Issue 91 Money: How it used to work June 4, 2013

The old system was backed by an actual value of gold and or silver. In other words, money was worth its weight in gold if not more so. But with the coming of national banks the system died. Here is how it used to work in the U.S.

State Banks: Originally each State in the U.S. had these chartered banks. They were private banks authorized by the individual States. These State banks were allowed to print their own money ("notes") and they had to guarantee the value by a gold/silver ("specie") reserve. Each of these banks would hold about 6 to 10 percent reserve to prevent a bank run if there was to be a panic and also allow them to trade there currency for its equivalent value in gold and silver (remember at this period in history, America's money was made form gold and silver). To ensure further survival and trust each of these banks decided how much they would exchange for the reserve each day (similar to the transaction limits banks have on our accounts each day).

How they new what had value: Each of the bank notes had value and the market dictated how much trust the people had in each bank. If the note was trading at more than 1% below value it was considered untrustworthy and people would not use that bank note. To ensure that people new the value of each note there was a single source of information "Dillistin's Bank Note Reporter." It reported the prices of all known money. Basically this system allowed banks and their notes to compete against each other. A bank note in this system was based on trust along with the banks ability to trade their notes back for its equivalent value in gold or silver.

How it died: When the national banks came to power, it taxed all other currencies by 10% creating unfair competition. Thus, it was cheaper to use the national currency and thus the other banks stopped printing their notes. Let it be known however, that this was not the end of the gold/silver standard. That occurred when countries began abusing the system by having loans paid back in another nation’s currency. Then the nation that was paid back would trade that currency for its equivalent value in gold and silver from the country they wanted to hurt. The result was the draining of a countries gold and silver reserves and impoverishing that government and hurting there ability to pay back their own loans.

Conclusion: The system was based on trust. Money competed against each other and this allowed choice in the market place. Some may be thinking that this system should never have worked, but money was easily exchanged between the banks in the same way you can trade in American dollars for Euro's if you are going overseas. I will not say that we should go back to this system. While it does have its own appeal I believe that the system in this modern era will have to be re-invented, in this case through online currency systems. Basically, we will have to wait and see what becomes of the money that we hoard in our accounts as governments allow it to become worthless with inflation.