How MONEY & BANKING Really works - Part 1 (1 of 5)

Summary

This script explores the lesser-known origins of money, contrasting the widespread curiosity about love with society's relative ignorance of monetary systems. It reveals that most money is not government-issued but created by banks through loans, a process originating from the practices of goldsmiths who lent out more 'claim checks' than they held gold. The script outlines the evolution of banking from a simple interest-based model to a complex system where banks legally create money, regulated to maintain public trust and economic expansion.

Takeaways

• 💖 Love and money are two great mysteries that dominate our lives, yet while love is widely explored, the nature of money is less discussed.
• 💼 The common misconception is that money is created by the government, specifically by The Mint, which produces physical currency.
• 🏦 In reality, most money is created by private banks through the process of lending, not from deposits or the bank's own funds.
• 📜 The script tells 'The Goldsmith's Tale', illustrating how the concept of banking and money creation evolved from goldsmiths who lent out gold and issued claim checks.
• 🔄 Goldsmiths noticed that depositors rarely withdrew their gold, leading to the realization that they could lend out more gold than they physically held.
• 💡 The innovative idea of lending out claim checks against gold that wasn't even deposited allowed goldsmiths to earn more from interest.
• 🤑 The goldsmith's wealth grew as he lent out more claim checks than he had gold, a practice that was initially secret but later became the foundation of modern banking.
• 🏛️ The threat of a 'run on the bank', where depositors demand their gold back, is a significant risk for banks that lend out more than they hold.
• 📉 The script highlights the historical occurrence of bank runs and the public's loss of confidence in banks, leading to the need for regulation.
• 🛃 Banking practices were legalized and regulated to control the creation of money from nothing, with central banks stepping in to support banks during crises.

Q & A

What are the two great mysteries that dominate our lives according to the script?

The two great mysteries that dominate our lives are Love and Money.

Why hasn't monetary theory inspired blockbuster movies like love has?

Monetary theory hasn't inspired blockbuster movies because it is not as relatable or entertaining as love, which is a universally explored theme in stories, songs, books, and movies.

What is the common misconception about where money comes from?

The common misconception is that money comes from the government, specifically from the Mint, which prints bills and stamps coins.

How does the script describe the creation of money by banks?

The script explains that banks create money by lending out loans, not from their own earnings or deposits, but from the borrower's promise to repay the loan with interest.

What is the Goldsmith's tale and how does it relate to modern banking?

The Goldsmith's tale is a story that illustrates the origin of modern banking. It tells how a goldsmith, who stored gold for others, began issuing claim checks that could be used as money. He then started lending these claim checks, effectively creating money from the promise of repayment.

Why did the Goldsmith start lending out claim checks instead of physical gold?

The Goldsmith started lending out claim checks because they were more convenient than heavy coins and could be easily traded in the marketplace. Additionally, it allowed him to earn interest on the loans.

What was the significance of the Goldsmith's observation that depositors rarely withdrew their gold?

The Goldsmith's observation that depositors rarely withdrew their gold allowed him to lend out more claim checks than he had gold, as he knew he could fulfill the claims as long as not all depositors demanded their gold back at once.

How did the Goldsmith's practice of lending out more money than he had in gold affect his wealth?

The Goldsmith's practice allowed him to earn interest on loans that were essentially backed by other people's deposits, thus increasing his wealth significantly without having to provide the actual gold himself.

What is a 'run on the bank' and why is it feared by bankers?

A 'run on the bank' is a situation where a large number of depositors withdraw their money at the same time, causing the bank to potentially fail if it cannot meet the demand for withdrawals. Bankers fear this because it can lead to the bank's collapse.

How did the practice of creating money from nothing become legalized and regulated?

The practice of creating money from nothing became essential for European commercial expansion, so instead of being outlawed, it was legalized and regulated. Bankers agreed to limits on the amount of fictional loan money they could lend out, and central banks were set up to support local banks in case of a run.

What is the ratio of fictional to actual money in the banking system as described in the script?

The script describes a ratio of nine fictional dollars to one actual dollar in gold as an example of how the banking system creates money.