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February 9, 2005

Evil Dictionaries and Money, Part 2

*** A Fairy Tale History of Money and Banking***
( Fractured Fairy Tales Theme )

ONCE UPON A TIME some very peaceful people bartered for their needs. A farmer would trade corn for chickens, a carpenter would trade labor for shoes, and a traveler would barter temporary work for a bed in a stable. These people agreed on value and exchanged as they saw fit. It worked well for a while.

Over time, certain goods that were easily carried, stored, and measured were seen as a kind of money, items that had inherent value to measure the value of other goods. Salt was such a good. Easily measured, it could be used as a means of exchange for other goods. Better still were silver and gold, which eventually became de fact standards.

Everyone wanted gold and silver. They contained a kind of inherent charisma. Gold and silver were easily malleable and made into jewelry. They were easily measured and checked for purity. The farmer would trade corn for gold knowing that he could buy chickens with it. The carpenter was happy to be paid in gold because he could buy shoes with it. The traveller accepted gold for his labor because it did not perish, and people in other towns readily accepted it. It held inherent value, because if people were left with only the gold, they could do something with it.

As commerce grew, the town flourished and more traders arrived, and the town became a center of trade. The traders brought gold and silver with them, and hired guards to protect their money.

One day Antonio got the bright idea of becoming a goldsmith, someone who would store and guard gold and silver for a fee. Antonio was someone with a credible reputation for security and discretion. The local town council supported the idea.

Traders would arrive, take their gold to Antonio , and he would give them a document testifying to how much gold they had deposited with him. The storage fee was agreed upon and the traders would receive receipts that said something like, "Bernardo Grumio has on deposit in Antonio's establishment 50 ounces in gold dust."

Over time as the industry grew and the town became a city, Antonio made the receipts more generic to make transactions easier. The receipt would state, "This note will pay to the bearer on demand 50 dollars in gold on deposit at Antonio's Goldsmithery." (The term dollar was used to indicate one ounce.)

All went well and people's trust in Antonio grew. That trust was such that people felt comfortable exhanging Antonio's notes, knowing full well that at any time they could get the gold that backed those notes. So people would go to the market with Antonio's notes and exchange them for food and goods and services.

Antonio noticed after several years that at any given time, the amount of gold he held never decreases below a certain amount. He knew that the city was in need of a better aquaduct to help with the irrigation of crops, but the city did not have enough money, and taxes could not be generate enough revenue for another year.

So he went to the mayor, Vitorelli, and suggested that they borrow the gold to pay for the public works project and then pay back the gold with a little extra. Antonio would ask the larger storers of gold if they would agree to have their gold used this way and get a little extra money in return.

They agreed and Antonio became a banker. The city flourished, it got a new aquaduct, they experienced a bumper crop the following year, the city experienced increased tax revenue and paid back all the gold plus interest, and everyone was healthy and happy. The economy was good.

Then Antonio died. He had trained his son well, a large young man who was not quite as bright and charitable as his father. People called him Big Tony. The mayor's son, Vitorelli Jr., was groomed by his father in politics. People called him Vito. Big Tony and Vito were friends.

Over time, Big Tony noticed something. People began more and more to treat the paper notes they were carrying as money, exchanging them freely among themselves. Even Big Tony did that. Fewer and fewer people actually cared about the gold they effectively "owned" in storage.

Big Tony knew that the actual number of notes out in the city equalled the exact amount of gold in his vaults. (He had $100,000 dollars in gold--real money--and there were exactly $100,000 in redeemable notes circulating--currency that merely symbolically represented the real money in the vaults. )

Big Tony's idea was simple. Why not print up a few extra notes and spend them? He had the printing press. What could it hurt? Nobody was going to notice. A few extra notes wouldn't be that big a deal. So Big Tony printed up an extra $1,000 in redeemable currency and spent it on a big political party for Vito. Big Tony inflated the currency supply.

Meanwhile, prices mysteriously rose by about 1%. More money in the system meant more could be bought, which naturally led to people raising prices as demand increased. When Big Tony was asked about the rising prices, he said that a thriving economy always results in some rising prices. People were satisfied with that explanation.

Big Tony told Vito what he had done for him, and Vito was grateful. In fact, Vito suggested that Big Tony print up more money, because they were going to need it to go to war with a neighboring city that was trying to dam the river that supplied the city with water.

So Big Tony and Vito began inflating the currency supply to pay for weapons and troops. And when prices rose dramatically, Vito called a press conference to explain that war always affected the economy and caused prices to rise because resources were more scarce, that it all was very natural and to be expected, but don't worry because things will get better after the war.

To be continued in Evil Dictionaries and Money, Part 3.

*** One good reason for trusting me is that many foolish people already trust me. Ashleigh Brilliant

Posted by witnit at February 9, 2005 9:07 AM

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