This is a short and simple story. It may be called a fable, but it is true
in its portrayal of how our present money system evolved. Many of
years ago, a certain rich man wanted to go abroad for a two-year vacation.
He owned, in cash, ten thousand shekels of gold. (Precious metals, such as
gold and silver, were the primary forms of money in early days). He
could not take the gold with him because of its weight and the
danger of being robbed; so he went to a goldsmith to ask if he could leave
his gold with him for safekeeping. (The goldsmith was one of the most
trusted individuals of that time.). The goldsmith, who had a large, secure
storage facility similar to a vault, wanted to be paid to keep the rich
man's gold. He asked for 10% or 1000 shekels to which the rich man agreed.
The rich man "deposited" his gold with the goldsmith, obtained a
"receipt" for same and then left on his trip abroad.
As soon as the rich man had left his gold and departed, the goldsmith told his helper to go and spread the word that his master had a few shekels of gold to loan to financially secure customers at 15% interest. Soon the borrowers came. One wanted 50 shekels, another wanted 100 shekels and so on. Naturally, the goldsmith wanted collateral as security for these loans and if the borrower defaulted, he would lose his collateral such as, a house, a farm or a business.
However, to the goldsmith's surprise, most of the borrowers did not take delivery of the gold. Instead, all they wanted was the goldsmith's receipt saying " I owe you x number of gold shekels" which could be used to claim the gold when they wanted it. In modern terms, they had what we call a demand deposit.
As the days proceeded, the goldsmith had loaned out all of his 1000 shekels which were drawing 15% interest. Yet, again to the goldsmith's surprise nearly all of the shekels were still in his vault. The only people who took their gold were a few of the small borrowers while the others only wanted receipts (IOU's) showing that the goldsmith held their gold and that they could have it whenever they needed it.
As time went on, the goldsmith found that the people were accepting his receipts (IOU's) in payment of goods and services rather than using the gold. When the occasional person did claim his gold and used it for the payment of goods etc., the one who received the gold brought it back to the goldsmith for safekeeping and accepted an IOU.
This gave the goldsmith a terrific idea!
This page was last updated on 03/03/02.