Story of Money; 4; Who Prints Our Money Today?

... Everything that happens, whether happy sad or calm, when you get down to the solid facts, it's basically economic. Robinhood helped the poor, they say, and stole from the rich folks every day. When they squawked, he repeated these awful facts. Isn't this better than a steeply graduated progressive income tax? Everything that happens, whether happy sad or calm, when you get down to the solid facts, it's basically economic.

You know they say, fire is a wonderful servant but a terrible master. Well you know, money's a bit like that too. As long as money works quietly in the background, fitting the needs of trade, fixing it so that the exchange works nice and smoothly, everything's fine. But if money gets out of hand, if it causes the ravages of inflation or the lethargy of depression, things don't work so well. So I'd like to tell you the story of money so that you, the thinking public, in finding out a little more about it, can perhaps support those leaders who are trying to give us a better monetary system. In order to look at this question of how money is created, I'd like to go back a long, long way and tell you something about the Goldsmiths.

I call this talk the Goldsmiths story. Now let's see if we can get this thing started just the way it ought to go. Once upon a time, oh I'd say back around the 14th or 15th century, there were Goldsmiths in England and also I think in Italy and some of the low countries, but we'll take perhaps England for an example. There were Goldsmiths in England who were artisans, who wrought figurines, and other object darts in Gold. And because they were so used to having Gold around and because they needed a place to store their Gold, they had a strong box which they kept perhaps in their back room, and this was tough and couldn't be broken into and it was where they kept their Gold. Now their friends knew about this and people being just a little fearful about keeping Gold in their houses or on their persons got in the habit of storing the Gold with the Goldsmith in his strong box there.

In those days the roads weren't so safe as they are today, at least in that sense of the word, and their houses weren't so safe. And so you see the Goldsmith pretty much got more and more into this job of accepting people's Gold on deposit. It's just as if you were to take your suitcase down to the train station and check it there in a room, you know, and you got a ticket for it, the ticket is signed and so forth, and there's your suitcase, here is the ticket. And so the Goldsmith got more and more into this job of accepting people's Gold and giving out tickets for it. In fact you might say he was the world's first Gold storage company and you might say he was the world's first banker because he accepted deposits here and gave out these receipts of one type or another. Now as the Goldsmith got more and more into this job, he sort of gave up his artwork and definitely went into the business of storing people's Gold. Actually he charged, you know, just the way you have to pay perhaps a dime or something of that sort at a check room.

He charged to keep the Gold in the back room or in his strong box and it was a whole new job for him and a whole source of income. Now you can imagine, can't you, that the Goldsmith after a while enlarged his whole setting instead of having just a strong box. He fitted out the whole back room of his shop into a strong vault so that he could keep the Gold there as things became more and more involved. Now isn't it also possible that the Goldsmith's ticket got to be pretty well known around the city? Even the Goldsmith's signature on the bottom there probably had a significance to people. And as the Goldsmith was a bigger and bigger operation and his business was a bigger and bigger operation, I suppose the Goldsmith hired a clerk to handle things for him so that he didn't have to be around all the time. He might have even had a photograph of himself put on the middle of the tickets after this and maybe he might put the numbers out in the four corners.

So that his clerk could take care of people bringing in their gold and giving out these tickets and then the Goldsmith could take a trip to Florida or someplace like that. So you see the Goldsmith is getting more and more into this business of being a deposit banker. Now then, the Goldsmith observes a very interesting thing starting to happen. He notices that actually most of the Gold there in the back room never leaves. Just gathers dust all the time. That's a shame isn't it to have all that Gold back there? You might say all of that old Gold back there and so he really decided he'd made a lucky strike. And so maybe the thing to do would be to lend some of it out. That's the thing that's tickling the Goldsmith now. Something else is developed too that he's observed. He notices that people bring in Gold every day a little bit and then some people come in and want to withdraw some Gold. And actually in any one day's operations it seems that the amount of Gold that people come and take away is about equal to the amount that people bring in.

You see people who live in other towns might be coming in and they have Gold and they deposit it there or people might come and want to take some Gold out because they would be leaving for a trip or something of that sort. Then too something else has probably started to happen around this city. Can you picture yourself in the furniture store with your wife and you've about picked out a nice new chair and you say to the furniture dealer, well I can't buy this today. I have to go down to the Goldsmith and get some of my Gold out. And the dealer might say, well let me see those tickets and you show them a ticket and he says, well I gum. They're just like the ones that I have. You don't need to bother going to get the Gold. Just give me your tickets. And so again you see the tickets are starting to float around and no one comes in and gets the Gold. And so then we see that the tickets are starting to be all alone kind of a money like thing, aren't they? It's because they're associated with the Goldsmith.

And as long as people realize or believe that they can always turn their gold in for those tickets, the Goldsmith always maintains the idea that these tickets are as good, as gold. Meanwhile let's go back to this Goldsmith shop and see what else we've found there. We have a shop over here and we'll take a quick look at this fellow because maybe we can use it to illustrate how the Goldsmith created money. As we've said, the Goldsmith found that the Gold in the back room of his shop was just lying there gathering dust all the time and he being an enterprising gentleman decided that maybe you would be smart to lend some out. So over a long weekend he has a carpenter come and the carpenter cuts a door in the back of the shop. And they put a sign up there. This door is opening out on the street around the block you see. They have a sign up there which reads gold for lending.

And when the people come down to the center of the city on Monday morning, they see this new shop in town lending gold. Now then, the Goldsmith is a very smooth cookie. He says to himself, well, here I have out in the city 100 gold tickets you see and these 100 gold tickets are what represents the gold in the back room. It's a one-to-one ratio. At this point the Goldsmith is in no trouble at all. And so the Goldsmith says if I have these 100 tickets out in the city, maybe I'd better keep some gold in the back room just in case we have one of those days when more people come in and try to withdraw gold by presenting their tickets than other people come in and deposit gold. Because, remember, if the Goldsmith should have more people come in to withdraw gold and he has gold in the back room, that's the end as far as the Goldsmith is concerned. So he's going to play it real smart, you see. And anyway, as long as he can always pay gold out for the tickets presented, the people are always believing that the Goldsmith's tickets are as good as gold.

Now, the Goldsmith then, on this Monday morning, lends out not the whole 100 in the back, but only 80 of it and he keeps 20 in the back room just as a kind of gold reserve. And here we have the 80 which the Goldsmith lends out. Now, this Goldsmith is shrewd in another sense of the word. The businessmen who come in and ask for loans have to be a very special kind of businessman. After all, the Goldsmith is lending somebody else's money and he wants to see it all come back again. So he doesn't want to make any of those sour, bad loans that never show up again. He wants to make sure all these men show and bring the money back. Plus a thing called interest, which incidentally I'm leaving out of this entire talk because it makes the arithmetic just a little fancy and we can see the point I'm trying to make without using this idea of interest. But keep in mind there is interest in the story and that's the part that gives the Goldsmith his income just as a shoe dealer sells shoes at a price higher than the price at which he bought the shoes.

So the Goldsmith charges an interest rate when he lends out this 80 which is higher than the interest rate he pays when people deposit their gold and that yield in between is the way he makes his income. You see the thing about a banker that people don't understand or find so difficult is that he sell something that you can't quite ever see or touch like a pair of shoes or a chair or a television set. So that you have to remember the Goldsmith is a dealer in debt, a dealer in credit and he buys people's debts and he sells debts, you see. It's a pretty fancy arrangement but it's all working out here. Meanwhile, back at the Goldsmith shop, these people who borrowed this 80 gold take it home, but an amazing thing happens. The afternoon comes along, the sun begins to set and the shadows lengthen across the city and the people get scared and they bring their gold back down and they deposit it with the Goldsmith.

And the Goldsmith, of course, seeing the gold come in the front door does, as he always does, he gives out tickets for the gold and he puts the gold in the back room and look at this. We have all the gold in the back room again by nighttime, 100 gold in the back room but out here in the city there are 180 tickets floating around. And so for the first time in history, the Goldsmith is on a fractional reserve. He doesn't have enough gold now to pay for all the tickets. So he is really starting this amazing game of how banks today print money. But this looks pretty safe, doesn't it? After all the Goldsmith thought at first the 20 was enough for 100 tickets and now he has, let's see, 100 gold in the back room and 180 tickets. That's like, oh, let's say it's 10 to 18, isn't it? That's not a bad ratio at all.

So the Goldsmith says, why don't we go round again? So the next day, the Goldsmith decides to lend some more money. But he plays it very cool again. After all, now there are more tickets out in the city. So the Goldsmith says, if I kept 20, when I had 100 tickets out, now I have another 80 out there. And I ought to keep the same amount of gold for them, you see, if there's any sense to this. So this time he keeps 16 for that gold, you see, which is out there. I mean, for those tickets, which are out there, and he only lends this time 64 gold. Again, these are high quality businessmen. These businessmen are very well known. They've already been checked by the FBI or no. We'll say by the old fashioned Dun and Brad Street. And we know they're high quality businessmen. Not only that, but these loans aren't like the ones that you and I usually get. No, these loans are made to men who are buying materials, buying, let's say, a new shipment of shoes for the shoe dealer or a new shipment of raw material for the factory on the edge of town.

But the point is this, when these men borrow this money, this gold, they buy goods. These goods will be sold. They will generate the money to pay off the loan, you see. We call this a self-liquidating short term commercial loan. And it's the heart of the original banking story. You see, if I borrow some money to buy a brand new car, oh, there's nothing in the way I use that car, unfortunately, for my family and for trips that'll ever generate the money to pay it back. And you probably know what a headache that can be. That's a consumer loan, even governments. When governments borrow money, they don't usually use it in this self-liquidating way. For instance, if you borrow a couple of million dollars to make a great, big, beautiful battleship and you sink it in the middle of the Pacific, there's nothing self-liquidating about that. I didn't mean any pun there at all. But these businessmen are good, solid businessmen. The goldsmith, you know, if he lends this money carefully, can get away with this, it would appear.

But let's go on again. The same sort of thing happens. Let's go back to the afternoon. The sun begins to set. And the shadows lengthen across the city. The people get frightened and they bring their gold down in the front door and leave it with the goldsmith. Here comes some more gold, says Mr. Goldsmith. So he gives them tickets. And the tickets go out in the city. And this little fellow here, of course, is the representation of the consumer or the general public using the tickets. And the goldsmith, of course, puts the gold in the back room. But look, here we are back again with 100 gold in the back room. And 244 tickets out in the city. We see this over here. Here you see all the gold is the 100 right back there in the back room. And the tickets out in the city, 244. Now, this still isn't too bad, is it?

Let's see, that's about like 10 to 24 almost, isn't it? It's a little less than half. In other words, his reserve is a fractional reserve now, a little less than half. Now, let's see, we'll say that the goldsmith has gone along like this for a few days or a few weeks and he seems to be doing a pretty good job with it. But some of the more astute citizens in the town observe that the door in the back of the shop opening out on the other street is the same as the shop in the front, you say. And so they come storming into the goldsmith and they say, look here, Oliver, we just found out that that's the same shop as yours and you're lending out our gold. We don't like it. Of course, the goldsmith is very relaxed by now. He's pretty well entrenched in town, you see, and he's been carrying on this way. So he looks them up and down and says, well, if you don't like the way I do business here, you can take your gold and keep it somewhere else. But the goldsmith says, look here, I've been making things a little better for you folks as a result of what I've been doing here. For instance, you didn't thank me when I lowered this charge on depositing gold. No, you just thought that was nice.

And then to look what else I've been doing for you folks because I've had created more money because there's more money around the city, there's less unemployment, there's more production, there's more construction going on. The gross national product is higher and our country is richer in every way, isn't that wonderful? There's a new airport on the edge of town, a new television station across the street. And so by then the people are modified and they let the goldsmith go along the way he has been working. So this is sort of the way the goldsmith has created more money, has printed more money. Now you can imagine, can't you at some point here. The people just borrow the gold out the back door and the goldsmith probably has a canopy, which he puts up around the block here so people can walk around the block without getting in the rain and leave their gold in the front door back. Back it goes, I'll come the tickets and he has created more money and you can imagine one day a man comes in the front door and says, oh, don't bother with that business of going around back and getting the gold and bringing it in, bringing it in front again.

Why don't you just print me up a batch of those tickets? They seem to do the trick, don't they? And so this is the way it happened in the goldsmith story. Now can you see where the goldsmith would wind up this thing? If at the beginning of our story the goldsmith thought that 20 was enough in the back room to do for a 100 tickets out in the city, then wouldn't it be smart to keep the same ratio? In other words, with all this gold in the back room, you say, the 100 gold in the back room, the goldsmith would be a smart fellow if he would stop printing tickets when 100 is to a certain larger number as 20 was to the 100. You of course already figured that out, it's 500 tickets. So the goldsmith would be smart if he were to stop creating tickets when there are 500 tickets floating around the city relative to the 100 gold all in the back room.

You see, with that many tickets around the city, there's just too much chance that more than 100 of them will show up on any one day for the goldsmith to have to pay out gold. And you see, if more than 500 tickets show up for the goldsmith to have to pay out gold once again, here we go. We'll probably run that fellow out of town on a rail or something of that sort. Well, the goldsmith hopes this won't happen. As long as the goldsmith can make payment, the people assume that his tickets are as good as gold. And this is the way our banks work in modern times. Only when we bring this story up to modern times, the gold in the back room isn't gold anymore because the gold these days is some place far off isn't I think like Fort Knox or maybe there's some in a big bank up in New York, but the gold in the back room is currency.

We might even just picture that by putting some of this currency in the back room here, you see, and the tickets out in the city in modern times are checks, checking accounts. We're going to call them demand deposits because you see, that's the point that the goldsmith had to live with all the time. He had to be able to make payment on demand, you see. This is an amazing sort of liability that this goldsmith has. He has to be able to pay it out at any minute. And that's the way a check works today. But the gold isn't in the back room anymore. No, it's miles away in Fort Knox. In fact, there's a very lucrative trade that we have nowadays. We can dig the gold out of a hole in the ground in South Africa, put it on ships, and then on trucks, and put it back in a hole in the ground again in Fort Knox. Isn't that a fascinating sort of a job?

I don't know what good it does, but that's the way it works. So that's the way the goldsmith operates. Now, in extending this credit, perhaps can I call it credit now because in the sense it is, the goldsmith has gone out on a kind of a limb, hasn't it? It seems as if this goldsmith, and let's call the goldsmith a banker from now on because that's what he is, it seems as if the banker of modern times is forever walking a tightrope, you see. On the one hand, he'd like to make risky loans because risky loans give him high interest return, which is making more profit for the goldsmith and his company for the banker. But on the other hand, the more risky the loans are, the more he has to worry whether they'll ever show up and pay up again. So he'd like to make money, but on the other hand, he has to worry about all you folks because if he doesn't have some gold in the back room and some way of being sure that he'll pay all the time, then he's likely to get himself into trouble. And one of those days you and I may show up and we may have more demands than he has in the back room and that's the end of the banker.

So this banker is a dealer in debt. He is, you might say, a debt merchant just the way a man who deals and feathers, we call a feather merchant. And yet it's hard to see what he buys and sells in the same sense that a shoe dealer buys and sells something. Now then, I don't know whether this worries you or not that this situation is this way. You know, our banks, when you walk by them, they look good and sturdy. They usually have tall, greasy columns in the front there with Doric, Ionic or Corinthian at the top and when you walk by you look in, it looks kind of kind of quiet in there, doesn't it? And that's to make you think that there's money in there, but we know, don't we? Actually, let's look at the money supply for a minute.

The money supply in the United States today is about $140 billion of stuff. But how is it put together? 30 billion of it is this green folding type money that we've been talking about and the other 110 billion is checkbook money. 30 110. So you see, right there is the problem. If everyone tried to cash their checks this afternoon, $110 billion would be chasing $30 billion of currency. But who has most of that currency? Is it in the back room of the bank? No, you have it. You have most of that currency, which is outstanding there. So there isn't much in the bank, in the bank back room at all. They just keep enough for that everyday business that we talked about with the goal. Most of the banks reserve is maybe 30, 40 miles away in another bank, in a big brother bank, in a bankers bank, a bank where bankers go to bank, bank, bank, bank. And I hope that maybe at some later time I can tell you more about this central bank and the way it stands behind our banking system.

I wouldn't want you to be too uncomfortable after I finish here thinking that that bank down there just isn't a safe place for your money. That's not true at all. The banks of the day do operate on a fractional reserve and the currency in the back room is a small fractional, not even the 20% that I've used in the story. Maybe only 4 or 5%. But somewhere 40 miles away or 10 miles away, we have another bank, this big brother bank, this central bank. Actually, we call it in the United States, the federal reserve bank, and they stand behind the banking system. And there a place where the banker can go if you and I should decide to cash our checks faster and want more money than he has in the back room. So things aren't so bad after all. And I certainly would hate to leave this story with you thinking that the banks weren't a safe place. It is true they do business on a fractional reserve. And this fractional reserve grew out of our Goldsmith story. And we call it actually in the money in banking books, the Goldsmith principle. But the fractional reserve doesn't mean that your money isn't safe today.

Oh yes, money is truly a fascinating thing. We never seem to have enough of it and where it comes from and where it goes are some of the things we're trying to get a line on here. But nevertheless, we all want to have more of it. That's why I say... Everything that happens, whether happy sad or comic, when you get down to the solid facts, it's basically economic. George Washington, the tree, did chop. And this is what he told his pop. I'm sure this move will solve our worries. It'll help support the price of cherries. Everything that happens, whether happy sad or comic, when you get down to the solid facts, it's basically economic.

Well, that about wraps up what I have to say for the day. Next time we get together, I'd like to ask this question, who prints our money today? Hope I'll see you all then. This is National Educational Television. Thank you very much.