In this chapter we will see how banks came into existence and how they attempted to manipulate the issuance of Bank Note out of greed.
After 300 years, the year 1640 Charles the first monarchy was deeply in debt. This drives him to seized all over the merchants and goldsmith hard-earned golds stored in the mint and declared it forced loan. Charles also seized the East Indian company’s pepper that plunged him into a death sentence.
After his death merchants and goldsmiths have joint forces to plan a broader financial scale. Goldsmiths offered security vault for merchants to leave a portion of their money, and only to pay them a small amount of money in return. This agreement grew strong as Goldsmith turned into banks.
Bank provides receipts to depositors to reclaim at any given time. In order to avoid everybody having to haul bag of golds around, merchants would pay the local bank and the bank would pay for the IOU notes for a lesser amount. Banks would send a rider to distribute IOU to city’s local bank where it originally came from, then local bank would collect payments to the merchants selling the goods. Merchants can then receive and pay for goods from far-off locations by paying their local bank.
Banks made a pivotal switch.
Banks changed from making out receipts to offering receipts to people. Instead of paying with Gold, they stored gold to the bank and use paper money as a medium of exchange. People started to request banks to divide multiple receipts in small regular denominations as they use it for small transactions like buying goods and personal items. Whenever receipts are divided into smaller denominations a banknote is issued which was the fundamental form of paper money.
Bank offered paper receipts to people as loanable amount with interests, although the amount borrowed is more than what it really has inside the vault. This was a form of deceit in general but this was termed by banks as, “Fractional Reserve Banking.” It is a process where banks use someone else’s deposited money as a loan, or will use it to cover somebody’s turning their banknote for their money back.
Now we that we have seen that money can be manipulated by an entity that we trust, I hope this sparks curiosity to really identify whether we truly are in the best form of financial security. In the next chapter, banks would start to crumble. Stay tuned!