FRACTIONAL BANKING – THE PREFACE
The barter system served our great-great-forefathers up to a point. In tandem with it at the time was the recognition of the beauty of both precious stones and precious metals. But diamonds and gold were not just pretty, they were rare as well. The rarity of an item greatly inflates its value and one-offs like the Mona Lisa can be priceless. Silver is ten times more plentiful than gold hence their relative values.
So while a man might once have traded three sheep for a cow, a bar of gold would have bought him a castle. The Romans recognized the value inherent in, and mailability of, gold and began minting gold coins for their realm and it became an alternative to barter. But when you think about it, it was still barter because you were handing over a gold coin in return for a product of service. The basis of it was always value for equal value. Critical to all of this was the general acceptance of gold and its value. You could not buy two cows for three rocks for example.
Gold coins had a major advantage too because they were small and you could carry them about in your pouch easier than you could carry ten chickens or a sack of carrots. But there was problem too. If most of your wealth was converted to say twenty gold coins, then these could be stolen from you. Worse again, if you'd just borrowed them from the money-lender moments before they were stolen, you were pretty much in complete negative equity, or fucked, as they used to say. Gold coins were a security risk to the individual.
But the money-lender was vital and because he had loads of gold coins of his own and because this was well known, he had to have a secure safe to keep them in. What actually happened then was vital to understanding money and banking. Individuals began calling on the money-lender, not to borrow but to give him their coins for safe-keeping. The money-lender then offered a written note saying he had the coins and they could be retrieved on request. There was a small fee for the service but that was it for starters. A fellow could sleep soundly knowing that most of what he had, was tucked up securely in the money-lenders safe and he had a note to prove it was his too.
The money-lender though noticed two things happening. His safe was filling up while at the same time, blokes were showing up with his receipts that he'd given to other blokes. His receipts were being used to buy things. It seemed the good citizens were so trusting of him that his receipt for gold deposited was good enough for them. So pretty quickly the money-lender's receipts became an early form of currency in their own right. The paper receopt was easily hidden, the paper receipts cost nothing and the real value, the gold, was safely stored away. The problem was the money-lender had to get a second safe and then a third. To finance this he had to put up his percentage fee for doing the storing. And because he was now a bigger target for robbers, he had to strengthen his building's security.
But a thought occurred to the money-lender. He was still running his main business of loaning gold coins of his own, for a percentage profit, but now his three safes were full mostly with other people's gold. Since those people were using his receipts to trade, none of them were taking any of it out and this at the a time, there was never such a demand for borrowings from him. So the money-lender began loaning other people's gold coins to borrowers and modern banking began.
At first, the money-lender was conservative with it. His credibility would have been at stake if suddenly, for no reason, loads of punters showed up wanting their coins and he didn't have them. However unlikely this was, he still had to able to accommodate the request to return deposits. The people would murder him if he didn't have their money. So his only question was, how much of other people's gold could he reasonably loan out as his own and still have enough left to honour even an unexpected run on his safes. To put it another way, what fraction of the coins on deposit could he safely use for his own business. This was the dilemma that gave us the term, "Fractional Rate."
The money-lender became the original banker with time. Business was booming and in the unlikely event that a truculent fellow showed up with lots of his receipts demanding to see all the gold he now owned, the money-lender made sure his safe appeared damned full of the stuff. The truculent fellow then told loads of other people the story and confidence in the money-lender grew exponentially.
You probably see where this preface is leading and it would be wrong of me not to admit that I am a victim of the banking collapse in Ireland so I'm coming to this with an agenda. Having said that though, and acknowledging that there's nothing I can do about my evaporated pension plan due to the banks, I will ignore personal angst in favour of presenting facts about the nature of the banking system and its effect on the world so far and where it seems to be taking us.
To be continued.