Earlier in Module 2 we reviewed Modern Money Mechanics, published by the Federal Reserve Bank of Chicago. Let’s re-look at the same piece. Certain words are bold-faced. Based on your study to this point what associations do you make with the bold-faced words?
You will as you progress through your study be able to disassemble the Strong Room Keeper’s rhetoric.
It started with goldsmiths. As early bankers, they initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them.
People would redeem their "deposit receipts" whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker.
Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment.
These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money.
Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money.
More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment.
Transaction deposits are the modern counterpart of bank notes.
It was a small step from printing notes to making book entries creating deposits of borrowers, which the borrowers in turn could "spend" by writing checks, thereby ‘printing" their own money.
Goldsmith
People
Needed
A lot easier
Whoever held them
Giving
Promises to pay, or bank notes, to borrowers
In this way
Of course
Transaction deposits
Modern Counterpart