More Secrets From a Banker

Air in the Vault

Real Values, and the Opposite — Money

Once upon a time, there was a town with folk that had more gold than they used. It was pretty much like every other little town, not everyone was rich, not everyone was honest. The ones that were rich hid it or buried it but could never keep it safe. The sheriff was no protection. Some even thought he was the main crook. They wanted security, and they wanted their gold to grow.

In this town there was an intelligent, observant, capable, and honorable man who had lots of prestige and a very large vault, strong and well protected. He didn’t have as much gold as the others, but he was not poor. Gold owners came to the vault owner and asked him to guard their gold.

The gold owners said “We have gold, you have a vault. We want our gold to grow, not shrink. So instead of just storing our gold, you can lend it out, at interest to trustworthy people who are willing to back up their loans with security worth more than the gold you lend. You charge 10%, you pay us 5%, you get 5% we get 5%. We’ve got a lot of gold you can lend, so both risk very little to earn very much.”

For the vault owner, very, very much. More than 10 times as much as they even imagined. But I’m getting ahead of myself.

The vault owner thought it over: “OK, to get a loan they’ll need references and property. I’ll get a lien on their land, house or other property. I’ll give the depositors and the debtors receipts in whatever denominations they want so that they can get as much or as little of their gold as they want whenever they want. If they welch, I’ll attach.” He agreed. The gold owners brought 1,000,000 oz. At 10%, if he lends it all, the vault owner gets 50,000 and the owners of the gold get 50,000. Simple, straightforward business. He banked gold. He was the first banker.

At least that’s how it started.

More Loans, More Ideas

The more he lent, the more he got in interest and more he attached with liens on land, houses, livestock, articles of value. Those who borrowed needed to buy seed, livestock, construction, machinery and a whole host of other things.

They seemed happy to hock their whole lives of effort, time and resources just to have what they needed to produce now. “What a strange affliction,” thought the vault owner, “they are so obsessed with work and productivity that they risk everything just to continue doing it.”

For the banker it was a card game. They could win, if wind, weather, family and friends helped them, but if they didn’t pay their loan, the law was on his side, not the debtor. He could take away everything they hocked. They risked much more than the banker.

They Didn’t Want Gold

Neither borrowers or depositors wanted all their gold. All they wanted was what they needed to trade. Carrying gold was heavy and risky. Paper receipts were more convenient.

The banker obliged. He gave them the full face value of the gold they borrowed in receipts for grams, ounces and pounds. Once in a while they took out 5 or 6 ounces, but they left the rest in the vault. They had so much CONFIDENCE in those receipts. After all the richest people in the town had faith in the banker, why shouldn’t they?

“It’s a rhetorical question.” “It’s obvious.” No. It is not. Not only that, to say “they should” is a HUGE mistake that trades real values for the thin air of other’s power and prestige. And, unless we know how money works, it is not obvious, either. We must be able to answer the question: Why not have faith in the money of a private banker?

OTHERS Returned the Receipts

The banker gave the receipts to one person, but ANOTHER claimed the gold. He discovered that in most cases they were exchanging receipts among themselves and never received gold. But, although some receipts came back so worn, damaged and dogeared that they were hard to recognize, he immediately recognized one thing — they weren’t gold. They were convenient, light and easy to carry. Some of them were even pretty. But they weren’t gold. They were paper receipts which he made and signed.

They didn’t need gold. They needed to exchange values. Receipts came in denominations that let them exchange their largest or smallest values, and they were light and easy to carry or hide. Receipts were convenient.

They believed they could change the receipts for gold whenever they wanted because they believed in the banker. So the gold in his vault never went down more than 10%. Receipts became the medium of exchange — he invented money!