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It is amazing to me how much we value our money. We argue over it, fight for it, heck, wars are even started over it. We hoard and protect the little money we've got because we don't understand how to create it. In this post I will digest the money creation process and show you how to use the process to your advantage. This is an Economics lesson you don't want to miss.
The Goldsmiths. Early traders used gold to pay for products or services. After several years of lugging it around and weighing it before each transaction they realized this system was very inconvenient. So, they smartened up and in the 16th Century began depositing their gold with goldsmiths who stored their gold in a vault for a fee. In return, the goldsmiths would issue the trader a paper receipt showing how much gold on deposit. The traders used these receipts as credit when conducting transactions with traders out there. Hence, paper currency was created.
Initially, the goldsmiths only issued paper receipts comparable to the amount of gold physically deposited in the vault. One day an observant goldsmith realized that the owners rarely redeemed their receipt. In fact, the amount of gold deposited far outweighed the quantity of gold withdrawn. Then they changed the economic system forever! The goldsmiths got clever and started issuing paper receipts in excess of the amount of gold physically in their vaults. The goldsmiths would put these receipts (which were redeemable for gold) into circulation by making interest bearing loans to the traders. The borrowers were willing to accept the loans because the receipts were a credible form of payment in the marketplace.
The goldsmiths found a way to create money. Now skip forward 500 years The only difference between the goldsmiths of yesterday and the banks of today is the actual currency. Today, our money is not backed by gold, but rather by our faith in the monetary system we have created. Banks lend money in a fashion similar to the goldsmiths, by keeping on reserve only a percentage of the money they lend.
This sounds a bit scary but think about the opportunity? If banks can create money, why not take advantage of it? Every day banks create money and lend it to people with ideas. These people present their ideas to the banks along with a plan for repayment. If the bank approves, the person signs a promissory note (a glorified IOU) in return for the money (plus interest). That's it. All you need is an idea and a plan for repayment and the bank will create the money for you. But what if your idea doesn't require a significant amount of capital? Or what if you don't like the idea of leverage? That's fine too. You can skip the bank and take your idea straight to the marketplace. My point here is that money need not be a limited resource. It's printed in machines and distributed to the people with the best ideas. What is your idea?
The Goldsmiths. Early traders used gold to pay for products or services. After several years of lugging it around and weighing it before each transaction they realized this system was very inconvenient. So, they smartened up and in the 16th Century began depositing their gold with goldsmiths who stored their gold in a vault for a fee. In return, the goldsmiths would issue the trader a paper receipt showing how much gold on deposit. The traders used these receipts as credit when conducting transactions with traders out there. Hence, paper currency was created.
Initially, the goldsmiths only issued paper receipts comparable to the amount of gold physically deposited in the vault. One day an observant goldsmith realized that the owners rarely redeemed their receipt. In fact, the amount of gold deposited far outweighed the quantity of gold withdrawn. Then they changed the economic system forever! The goldsmiths got clever and started issuing paper receipts in excess of the amount of gold physically in their vaults. The goldsmiths would put these receipts (which were redeemable for gold) into circulation by making interest bearing loans to the traders. The borrowers were willing to accept the loans because the receipts were a credible form of payment in the marketplace.
The goldsmiths found a way to create money. Now skip forward 500 years The only difference between the goldsmiths of yesterday and the banks of today is the actual currency. Today, our money is not backed by gold, but rather by our faith in the monetary system we have created. Banks lend money in a fashion similar to the goldsmiths, by keeping on reserve only a percentage of the money they lend.
This sounds a bit scary but think about the opportunity? If banks can create money, why not take advantage of it? Every day banks create money and lend it to people with ideas. These people present their ideas to the banks along with a plan for repayment. If the bank approves, the person signs a promissory note (a glorified IOU) in return for the money (plus interest). That's it. All you need is an idea and a plan for repayment and the bank will create the money for you. But what if your idea doesn't require a significant amount of capital? Or what if you don't like the idea of leverage? That's fine too. You can skip the bank and take your idea straight to the marketplace. My point here is that money need not be a limited resource. It's printed in machines and distributed to the people with the best ideas. What is your idea?
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