We all use a bank, or sometimes more than one. Banks allow us to write and mail checks, hold credit cards, borrow dollars, or save them, (if one could be so stupid), in relative safety. How did banks get started? Let’s examine it.
Originally of course, “money” was gold and silver, and it still is. There was no paper money, and gold and silver were used on a daily basis for trade, saving, and selling. Silver and gold in one’s pocket, became a drag, and especially if one carried a lot of money. Silver especially, was heavy, and gold, at 16 times the value of silver, could easily be lost. A one dollar gold coin, was extremely small. Wealthy persons had a lot of gold and silver, and were open to robbery by the unscrupulous and criminal element. They needed a safe place to store their surplus gold and silver. The bank was born, as a safe storage place. Banks were actually safe warehouses, where one could store the gold and silver money they weren’t using, and didn’t want to carry, or store in home or business. The warehouses or banks were fortified, and a safe place to store one’s gold and silver. When “depositing” the gold and silver for safe storage, a receipt was issued by the storage facility, which indicated how much gold and silver was being held for the owner, or depositor.
Trade was carried on by rich and poor alike. Gold and silver was freely passed from producer to consumer, to manufacturer, to transporter, to raw materials producer, etc. As the horizons of the world and America opened, it soon became obvious that there must be some method of transmitting one’s gold and silver wealth, or “money” great distances, to pay for whatever needed to be bought, and without danger of theft. Owners of stored gold and silver, began using their bank or warehouse receipts as actual money. The receipts from a reputable storage place of gold and silver, were taken for what they represented, and the holder of the receipt, could redeem them for actual gold and silver upon demand. The “check” was born. The receipt, was actually a “check,” with which the bearer could draw gold and silver from the storage facility, or “bank,” as they came to be known.
Many times, the holders of the gold and silver noted that their wealth wasn’t earning them any return or “interest” on their deposit. They gave the bank or storage facility, permission to loan their gold and silver to applicants who in the bank’s judgement were reliable, honest, had a good record of paying back, and a good reason for borrowing someone else’s wealth. The owners of the gold and silver, would then receive a “return,” or payment for the use or loan of their money. The owners of the wealth might get 3% “interest,” and the bank might charge a 5% interest rate for the loan. The 2% difference, would pay for the bank’s staff, paperwork, and a profit for the bank. Many times, the bank would store the gold and silver at no charge, if the owner allowed them to loan it out, and pay the owner a small stipend for its use. So far, so good.
If the bank made a bad loan, and the borrower defaulted, it was the bank’s responsibility to repay the owner for the lost gold and silver. It was the bank that made the loan, and a bad loan was their responsibility. Banks depended on their reputation to attract depositors. Why would anyone deposit their gold and silver in a storage facility or bank, which had a reputation for being unsafe, being robbed, or making bad loans? If the bank wanted to avoid risk, they would insure their activities, but the insurance policy might take a lot of their profit, just as did bad loans. A bank that was insured, had an additional selling point to attract depositors. Banks were built to appear as strong fortresses, with huge vaults in plain view. Their tellers were fronted by fancy wrought iron windows, and armed guards were stationed in public areas, to give an appearance of safety to customers, and to actually provide such as well. Banks were safe places to store one’s gold and silver, and at the same time to earn a return on one’s “money.”
Gold and silver were stable, as far as their value and price in dollars was concerned. The ratio between the two was a steady 16 to 1, with gold being $20.67 per ounce, and silver about $1.30 per ounce. The US silver coins reflected that 16 to 1 ratio.
Let’s now concentrate on the United States. When the government first issued paper money to foster trade and convenience, that paper currency was always backed 100% by gold and silver. The government began to issue silver coinage, to relieve the banks from some of their duties. Banks were glad to be rid of that responsibility, and began to store only gold for their customers. The government paper currency was so good and acceptable, that it could be exchanged for actual gold at any time the holder of the paper currency demanded it. Banks also issued their own dollar currencies, and their dollars had the bank’s name on it. The banks which issued the currencies in their own names, had flawless reputations, and always had gold in their vaults to back their issues.
The word “dollar,” comes from the German “thaler,” which was a 16th century silver coin.
When I speak of gold and silver being actual money, and banks being warehouses for such, this was long ago. This was the honest and reputable method of issuing money and facilitating trade over long or short distances. Issuance of gold and silver backed money, could be done by anyone. If the issuer’s reputation failed, their currency may lose favor, and the public would cease using it, just as the public ceases to buy foods, gas, or other consumer goods, if the manufacturer of such loses its reputation. We have seen thousands of consumer goods and brand names fail, and be consigned to the trash can, when their makers lost the trust of the consumer. Bank issued money, and government issued money, can have the same thing happen to it, and has many times.
When the government issued silver coins, they were totally safe from crooked dealings, shoddy storage methods, or dishonest banks and warehouses. The silver was imprimatured with the government seal, and was 90% pure silver, with an alloy added, to make it tough and durable. Silver, being a sixteenth as valuable as gold, was a natural candidate for coining. Silver’s use in dimes, quarters, and halves was in exactly the correct weight as fractions of dollars. Smaller coins, such as nickels and pennies, were made of inferior, or less valuable metals, such as nickel and copper. Gold coins were still issued by the government, but the most popular were the “eagles” and “double eagles.” The gold eagle was a $10 coin, and the double eagle was a $20 coin. The double eagle had .9675 of an ounce of gold in it. By multiplying .9675 by the price of gold at $20.67 per ounce, it comes out to exactly $20. Honest, huh? Money was very honest before FDR’s time.
The gold coins were made in various denominations. The one dollar coin had several variations, and the last one was made in 1889. They were just so small, that they were easily lost, and the public shunned them. The quarter eagle, or $2.50 gold coin was made for the last time in 1929, and there was a three dollar gold coin made briefly, from 1854 to 1889. This coin had a very small circulation, probably because it wasn’t divisible with the eagle. Four dollar gold coins were issued in the years 1879 and 1880, but were a failure. The half eagle or $5 gold coin was minted from 1795 to 1929. The eagle, or $10 gold coin was minted from 1795 to 1933, and was the longest period of one size coin. The double eagle didn’t come on the scene till 1849, and was issued until 1933, when FDR put a stop to all such authentic coins of gold, or real, honest value. There were dozens of different strikes of the same value gold and silver coins over the years, but all had the same amount of gold or silver in them. Totally honest governmental coinage. How far we have come down since FDR. More next week, but in the mean time, protect yourself.