In medieval times people deposited their gold and silver with goldsmiths for ‘safe keeping’. In exchange people were given a certificate that represented the value of the gold or silver they deposited.
Instead of going to the goldsmith, withdrawing their gold and taking it to the farmer to buy food, people would simply exchange their certificates for goods and services. Merchants also deposited their gold with the goldsmiths. It was much safer and more convenient than carrying all their gold around everywhere they went.
Goldsmiths noticed that people seldom withdrew their gold. So when people in need came to them for gold, they simply loaned them the value of the gold they needed in the form of a certificate. When the needy wanted to purchase something, they’d give the salesmen the certificates they’d gotten from the goldsmith. Then the bank- I mean safe keeper charged interest in exchange for allowing the needy to borrow the paper certificates that represent the gold.
As fewer and fewer folks came to collect their gold, goldsmiths figured they could issue at least 10 times more certificates than the true amount of gold that was actually in their possession. The interest they charged meant eventually, the bank would end up with more gold than they ever had in the first place! This is known as fractional reserve banking.
Today those paper certificates are called money. Goldsmiths and safe keepers are known as banks, brokerages and accounting firms. Despite the end of the gold standard in the 1970s, people still believe in the value of these paper certificates.
Even though the bank issued loans for far more gold than they ever had in their possession and even though there is no longer a gold standard we still believe in the value of money. Our confidence in the represented value of these pieces of paper is what we now know as the economy.
So what is money? Ultimately, it is based on belief. It’s a confidence game. Banks, goldsmiths and safe keepers created money out of nothing. Their scheme only works as long as your confidence or belief in its value is still in tact.
The age of technology has taken this game to a whole new level. Financial transactions via virtual credits in a globalized economy represent credits that never existed to begin with. The bitcoin technology is the newest financial game changer. C’mon, you don’t think your bank physically sends someone to your landlords bank with the money they withdrew from your account do you? They type a number of virtual credits into the computer which represents $X,XXX.00 “value”. Your bank gave your landlord’s bank something it never had in the first place and BAM! Your rent is paid. Value is equal to your belief in it.
Money is a belief. Economy is a confidence game and because your value is whatever you believe it is and wealth is YOUR energy.
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