If only the occasional person wanted gold, and even then most of it would come back in the form of a deposit, the goldsmith reasoned that he could loan out the rich man's 9000 shekels as well and collect interest on it for the next two years while he (rich man) was away. Now, the goldsmith would collect 15% interest on the full 10,000 shekels. Even if the rich man should come back sooner than expected, the goldsmith could pay him his 9000 shekels, and the people who were using the goldsmith's IOU's and paying him interest would not even know the gold was no longer there. So he proceeded to loan out the rich man's shekels and to his delight nearly all of the rich man's gold stayed in his vault as did his own 1000 shekels. In other words, the people were satisfied to use the goldsmith's IOU's as a medium of exchange believing that the gold was there if they wanted it.

  When the rich man did return, the goldsmith paid him his 9000 shekels. The 1000 shekels of his own was enough to pay the occasional person who wanted gold, and he found that even most of that gold came back to him as a deposit for safekeeping. So now he was collecting interest of 15% (1500 shekels) on 10,000 shekels every year when he only had 1000 shekels, or 10%, in reserve.

  After a time, when the goldsmith was convinced that his customers did not want what he owed them, namely gold, except in rare cases, but  they were willing to pay him interest on his IOU's, which were supposed to represent gold, this gave the goldsmith a brilliant idea. He thought that if the people are willing to pay him interest on the money he owes them, namely, on his paper receipts (IOU's), he could become the richest man in the entire world!

  This was too good to be true. Sooner or later some smart fellow would find out what he was doing and tell the king. And once the king realized that he could issue his own paper receipts (IOU's) to pay for his government's expenditures, he may even go so far as to issue enough receipts to supply the whole economy. If this were to happen, the goldsmith knew his profitable game would be over.

  So the goldsmith set out to find the wisest man in the village and told him his story of how he could become the richest man in the world if only there were some way to secure a monopoly on the storing of gold as a reserve and on the issuing of paper receipts (IOU's), or in other words, paper money) and the loaning of them for the purpose of collecting interest.. The wise man said, "You know, that may just be possible while the king is still ignorant about money matters. The king, like everyone else, runs short of money. When he does and he comes to you to borrow money, you ask the king to give to you, as the goldsmith, the exclusive right to issue paper receipts (your IOU's) against gold reserves. However, it may be wise for you to include the rest of the goldsmiths in your scheme. With their support, the extent of your profits and power would be unlimited. Once you and the other goldsmiths have the exclusive right to issue all the paper receipts against gold reserves, then your IOU's will become paper money."

Previous Page   Home Page   Next Page

This page was last updated on 03/03/02.