The story of the town’s goldsmith helps to simplify our understanding of modern banking. This goldsmith, so the story goes, having a secure place to store his own gold, began to be asked by the townspeople to store their gold too. He obliged, and to keep an account of who had what in his vault he provided certificates of deposit to his customers.
In time the goldsmith realized that very few people actually ever claimed their gold because they were exchanging his certificates around town, instead of the actual gold, for goods and services.
With this in mind the goldsmith got himself an idea. Since his signature was as “good as gold”, he began to make loans using only his signature on a piece of paper. The net effect of this was that each certificate of deposit was actually worth less than it claimed to be worth. Us moderns call that inflation.
The goldsmith however was confident that no one would catch on to his scheme because he was certain that they would not all want their certificates redeemed at one time. Experience had taught him that, at any given time, there was always a “fraction“ of the the gold, which was represented by outstanding certificates, sitting in his vault available for claim. So he felt assured that as long as there was sufficient gold on hand to satisfy those who wanted to redeem their paper, he was, as one might say, as good as gold.
This is what us moderns call “fractional reserve banking“. But instead of actual gold, paper dollars themselves work somewhat, but not exactly like, gold. In addition, in modern times everyone from your local goldsmith (the bank) to the federal government (via laws) to the federal reserve (currency makers) are all in on this action–for good and/or evil– with coordinated participation.
Ideas that are so basic and fundamental that they are beginning points of thinking I call “first things”.
An example of this is the idea that nothing can be got from nothing. In economics this particular “first thing” is fundamental. But wait, you might protest, the government can create money from nothing and then exchange that money for something; isn’t that getting something from nothing? No, and we know this because it violates a fundamental commonsense principle… or “first thing”.
Economics is a kinfolk of global warming and evolution in this way. A thing is made so complicated that “first things” are lost sight of. Plausible explanations about a thing, combined with a highly technical language, combined also with conclusions we desperately desire to be true, mixed with academic browbeating and political correctness, can lead otherwise smart people to believe that man can change the temperature of the planet through a tax, that he himself exists through a chain of events that started from nothing, and that wealth can be created by printing money.
But though we may not be able to argue against the millions of technical details thrown at us, as long as we do not lose sight of first things we will not have to fall prey to dazzling displays of BS. Politics has usurped true science. There are political motivations having nothing to do with the sciences at hand, but which are driving many of the issues supposedly based on science. The modern acceptance for scientific consensus is an excellent example of this. Man would do well to remember his past experiences with scientific “consensus” and make all attempts to avoid its advancement-retarding dogma.
Science means knowledge, that is, what is known and not what is politically acceptable and presupposed. We live among the wonders of a scientific age which can be intimidating. There is much every person doesn’t understand which can make us susceptible to intimidation by intellectual words, charts and doublespeak. But we need not be the moronic patsys, of others who are themselves moronic patsies, as long as we don’t lose sight of first things.
How can saving money be the same as spending it? What? Do you think the banker just hides your savings in a big vault until you want it back? In a normal and healthy economy your money would be put to use doing things like building stuff, or digging and exploring for new resources, or all sorts of things like that. It would in fact be working just as if you had spent it. What you are putting in the bank, you see, represents value: which is your work. But rather than consume the fruits of your labor right away, you forego that satisfaction and save. This means that the currency that represents something of value, your labor, is used for other enterprises. Those other enterprises involve profits, of which you get a little, (interest) the banker gets a little, (interest) and the one who borrowed it gets a little. (profit)
Don’t be an economic moron. Take the time to watch this short video to understand how we are all much better off with a true banking system, and not just a spigot with a money printer at the other end.
Hat tip: Austrian Economics Addict