The Origin of Money and Banking

By Chris Lind www.ChristopherLind.com

Introduction

Below are pictures of money used in America from the early 1700s right up until 1940. All of these paper bills have one thing in common. They all contain the words "pay to the bearer on demand".

Take a Federal Reserve Note out of your wallet and look closely at it. What words do you find missing from the note?

The true story of why these words have been removed from our money is absolutely fascinating. Many of the most brilliant economic and mathematical minds in the world believe this story is also the true story behind the rising costs of living(also known as inflation), the massive debt and impoverished living conditions of the third world, the great depression of 1929 to 1941, and the cause of World War I, World War II, and every other modern war since WWII.

This story begins with the very origin of money itself, and ends with the global banking system we have today.

Sound interesting? Could the story be true? Read on and decide for yourself!


Colonial Currency, Georgia, $4, 1776

Legal Tender Note, $10, 1880


National Bank Note, First National Bank of Seattle, Washington, $50, 1902



The last 3 pictures are of dollar bills less than 80 years old. They are called Federal Reserve Notes, the very same type of money we use today:


Federal Reserve Note, 1928

Federal Reserve Note, 1934


Federal Reserve Note, 1941

What is Money? Part I: The origin of Money

Money exists as a convenience tool to solve the big problem associated with barter.
This problem is that not everybody is going to want to trade with you.

For example, say you have a bag of apples and you want one of Bob's baseball cards. If Bob does not like apples, no trade can take place. To get Bob's apples, you must find out what Bob does want and trade your apples for that item. Say Bob really likes canned spam. You must then find a person who likes canned spam and is willing to trade for apples.

You personally may hate spam, but if you want the baseball cards badly enough, you'll trade apples to get the spam. In other words, you value the spam not for its own sake, but because it can be used to get your baseball cards.

This process of trading for things you don't want in order to get what you do want has a name. It is called Indirect Exchange.



As you might imagine, indirect exchange can be a real hassle. In the course of your day to day bartering, if you notice that people tend to prefer spam in trade over other items, you will begin trading you own goods and services for spam. You would do this, not because you like spam, but because you know that spam can be more readilly traded for what you do want, than what you could obtain by directly bartering with your own goods and services.

This sets up what is known as a positive feedback loop. Increased use of spam in barter, causes even more people to begin trading their goods and services for spam, not because they like spam, but because they know that the spam can be readilly traded for what they do want. This causes even more people still to begin trading and bartering for spam, until finally the whole city you live in is bartering and trading, not for what they do want, but for spam. They then take the spam and trade for what they do want.



When this happens, money has been born. The money in this example is spam. Historically, gold and silver have emerged as monies by the same process.

Webster's dictionary defines the word commodity as "An economic good", and lists products of agriculture and mining as examples of commodities. In short, a commodity is a tangible, physical good that people value for its own sake. Spam, gold, and silver are all commodities. The "spam" money in the above example is also known as a commodity money, because it is nothing more than a tangible, physical good that people have been trading with all along.

There are 4 conditions that a commodity must meet in order for a "commodity money" positive feedback loop to occur. These conditions are all driven by convenience, they are:

1) An existing, large number of people already value and accept the commodity in barter for its own sake. In the above example, a large number of people just happened to LIKE spam!

2) Divisibility: A commodity such as gold, silver, or spam can be easilly divided into larger and smaller amounts for different size transactions.

3) Durability: The commodity is not going to deteriorate in the owners hands before they have a chance to spend it. Gold and silver are prime candidates. I suppose spam could be canned.

4) High unit of value: The commodity has a high percieved value per unit of weight. This makes it possible to carry a large amount of wealth with you wherever you go. Spam does not meet this criterion very well at all, but gold and silver certainly do. A few ounces of gold is very expensive.

Once these conditions are met within a community, a commodity money will soon come into existence.

What is Money? Part II: The origin of Banks and Paper Money.

This article picks up with the hypothetical example from the first article, where cans of spam have emerged in a market as a commodity money.

Let's say you're a successful business owner, and through hard work and shrewd business deals, have amassed a small fortune in money...50 cans of spam!

You don't want to worry about thieves breaking into your house and stealing your spam, so you take your spam to a warehouse for safekeeping. The warehouse charges you a small annual fee for their services.

The warehouse gives you a receipt for the spam you have deposited with them. This receipt has the words, "Will pay to the bearer on demand 50 cans of spam".



At this point, your 50 cans of spam have been completely removed from circulation, under lock and key in a warehouse. In place of the cans of spam, you now have a paper receipt, which you can present to the warehouse at any time for your spam.

The warehoue has been in business for quite some time. People know from experience that the items they deposit at the warehouse will still be there months or years down the road when they need them again. The warehouse has a reputation of trustworthiness in the community.

The next day, you happen to see a television set worth 50 cans of spam that you'd like to buy. You start to head down to the warehouse to redeem your cans of spam, but then stop, struck with a sudden thought.

Perhaps the television owner would be willing to accept the warehouse receipt as payment for the television. The television owner could then take the receipt to the warehouse at their leisure and redeem the receipt for the cans of spam.

The television owner agrees! You pay the former owner of the television your 50 cans of spam paper receipt, and they give you the television.

Paper money has just been born.

This type of money is called Receipt money, because it is literally a receipt, or certificate, for a tangible physical good that exists.

There are 2 factors which will cause the entire community to soon accept paper receipt money in their day to day business deals.

These factors are:

1) Convenience. It is much easier to carry around a piece of paper than 50 cans of spam or 5 pounds of silver.

2) Trustworthiness. The community trusts that the paper reciept or certificate actually represents the tangible good printed on the paper. In the previous example, if the television owner suspected that the reciept would not be able to be redeemed for the 50 cans of spam, no trade would have taken place.

Below are pictures of money used in the United States with the words "Will pay to the bearer on demand" printed on it. The first is picture is a picture of a $10 dollar bill from 1941. The second is a picture of a $5.00 bill from 1950, only 55 years ago!


Federal Reserve Note. 1941.


Federal Reserve Note. 1950.

If you enjoy this article, you will also like the following websites by the author:
www.ChristopherLind.com
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