Soon enough people started paying with these tickets – why not? It is a perfect alternative for gold and it’s a lot less heavy =D Paper money was born.
The goldsmith came up with this amazing idea: He could sell more tickets than he had in gold. That would increase his profit enormously! He figured it would be good enough to keep a certain amount of gold as a ‘reserve’. The rest was available to lean to other people and to gain interest.
People started leaning more and more, and more and more tickets got into the village. However: Critical citizens saw this happening and noticed there suddenly was an overwhelming increase of tickets and they started to convert their tickets to gold.
The goldsmith wasn’t prepared for this: a lot of people tried to convert their tickets into gold and he started to run out of ‘reserves’. This would have been the first bank-run ever. But certainly not the last one.
De goldsmith had to admit he handed out more tickets than there was in gold: people who had those tickets suddenly realised they didn’t own gold but just an illusion.
The banking system nowadays works exactly the same way. Let’s have a look at a – very much simplified - example. (We are assuming banks keep 10% as ‘reserves’)
You are in a country with 110 people and everyone has 1,000 pounds worth of paperbacks. 100 of those 110 people bring their money to the bank on the island. The bank now owes 100,000 pounds. The bank keeps 10% and has therefore 90,000 available for leaning out to the people on the country.
This 90,000 pounds will be leant to 10 people in the country ; they are agriculturally active and they but equipment to work the land. The 90,000 goes to other citizens who produce the equipment. They bring this to the bank again.
The bank now has 190,000 worth of deposits. The amount of money in the country surged to 210,000 pounds. This consist of: 10,000 as a reserve from the bank, 10,000 of own value and 190,000 of deposits.
The citizens were very happy; they became way more wealthy! They suddenly owned 190,000 pounds!
Again, the bank got 90,000 pounds and will keep 10% as a reserve. Being 81,000 available for leaning to people on the island.
This cycle continues and continues until there is for every 1 pound of ‘base-money’(the money we started with) 10 pounds of credit.
Banks have created an additional 9 pounds for every 1 pound.
The question is: are the savings of the people on the country still money? Or are they just a loan to the bank?
Nowadays there is a very thin line between money…. and debt.
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