In this chapter we will understand how banks came into existence and how they manipulate the issuance of Bank Note out of greed. People believed whatever that is written on the Bank Note even when Bank does not really have the amount to cover all its depositors.
Chapter 3
After 300 years, the year 1640 Charles the first monarchy was deeply in debt that drove him to seized all over the merchants and goldsmith hard-earned gold, stored in the mint and declared it to them as if it was a forced loan. Charles also seized the East Indian company’s pepper that plunged him into death sentence.
After his death merchants and goldsmiths have joint forces for a broader financial scale. Goldsmiths offered a security vault for merchants to leave a portion of their money, and only to pay them a small amount of money in return. Years have past, Goldsmith turned into banks.
Bank provides a receipt to depositors. They can reclaim their money at any given time. In order to avoid everybody having to haul the money around, merchants would go to the local bank of the seller to pay the bank directly and then bank would buy the IOU note 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 realized that they can actually print more and more Bank Note and eventually changed from making out receipts to offering receipts to people. Bank started issuing paper receipts for more than the amount that it really has inside the vault. There came to existence the people today's called, "Fractional Reserve Banking." It is a process where banks use someone else’s deposited money to cover somebody’s turning their Bank Note for their money.
People started using receipts as a form of money. Instead of paying with Gold, they stored gold to the bank and as they realized that banks issued receipts after each deposit, they began to ask multiple receipts in small regular denominations to buy goods. Whenever receipts are divided into smaller denominations a Bank Note is issued which was the fundamental form of paper money.
We’ll see you to the next chapter for the England’s economic fore fathers.