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Inside Notes: Like Rats on a Wheel

By Curtis Parrott

In the old days money was dealt with different than it is today. Trading was the main facility of prehistoric people, who bartered goods and services from each other before the innovation of modern-day currency. Trade provided mankind’s most significant meeting place, the market place. As history went forward trade routes were established all over the world to provide goods.

Georgia Director, Curtis Parrott
Georgia Director, Curtis Parrott.

There are many theories about the origin of money, in part because money has many functions. It facilitates exchange as a measure of value; it brings diverse societies together by enabling gift-giving and reciprocity; it perpetuates social hierarchies; and finally, it is a medium of state power.

The Mesopotamian shekel, the first known form of currency, emerged nearly 5,000 years ago. The earliest known mints date to 650 and 600 B.C. in Asia Minor where the elites of Lydia and Ionia used stamped silver and gold coins to pay armies. It was pretty simple, goods had a price and it was easier pay a debt. Coins were also easier to carry. The simple system of money for goods continue to spread.

The Knights Templar are said to have developed the first real banking system. In 1150, the knights were responsible, not only for safeguarding pilgrims but their valuables as well. This forced them to establish what can be described as an early deposit and withdrawal system. A pilgrim could deposit money or valuables within a Templar stronghold and receive an official letter describing what they had. That pilgrim could then withdraw money along the route to take care of their needs, equal to what they had in safekeeping.

Governments all over the world understood that money meant power and control over its people and banking took many different directions as time passed. In the U.S. we had so many forms of banking changes that you couldn’t keep up with it.

Now it’s come to fractional reserve banking – a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. This is done to expand the economy by freeing up capital which can be loaned out to other parties. Many U.S. banks were forced to shut down during the Great Depression because too many people attempted to withdraw assets at the same time. The problem with the fact that reserves are a fraction of total liabilities is that problems can arise when a large number of depositors suddenly ask for their money back and banks are unable to get their hands on enough cash to meet that demand.

The ratio of cash to total assets was 100% before the development of fractional banking. In the 1950s banks were holding around one-third of their overall assets in liquid instruments (including cash and government bonds). The liquidity ratio was cut to 12.5% in 1971, then virtually abolished a decade later. By the time of the credit crunch in 2007, banks in the United States were holding less than 1% of their assets in cash – just like the problem we had before the Great Depression. All these changes were going to fix that situation. Seems like we are just going in a circle once again.

Keep the Faith!

 

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