Money As Debt Page #2

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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

than the actual value of gold and silver in the vault.

Quite often the ratio was 9 fictional dollars

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