Finance Wanted.

By Luke Hawthorne

A lot of people think that the cost of living just naturally goes up; they rarely wonder WHY things cost more than they did ten years earlier. The few people who do put some thought into it think that the cost of buying things increased because manufacturing companies want more profit. Others think that the manufacturers HAVE to increase their prices because the cost of THEIR raw materials has increased, but this would beg the question, why did the cost of the raw materials increase?

We'll answer those questions, but for now let's see how a typical trade might go. In this example we'll have two tradesmen, a carpenter and a blacksmith (we're still in the era when people traded with gold and silver remember).

The blacksmith wants a bench which the carpenter can make, so the two come to an agreement on the price which is, say, two ounces of silver. Now, if the blacksmith already has the silver, he can simply exchange the ounce of silver for the bench, or perhaps pay one ounce as a down-payment and then would pay the other ounce upon receiving his finished bench. Both are happy with this arrangement.

Now, if the blacksmith doesn't yet have the money, but he knows that an upcoming job shoeing some horses is going to bring him enough silver, he can offer the carpenter an IOU; a PROMISE that he will pay the carpenter as soon as he has the "money".

In the first instance, they were trading via commodity, the first kind of "money". In the second, they were using promissory "money" (and IOU). The third way they could trade is if they used fiat-money, that is a token (a small medallion perhaps) that a king (emperor/government/dictator) determined has a certain value.

Enter the COIN! Coins have been used by rulers as currency for thousands of years. These are in effect, pieces of metal (metal being very durable and long-lasting) that have a specific value.

Originally, coins were minted (where the word 'money' comes from) by PRIVATE companies. People would take their gold or silver to these trusted companies and these companies would divide the metal into fixed amounts (say 1/20th ounce each) and then stamp them with their OWN seal, guaranteeing that the metal was exactly that weight. They would, of course, charge for this service, otherwise they'd go out of business very quickly!

The word 'dollar' is a corruption of the European word 'thaler', which was a coin minted in the early 16th century in a town called Joachimsthal. The coin was called a Joachimsthaler, which was later shortened to simply a 'thaler' (the letter 'a' being pronounced 'ah'). The original dollar was actually 1/20th of an ounce of gold.

As some people became wealthy( because of the products and services they produced for others), they had a problem. They didn't want to keep their coins at home where they might be burgled, nor did they want to risk being robbed by carrying it with them each day. So other types of service companies appeared which were simply, secure warehouses.

These privately-owned warehouses would charge an agreed fee to securely look-after people's gold and silver, and would give the people a slip of paper showing how much weight of metal was being kept in the warehouse(in England it would be weighed in 'Pounds' of silver). When the owner of the metal wanted some to use, he would simply take his slip of paper to the warehouse where his metal resided, and exchange it for the paper. If he had some left in the warehouse, he would be given a new slip of paper telling him how much he had remaining.

To make things even simpler for the owner of the metal, he would sometimes offer the slip of paper ITSELF as money, rather than going to the bother of traveling to the warehouse and taking his gold out. As long as both the metal owner and the person he was buying from trusted the warehouse (had confidence that the owners would give the bearer of the slip the amount of gold that it referred to) then this system would always work and no metal had to be carried around.

These warehouses were, of course, the first banks. But the banks soon realized that the rulers of their country (dictator/government/emperor/king etc.) didn't like what they were doing. Why? Because the ruler didn't have any CONTROL over the money! If they couldn't control the money, how could they possibly control the people? (Whoever can afford an army controls the population).

So, in every country over the years, the rulers of those countries HAD to stop these private banks from trading. How did they do this? Continued in Part III.

Luke Hawthorne has been writing for over 12 years. His interests include flying airplanes, scuba-diving, skiing, paragliding and making money. (http://www.lukehawthorne.com )