder idea.
Since no one but himself knew
what was actually in his vaults,
he could lend out claim checks on gold
that wasn't even there!
As long as all the claim check holders didn't come to the vault
at the same time and demand real gold, how would anyone find out?
This new scheme worked very well,
and the banker became enormously wealthy
on the interest paid on gold that did not exist!
The idea that the banker would just create money out of nothing
was too outrageous to believe,
so, for a long time,
the thought did not even occur to people.
But, the power to just invent money went to the banker's head
as you can well imagine.
In time, the magnitude of the banker's loans and his ostentatious wealth
did trigger suspicions once again.
Some borrowers started to demand real gold
instead of paper representations. Rumors spread.
Suddenly, several wealthy depositors showed up to remove their gold.
The game was up!
A sea of claim check holders flooded the street
outside the closed doors of the bank.
Alas, the banker did not have enough gold & silver
to redeem all the paper he had put into their hands.
This is called a "run on the bank"
and is what every banker dreads.
This phenomenon of a "run on the bank"
ruined individual banks and, not surprisingly,
damaged public confidence in all bankers.
It would have been straightforward to outlaw
the practice of creating money from nothing.
But the large volumes of credit the bankers were offering
had become essential to the success of European commercial expansion.
So, instead, the practice was legalized and regulated.
Bankers agreed to abide by limits on the amount
of fictional loan money that could be lent out.
The limit would still be a number much larger
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"Money As Debt" Scripts.com. STANDS4 LLC, 2024. Web. 8 May 2024. <https://www.scripts.com/script/money_as_debt_13960>.
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