History Of The Central Bank

Here's a little piece I've made for you.

HISTORY OF THE CENTRAL BANK

Banking has always been a business shrouded in secrecy. This has made people believe that banking is a complex and sophisticated piece of business engineering. After all, the bankers are usually the richest guys in town, and the money never seem to stop flowing. Surely there must be a lot of hard work and brainpower behind all of this? I might as well give up trying to figure it out and go back to my farming, right?

Actually it's not very complex at all. It's very simple really. You see, that is why they don't want you to know. Because if you did, they'd all be out of business tomorrow.

To know the history of banking, we must know the history of trade. Early man did little else than gather food for himself and his family. It was all he knew. He soon found out however that he sometimes produced more than he needed. This was great, for now he could trade his surplus for something he didn't have. This was tiresome though. What if you produced milk and nobody needed milk at that moment? It wasn't too practical to carry around several pounds of milk when you wanted to trade something either. Besides, milk goes sour pretty quick.

There was a solution. Why not trade it for something with a higher demand and easier transportation, like gold? That sounds like a good idea, I'll do that. Soon however there was another problem. While a lot better than milk, gold is still pretty heavy, especially if you got a lot of it. Besides, what if you got robbed? I should store the most of it in a safe location and only carry what I need around. This could be a hole in the ground, a cave or under your pillow. Great, this is beginning to sound like something!

There was an even easier solution however. Why not pay someone to keep it for you, somebody you trust? Then it would be his responsibility to make sure nobody stole it. After all, I got work to do. Can't afford to spend all this energy protecting my goods. Actually, there happens to be a guy down the street with a big metal box, a vault, he should be able to keep it safe for a small fee. I'll try him.

That is how banking was born. The banker would store peoples gold for a small fee, give them a receipt and whenever people needed something they'd just draw back some of their deposits. As more and more people deposited gold, the banker soon became wealthy. He figured, why not offer loans, charge another small fee for the trouble, interest, and make even more money? As time went on and the confidence in the bank grew, people would simply exchange their receipts in transactions instead of having to visit the bank every time they made a trade. The concept of money was born.

The bankers now grew very wealthy. They put up big buildings, wore high hats and smoked cigars. But as they say, enough is never enough. Over time the bankers discovered that few ever came back to pick up their deposits, and they never came at the same time. He figured, around 10% would ever claim their gold back in a specific time period. So soon he started loaning out more receipts than there was gold in the vault. 10 times as much even. Now the bankers became extremely wealthy, super rich even. They became so rich, they decided to not charge you a fee when you deposited gold. They would actually pay you money to store your gold. This sounded too good to be true!

Not for long a lot of people started to wonder: "Where does all the money come from? He must be stealing from us!" So they would all storm to the bank and claim their gold back. The banker of course didn't have all the gold, only 10%. He would then go broke and often worse, even killed. It's dangerous to mess with the mob, indeed.

But despite it's drawbacks and risks this system was just too good to be abandoned. There had to be a solution. This is where the central bank came in. For this we need to sidetrack a little:

The bankers weren't the only ones experiencing trouble. The kings and rulers also had a hard time. They would often go to war. Sometimes for necessity, sometimes for money, power or honor. Wars cost money though, a lot of money. The king would usually fund his war through taxation. He couldn't tax his subjects too much though, or else they would revolt and the king would lose his head. He would then often turn to the banker, take up a loan. After all, if he won the war he could pay them back easily. But what if he lost the war? Then he wouldn't be able to pay the bankers back. The bankers might then decide to fund his enemy instead, and with no money to pay his army he would loose his head then too. It isn't easy to be king.

But as we've seen before, there isn't a problem without a solution. What if the King and the bankers pooled together? What if they created a central bank?

What is this concept one might say? Well, basically it functions as the stabilizer for the fragile banking system. As we have seen people would sometimes lose confidence in the bank, and as soon as that happened everything fell apart. With a central bank however, the small banks could always go to them and get a quick short time loan if the shit hit the fan and people started demanding their gold back. When confidence was regained they would simply pay it back, and in the end everything would be jolly jolly. The central bank however didn't have a whole lot of money either, cause it operated on the exact same system as the smaller banks. So what's stopping people from storming the central bank? Well, this is where the king comes in. You see, once he became involved people couldn't simply go and kill the banker anymore. Now there would be consequences. The king might send his soldiers to kill you and your family. So people would trust the central banks, and the system finally got the balance it had been looking for.

The King then, what does he got out of this? Well, now he gets the access to all the money he needs to pay for his wars, castles and expensive wine. He would simply make a loan with the central bank, and put up the taxation of his subjects as collateral. So were does all the money come from? Well, actually they don't come from anywhere. After all, the bankers aren't handing out real money, they're just handing out receipts! What a fantastic arrangement, what a scheme! The only real money in this system is the blood and sweat of the populace that pay tax. In other words, the bankers give out debt, the king spend it and the citizens work to produce something they can pay back with.

So why don't the people revolt this time around? After all, they're clearly ripping you off! Well, that's the thing, people simply don't know because of all the secrecy. It's the old 'boil a frog' principle; as long as you don't get cooked too much too soon you'll go along, until you die.

So remember what I said; "It's a secret, because if you knew...if you really knew..."