Origin of Banks

The first banks emerged with the introduction of banknotes. The first form of banknotes, the so-called bills of exchange, were a solution for risky gold transports. These bills were issued in the name of the holder and could be exchanged at the bank for gold.

The bills were of course much easier to transport than large quantities of gold. The system with bills was based on trust. The holder trusted that the bank could fulfill its promise and indeed kept the right amount of gold available.

In practice, the physical withdrawal of gold became less and less common. As long as the bank's reputation remains intact, withdrawing gold becomes less and less necessary. It is just as feasible to have the previously mentioned bills change ownership.

What is fiduciary money?

At a certain point, the idea arose among bankers to lend out more banknotes than the amount of gold that would actually allow in the vaults.

Bankers assumed in this case that the amount of gold requested would only be a fraction of the gold that was actually present. The banknotes then function as fiduciary money. It is estimated that at least ten times the amount of gold is lent out compared to what is actually present, allowing banks to create value out of nothing.

Evolution of monetary systems

Central banks have increasingly taken on a greater role in the world economy in the past. After all, they steer the economy by determining the amount of money in circulation.

When little money is in circulation, the economy comes to a halt (stagnation), while with a large amount of money in circulation there is inflation or even hyperinflation. Goods, whose value is by definition expressed in money, simply become worth less, because more money is in circulation. Monetary systems continued to develop, which led to the economy being increasingly regulated.

Criticism of and the future of fiduciary money

Fiduciary money is money whose value is not based on an underlying substance like gold or silver, but solely on trust. The trust that this money can be used to trade goods and services.

The nominal value of money is therefore no longer based on a certain weight and content of gold or silver, but on the trust that exists in this money. In times of economic uncertainty, this trust declines, which among other things leads to inflation.

Nowadays, fiduciary money has become very common worldwide. Both in Europe and in America, a new round of “money printing” is regularly organized to keep the economy going. In reality, no banknotes are printed anymore, but everything nowadays goes digitally. Fiduciary money is increasingly digitized, among other things with the introduction of cryptocurrency. Fiduciary money is thus becoming less and less physical.

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Disclaimer: The Silver Mountain does not provide investment advice and this article should not be considered as such. Past performance is no guarantee of future results.