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 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 the amount of gold on deposit. The traders used these receipts as credit when conducting transactions with other traders in the marketplace. Hence, paper currency was born.
Initially, the goldsmiths only issued paper receipts equal to the amount of gold physically deposited in the vault. One day an observant goldsmith discovered that 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 In fact, the amount of gold deposited far outweighed the quantity of gold withdrawn.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 began issuing paper receipts more than the quantity 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 ready to accept the loans as the receipts were a credible form of payment in the marketplace.
The goldsmiths found a method to create money. Now fast forward 500 years The only real distinction 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've created. Banks lend money in a fashion similar to the goldsmiths, by maintaining on reserve only a percentage of the money they lend.
This sounds a little bit scary but think of 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 provide the money for you. But what if your idea doesn't need a significant amount of capital? Or let's suppose 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 don't have to be a limited resource. It's printed in machines and given to the people with the best ideas. What is your idea?
The Goldsmiths. Early traders used gold to pay for products or services. After 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 the amount of gold on deposit. The traders used these receipts as credit when conducting transactions with other traders in the marketplace. Hence, paper currency was born.
Initially, the goldsmiths only issued paper receipts equal to the amount of gold physically deposited in the vault. One day an observant goldsmith discovered that 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 began issuing paper receipts more than the quantity 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 ready to accept the loans as the receipts were a credible form of payment in the marketplace.
The goldsmiths found a method to create money. Now fast forward 500 years The only real distinction 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've created. Banks lend money in a fashion similar to the goldsmiths, by maintaining on reserve only a percentage of the money they lend.
This sounds a little bit scary but think of 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 provide the money for you. But what if your idea doesn't need a significant amount of capital? Or let's suppose 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 don't have to be a limited resource. It's printed in machines and given to the people with the best ideas. What is your idea?
