For as long as I can remember I’ve been curious about money. As a little boy I’d wonder over these magic pieces of paper and metallic disks. Why would someone take these pieces of paper for valuable goods and services but not those? Or mine!? I’ve looked into it and it’s a rich and fascinating history. Incredible stories like Tulipomania, the stone money of Yap Island, Wildcat banks and subprime.
I can’t say my early curiosity toward money led me to banking, I became a loan officer over 25 years ago quite by accident. In those days being a loan officer wasn’t about making a deal and collecting a fee, it was about counseling people on prudent borrowing and financial management, helping them be successful. It was about explaining money. I think the story of our Dollar is worth telling and that it needs to be told now more than ever; where it’s been, what it’s doing and where it might be headed. That is the purpose of this series.
Coin is the easiest monetary system to understand and it’s also one of mankind’s oldest. Lumps of metal stamped with symbols traded in the ancient markets of Lydia, Greece and Rome over 3,000 years ago. Because it’s made of metal, and the metal itself is worth something, coin has a fundamental intrinsic value.
FUN FACTS December 2010:
- Current issue United States Nickels are 75% copper and 25% nickel. $100.00 face value in nickels weighs 22 pounds and is worth $130.00 at the current spot price for copper and nickel.
- United States Pennies minted prior to 1982 are 95% copper (pennies minted after 1982 are copper coated zinc disks). $100.00 face value in pre 1982 pennies is 68 pounds of copper and is currently worth $300.00 in copper.
- 1964 and earlier United States dimes, quarters and half dollars are 90% silver. $100.00 face value in pre 1964 dimes, quarters and half dollars is 72 ounces of silver and is today worth about $2,000.00 in silver.
The downside to coin is it’s heavy and bulky. Image buying a new computer at Best Buy with nickels, you’d need a hand truck to move them and it would take two people all day to count them. A present day example of coin working as a store of value but poorly in commerce.
Paper money began as a receipt for coin. The earliest bankers, the “Goldsmiths”, would establish a vault and for a small fee people would deposit their coin with the goldsmith for safekeeping. Naturally the goldsmith issued a receipt for the coin deposited and eventually these deposit receipts came to circulate in the market as money in place of the less convenient coin.
As you can well imagine, the temptation for the goldsmith to cheat is enormous. Since only a small percentage of the receipts are redeemed at any given time, what’s the harm in issuing more script than actual coin on deposit? The money created by the issuance of the additional script they would then lend at interest, repayable in coin or script. This is known as “fractional reserve” banking.
In fractional reserve banking there’s only a “fraction” of the coin backing up the script. Initially it seems like a good idea, the wealth effect of the increasing money supply makes everybody feel a little richer, but in the long run history has shown things just cost more as the money is diluted. Eventually the money becomes so diluted the goldsmith is forced to suspended coin redemption.
FUN FACT: The United States Treasury issued Silver Certificates from 1878 to 1964. In 1968 The treasury suspended redemption of silver certificates for silver.