Up to this point, I’ve explained a lot of foundational principles. The importance of those will become clear quickly as we watch Avaria’s monetary system evolve into a more modern system.
Let’s say a gold prospector visits the region and finds a new gold deposit in the mountain right next to Avaria. He establishes a mining operation there and moves to Avaria himself. He wants to safely store all this gold he’s mining so it doesn’t get stolen before he can sell it, so he has the blacksmith build him a huge safe.
Meanwhile, tragedy strikes. The farmer, who was storing his extra gold coins under the floorboard in his room, had a break-in when he was out working in his fields. The burglar found his emergency stash of gold coins and took them. That wealth that was stolen represents several weeks’ worth of labor!
Suddenly everyone in town is a little more hesitant about storing their hard-earned wealth in their house. And most Avarians have gold coins stored in their houses because they have been industrious enough to have accumulated some extra wealth.
And that’s when they strike upon a genius idea. They remember that the prospector has a large and secure safe in his house, so they make a proposal: “How about you store our extra gold coins in your safe for us? We know you have plenty of excess capacity in there, so it should be easy for you to do. In return, we’ll pay you a small storage fee each month.”
This is a no-brainer for the prospector, et voila! Avaria has a bank, and the prospector has become a banker. And since he loves spices so much, he names it Peppercorn Bank.
Each time a person brings some gold coins to store, he carefully counts them out and makes two copies of a piece of paper. He gives one to the depositor and keeps the other in the safe with the person’s pile of coins. The papers say how many total gold coins that person stored in Peppercorn Bank. And each time they visit him to put more money in the bank (or take some out), they just need to bring the most recent paper so he can update it. In this way, both the customer and the banker know exactly how many gold coins are supposed to be in that customer’s pile, and they could ask to go in and see them any time.
What a relief. The townspeople have a solution to their worries about break-ins because, even if the burglar strikes again and steals someone’s deposit paper, it’s worthless–the burglar can’t show up to Peppercorn Bank and expect the banker to give him that person’s gold coins!
Then one day, the banker has an idea. It would be much faster for him to simply work with the town printer and make a bunch of little pieces of paper that each state, “The bearer of this paper is entitled to 1 gold coin at Peppercorn Bank.” And it would also be convenient for the townspeople because then they wouldn’t have to carry around bags of gold every time they wanted to buy something. They could instead use these pieces of paper for their transactions. The downside of switching over to this system is that those pieces of paper are steal-able, but at least a little stack of papers would be easier to hide in a house than a chest of coins, and the added convenience probably outweighs that downside.
The banker also thinks that if a lot of people start using those papers for transactions, more people will want to do the same because of how convenient they are, so more people will end up converting their gold coins to paper by storing their money in Peppercorn Bank too, which will allow the banker to earn even more money off of storage fees!
What should he call these pieces of paper? Initially, he decides to call them gold coin receipts, but that’s too long and awkward to say, so eventually he shortens it to Goldnotes.
After printing all the Goldnotes he needs, the banker visits every depositor, shares with them his new Goldnotes idea, and trades them for their deposit papers, making sure to give each depositor the appropriate number of Goldnotes to represent the number of gold coins they have already saved in his bank.
And from that point on, he always gives Goldnotes in exchange for gold coins stored in his bank. He cautions everyone not to lose any Goldnotes because there will be no way to prove that the Goldnote was stolen. But he does say that if a Goldnote is getting old and worn, they can bring it to him and he’ll exchange it for a nice fresh one.
Pretty soon, the townspeople are making exchanges both with gold coins and Goldnotes, but more and more they are transacting with Goldnotes due to the additional convenience of them being so much lighter and less bulky. But, any time they want some gold coins for any reason, they simply present the Goldnotes to the banker and he exchanges them for gold coins.
Well, there you have it. We have finally made the transition to a new kind of money! We started with bartering, which then evolved to commodity money–landing on precious metals as the most convenient kind of commodity money–and now we have receipt money.
Is it ok that these Goldnotes are, themselves, nearly worthless?
Yes, because 100% of these Goldnotes are always able to be traded for gold coins immediately, so you can consider them to be fully interchangeable with gold coins, only they are more convenient.
Here’s the principle: Receipt money is equivalent to commodity money as long as 100% of the receipt money is backed by the commodity and the receipt money is always immediately exchangeable for the commodity itself.
In Part 9, I’ll explain a few additional principles related to all of this. And then, the post after that, I’ll talk about what the banker decides to do when he sees all that gold just “sitting there doing nothing” in his vault. (Dun dun duuuuun.)
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