Before money was born in the form
we know today – fiat money the markets used so-called hard money. It is a kind of money that was based on material goods most often some precious metal It cannot be forged, fake and therefore
there was no person or institution that people had to trust or whether it was
not issuing money for its private purposes. The beginning of the financial
institutions were deposit banks. The bankers who worked there had little
in common with today’s bankers profession. In those days, they were the owners of banks where gold or other or could be deposited. For the goods brought
the banker issued a bank note. Hence, the later word of the banknote. It was a confirmation of depositing
a certain amount of gold. In order not to withdraw the metal
from the bank at each payment the fee was paid by a banknote
with an appropriate denomination. There were many banks and each of them
could print their own bank notes, but only banks with good repute
were the most respected. Their banknotes were
widely used by the market. Everything worked very well, however, cunning bankers also appeared They came up with the idea of issuing more
banknotes than there is gold in their vaults. After some time people realized that there are
much more banknotes than precious metal this resulted in a so called bank run. Everyone wanted to exchange
all their banknotes for gold. It was not possible. banks that produced notes without coverage
closed and declared bankruptcy, Of course false bankers were punished not only by bankruptcy, but also by state fines. That’s why it didn’t make sense for
anyone to make false banknotes. The markets worked well until the states allowed the production
of more banknotes than bullion and they themselves took over
the monopoly in money production. The described idea in which every institution and bank can issue its currency is called: Free Banking and was enforced in 18th and 19th
centuries in over 60 countries. However, when countries realized how lucrative business it might be to have a monopoly on money creation, they forbade Free Banking. The currently valid system
Central Banking was established. So-called fiat money was created. It is a denial of everything
that existed in hard money. Until the mid 20th century, all episodes with private money were replaced
by money issued by the monopolist. This money is not covered in any goods or metal
and is based only on trust in the monopoly, which guarantees that it conducts
its monetary policy well. The world was again interested in private money
with the creation of the economic book: “The Denationalization of Money”
by the Nobel prize-winner Friedrich Hayek. He has again started a discussion about
the superiority of private money over the state. However, no government
wanted to take up this topic. It lasted until the 90s
when a group of cypherpunks appeared. In the next episode: How crypto currencies were created.