Month: May 2024

Introduction: 2008 Crisis

The subprime mortgage housing market was the reason for the 2008 Financial Crisis.

During this time, millions of hardworking, tax-paying Americans bore witness to horror as their retirements, investment portfolios, and 401(k) plans plummeted in value.

What to Look Forward to: The 2008 Financial Crisis

We are going to examine the 2008 financial crisis because its outcomes had a profound impact on many countries worldwide.

As I discussed in my article titled “Our Financial History,” our financial systems are deeply interconnected.

I will also be discussing why the United States elites decided to use central bank interventions to bail out major banks from facing bankruptcy by injecting

liquidity into the market—and why the masses were against the actions taken by the government to bail out Wall Street.

We will also cover the viewpoints of the main individuals who were involved in bailing out the banks

and why they believed it was the right thing to do. Lastly, we will cover the few people who managed to make millions, if not billions, during this crisis.

Central Bank Intervention: 2008 Crisis

The question that most people ask is, ‘Can the central bank go bankrupt?’ And the simple answer to that is NO!

Central banks, unlike commercial or investment banks, cannot go bankrupt. Walk with me for a second.

In my previous article titled ‘Banking Through the Ages… Pt 1,’

I mentioned that back in the 17th century (Europe), goldsmiths used to act as banks.

Whenever citizens felt like their goldsmith was not honouring their agreement or their corporation was dealing with insolvency,

it would cause other clients from different goldsmith’s corporations (that were not dealing with

insolvency) to panic and believe their goldsmith’s corporation might be next to fall, eventually triggering a bank run.

The invention of central banks was to prevent such activities from happening.

A central bank is a private institution responsible for stabilizing its financial system by issuing currency and managing a country’s monetary policy.”

Why Central Banks are not Government Institutions?

The reason central banks are not government institutions is simply because if politicians had the authority to print money as they pleased,

they would always print money to fulfill their campaign promises, ensuring they stay in power for a longer term and gain admiration from the public.

What this would do is cause an increase in the money supply in a country, which will affect the citizens’ purchasing power and the growth of a nation.

Central Bank Intervention in the 2008 Financial Crisis

Keep in mind that it took the United States government roughly 200 years to reach a trillion dollars in circulation within its economy.

In 2008, the U.S. government initiated the Troubled Asset Relief Program (TARP), authorizing $700 billion to stabilize the financial system during the crisis that year—crazy, right?

The government and the Federal Reserve took these measures to prevent a financial system collapse,

which could have led to a depression similar to the one that began in 1929 and lasted until the early 1940s.

This form of central bank intervention is known as Quantitative Easing (QE), where the Fed buys longer-term

securities to increase the money supply and encourage lending and investment.

How the Citizens Reacted to QE?

Quantitative easing (QE) was very unpopular in the eyes of some American citizens.

Many were angry at the government for bailing out the “too big to fail” institutions.

They argued that the government should have let these institutions collapse and file for bankruptcy

instead of buying $700 billion worth of troubled mortgage-backed securities with tax payer money to save the big banks.

These institutions, such as Lehman Brothers, JPMorgan, Bear Stearns, Citigroup, Merrill Lynch, Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo, and AIG,

were responsible for taking on a lot of risky speculations with their depositors’ money because they legally owned it.

This reckless behaviour led some of them to file for bankruptcy. This was one among many other reasons that led to the fall of President George W. Bush.

The Elites Involved in Injecting Liquidity to Stabilize the 2008 Financial Crisis

The three important individuals who played a significant role in stabilizing the markets were Hank Paulson (U.S. Treasury Secretary, 2006-2009),

Timothy Geithner (President of the NY Federal Reserve, 2003-2009), and Ben Bernanke (Chairman of the U.S. Federal Reserve, 2006-2014).

They worked alongside former U.S. President Bush by offering him guidance and support in navigating this crisis.

Former U.S. Treasury Secretary Paulson argued in one of his interviews that what they did was not for Wall Street but for the American people.

He continued by stating that he and the government should have done a better job explaining to people that the financial system is so interconnected

that if you want to stop the bleeding, you go for the source, and the source he was referring to is Wall Street.

Wall Street is a street located in New York City. The term ‘Wall Street’ is often used to refer to the institutions located in the lower district of Manhattan,

where hedge funds, investment banks, and stock exchanges are situated. It’s important

to keep in mind that these institutions play a very important role in ensuring stability in global finance.

What Caused the 2008 Financial Crisis

2008, for me, was just another year full of fun, playing with my peers every day at school, and spending a lot of quality time with my family.

 Little did I know that the financial system was on the brink of collapsing. Even though the aftermath of it affected my nation’s economy too (South Africa),

I was too young to understand any of it.

I also understand that for some of us, this could be the first time hearing about this, which is absolutely fine.

 My goal is simple: to take this complex subject and simplify it as much as I can so that everybody can be on the same page.

Community Reinvestment Act of 1977

Let’s take a trip back to America in 1995. During this time, the U.S. government saw the need to fight discrimination against lower-income home buyers.

Their goal was basically to give low-income community members an opportunity to credit and banking services which were not available to them before with this law was passed.

The government saw fit to implement these reforms (CRA) of 1977 during 1995. Therefore, the banks could now offer reduced payment over a duration of time from their clients.

The Glass-Steagall Act of 1933

On November 12, 1999, the Gramm-Leach-Bliley Act (GLBA) was passed by President Bill Clinton.

This act was implemented to repeal key provisions of the Glass-Steagall Act of 1933. What is the Glass-Steagall Act, you might ask?

Well, it is also called the Banking Act of 1933. The Banking Act of 1933 was a law passed as a means to fight and prevent the actions that led to the Great Depression.

This piece of legislation separated commercial banking from investment banking.

 The Glass-Steagall Act of 1933 restricted commercial banks (banks that issue loans and take deposits) from participating in the securities market and from dealing with stocks and bonds.

The reason it was passed was simply in response to the financial crisis that led to the Great Depression.

 Fast forward to 1999, the GLBA legislation passed by President Bill Clinton allowed commercial banks, insurance institutions,

and investment banks to yet again offer a bundle of financial services that had been prohibited under Glass-Steagall after 66 years.

What happened next was that some banks who used to manage their portfolios responsibly all turned to riskier investments and speculation competing against each other,

all in the efforts of generating the most return on investments and also adapting to changes within the housing market.

 In other words, banks were more concerned about making Wall Street profits than about their clients who entrusted them with their savings and investments.

The Dot-Com Bubble

During 1995, people were blown away by the internet. Many individuals were investing in the booming Dot-com bubble (Internet bubble),

and numerous institutions were also putting money into any company that had a “dot-com” at the end because they were making a lot of money doing that.

 In March 2000, we witnessed the burst of the market. Investors lost confidence in these dot-com companies that were publicly traded.

We saw an enormous decline in the value of many technology stocks during this time.

 What followed later were the 9/11 attacks, along with many other economic challenges.

It looked like America was heading toward a recession, but just before that, the central bank stepped in to save the day.

Central banks stabilized the markets by lowering interest rates down to 1%.

The outcome was that a lot more people were able to borrow money and were not paying high interest rates on their loans.

The economy recovered quickly, and life was good again.

Subprime Loans: 2008 Financial Crisis

Subprime loans are essentially a collection of loans given to individuals with bad credit scores,

insufficient credit history, and a higher chance of defaulting (high risk).

The institutions offering these subprime loans were banks, credit unions, finance companies, and mortgage companies.

As more and more people rushed to take out loans over time, these institutions began to decrease the lending requirements needed to secure loans.

Eventually, they stopped verifying whether people actually had jobs or incomes to pay off these loans.

This caused a boom in the housing market, and many people were buying houses they previously couldn’t afford.

People didn’t worry because they believed that if they couldn’t afford their mortgage payments anymore,

they could simply sell the property, as home prices were skyrocketing.

Collateralized Debt Obligations (CDOs)

As time went on, Wall Street saw an opportunity that they could capitalize on.

 Since subprime mortgage lenders were taking all the risk of lending to subprime clients, they needed to find a way to mitigate their risk.

There was also demand for high-yielding investments (that were safe) at that time from institutional investors.

What followed was the creation of mortgage-backed securities.

 Mortgage-backed securities were a pool of subprime loans mixed with prime loans (individuals who had good credit history).

This bubble of mortgages was issued out as shares to investors.

 The goal of these shares was to provide a fixed safe income for the investors who purchased them.

That is when Wall Street decided to use a financial tool that was created in the late 80s (CDOs).

A CDO is a bundle of cash-flow-generating assets like commercial mortgages, car loans, student loans, etc., bundled together and sold to investors.

 Banks would make over 10 billion dollars monthly selling these shares to investors at a higher interest.

Think of these grouped cash-flow-generating assets as a box (CDO); every box sold has different levels of risk.

Jonathan Jarvis once explained on ColdFusion TV that a CDO operates like three cascading trays.

 As money flows in, it fills the top tray first, then spills over into the middle tray, and whatever remains fills the bottom tray.

This money originates from homeowners paying off their mortgages. If some homeowners default on their mortgages, less money flows in,

leaving the bottom tray potentially unfilled, which makes it riskier.

 Conversely, the top tray is safer. To balance this risk, the bottom tray offers a higher rate of return, while the top tray provides a lower but still attractive return.

This structure was designed to appeal to a range of investors, from those willing to take high risks to those preferring lower risks.

 While CDOs seemed promising in theory, the issue was that subprime loans were mixed with prime loans, increasing the overall risk.

Subprime borrowers were more likely to default, making the CDOs riskier investments.

End of Part 1: 2008 Financial Crisis

In part 1 of the “2008 Financial Crisis,” we briefly mentioned central bank interventions, specifically how the central bank lowered interest rates to 1%.

We also mentioned how President Bill Clinton passed a bill in 1999 that allowed banking institutions to partake in risky investments, among other things.

In part 2 of the “2008 Financial Crisis,” I will explain how all these factors I mentioned contributed to the market crash in 2008.

Banking Through the Ages

Banking Through the Ages: A Journey of Power and Influence part 2
A few years back, as I was growing up,

I always used to wonder how banks made a lot of money while waiting in line to withdraw money from an ATM.

The most common answer I received from people was that banks had these large vaults of depositors’ physical money stashed,

and that this money is used to lend out to other clients from the same bank, and the banks make money on the interest on the loan.

To a degree, this is true. Now, allow me to give a detailed breakdown of the formation of modern banks and later speak about the financial crisis they caused during 2007-2008.

In the last article, we spoke about the origins of banks. If you have not read part 1 of “Banking Through the Ages”,

I urge you to begin there before reading this article. Thank you.

The First Form of money: Age of Modern Banking

The first form of money is created by the government. There is about 3% of this form of money (notes and coins) created through the central bank.

So basically, this physical money (3%) is sold to banks. For example, it roughly costs the central bank about 3 cents to print a $10 currency note.

The central bank then sells this $10 note to a bank at face value.

Banks can either buy this $10 or repay it back at a later stage. Banks then can finally use this physical money to meet their obligations,

like making sure they have enough money to meet the daily withdrawals of individuals belonging to that bank.

So now we understand where the money we withdraw on a day-to-day basis comes from.

Now the question is if it costs the central bank 3 cents to create a $10 note, what does it do with the $9.97 profit?

Well, the central bank uses this profit to add to the tax revenue of the government.

This is known as seigniorage. Seigniorage helps reduce taxes that we, as people, pay and also helps reduce government debt.

Private Banks (Fiat Currency)

Fiat currency is money that is backed by nothing, it does not have intrinsic value.

1971 former president Nixon put an end to the Bretton wood system and all currencies became fiat.

When we look back in the 17century remember goldsmiths issued out receipts in exchange for gold coins

and these receipts were as good as gold because people believed it had value, so they continued to trade with it.

The same thing with us today. Fiat currency’s value is largely based on the public’s faith in the currency’s issuer(government).

In most developed countries, 97% of money is created digitally by the private banking sector,

even the 16th Chair of the federal reserve of the United States Jerome Powell mentioned in an interview that the fed prints the money digitally.

The reason for this is that banks have been exposed to bank runs many years ago.

A bank run is an occurrence whereby a lot of depositors simultaneously withdraw their deposits from a bank in fear of the bank being insolvent (not able to repay its depositors).

Remember in my previous article “Banking Through the Ages” part 1, I mentioned, back in the 17thcentury goldsmiths would give out receipts (notes) to borrowers.

The receipt details that the borrower promises to pay back the principle plus interest.

Goldsmiths would write out more receipts than they had gold reserve to back it up and this would often end in situations

whereby depositors would all want to withdraw their money e.g.

they heard a rumour that the goldsmith was using their gold deposits to finance their lavish lifestyle.

This situation would often leave goldsmith bankrupted crashing the whole system.

In the modern days we have digitized this agreement. Today this agreement is called debt

For many years’ banks have been trying to pursue policymakers to allow them to create money digitally.

Banks highlighted the potential growth this might have for the future until they eventually pursued policymakers to create digital money.

Private Banking :Banking Through the Ages

Obtaining a banking license means a financial company adheres to strict government regulations. Only licensed institutions can be designated as banks.

To earn this license, a company must meet a comprehensive list of requirements, such as maintaining financial reserves and safeguarding data systems.

Therefore, when an institution is granted a banking license, it is authorized to issue loans and accept deposits. Let’s start by examining deposits.

What significance does our deposit hold for a bank?

Many people aren’t aware that once you deposit money into a bank, you’re no longer the legal owner of that money; it becomes the bank’s money.

“What do you mean I’m no longer the legal owner of my money?” you might ask. Well, allow me to explain.

Whenever you deposit money into a bank, that amount appears on the bank’s financial statement in the liability column, meaning the bank owes you that money.

In other words, the bank owes you money that you can legally claim back anytime.

However, banks can legally loan out 90% of your money and keep 10% in reserves.

For example, if Mr. Walker goes to ABC Bank and deposits $100, ABC Bank then takes $10 (10%)

and puts it in their reserves and loans out his $90 (90%) with interest to their other client, Jake.

Jake then takes the $90 and pays off his mechanic for fixing his car.
Then Jake’s mechanic goes to ABC Bank and deposits the $90,

and the cycle would restart again.

This is known as fractional reserve banking. Basically, there was $190 in money circulation, and the bank had only $19 in their reserve.

Today, we see this scenario in large volumes because the world is run by debt. The economy is driven by the backbone of debt.

Now allow me to break down the process step-by-step to ensure clarity:

Initial Steps:

1. Mr. Walker’s Deposit:

• Mr. Walker deposits $100 in ABC Bank.
• ABC Bank keeps $10 (10%) in reserve.
• ABC Bank loans out $90 (90%).

1. Jake’s Transaction:

• Jake receives a $90 loan from ABC Bank.
• Jake pays $90 to his mechanic.
• Mechanic deposits $90 in ABC Bank.
• ABC Bank keeps $9 (10%) in reserve.
• ABC Bank loans out $81 (90%).

Total Money and Reserves:

1. After Mr. Walker’s Deposit:

• Total Money Deposited: $100
• Money Loaned Out: $90
• Reserves Held: $10

1. After Mechanic’s Deposit:

• Total Money Deposited: $100 (Mr. Walker) + $90 (Mechanic) = $190
• Money Loaned Out: $90 (Jake) + $81 (loaned out from Mechanic’s deposit) = $171
• Reserves Held: $10 (from Mr. Walker) + $9 (from Mechanic) = $19

Breakdown of Circulation:

• Initial Deposit (Mr. Walker): $100
• Reserves: $10
• Loaned Out: $90
• First Cycle (Jake’s Payment): $90
• Mechanic’s Deposit: $90
• Reserves: $9
• Loaned Out: $81

Verification of Money in Circulation:

• Initial Money in Circulation:
• Mr. Walker’s $100 deposit is part of the money supply.
• Jake has $90 in circulation after receiving the loan.
• Mechanic’s Deposit and New Loan:
• Mechanic has deposited $90, which is now part of the bank’s deposits.
• ABC Bank loans out $81 from the mechanic’s deposit.

Summary:

• The total money in circulation increases as loans are made and deposited back into the bank.
• After the initial deposit and first cycle:
• Money Supply: $100 (initial deposit) + $90 (loan to Jake) = $190
• Reserves Held by Bank: $19 (total reserves from initial and mechanic deposits)

Conclusion: Banking Through the Ages

The process of fractional reserve banking indeed leads to a multiplied effect on the money supply while maintaining the required reserves at each step.

This scenario demonstrates how the money supply expands through repeated lending and depositing,

which is a fundamental aspect of how modern banking operates.

Banks today operate in an environment where there are policies in place to prevent them from becoming insolvent and collapsing the global system.

For many years, when too many depositors demanded their deposits back but the banks didn’t have enough reserves to service that outflow of liquidity,

unfortunately, the bank would have to file for bankruptcy and everybody would lose.
In the modern day, steps have been implemented to prevent bank runs like the establishment of Central banks.

They act as lenders of last resort because they have the muscle to inject liquidity directly into banks.

By doing so, they can stabilize the banking system given that there was perhaps a run on the bank

because people heard rumours or news that ABC Bank, for example, is going through financial instability.

My next article will focus on the 2008 crisis and the breakdown of central banks

Banking Through the Ages: A Journey of Power and Influence Part 1

The subprime mortgage crisis of 2008 shattered trust in the banking system, revealing its vulnerabilities and flaws. During this period, many people watched as their pensions and savings were wiped out, and homes were repossessed, while institutions received government bailouts. This awakening left many citizens with little to no trust in governments. With this article “Banking Through the Ages” we aim to breakdown the origins of banking and in part 2 of “Banking Through the Ages”

I will explain how modern banking works and most importantly, what does this all mean for you.

Before we dive into the 2008 crisis, let’s take a brief look into how banking works. As Henry Ford once famously said,

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

Barter System: Before Banking

To understand the key tools banks, have at their disposal, we first need to dive back into history. In ancient times,

trade began with people bartering for goods and services.

For example, if you had an extra supply of tomatoes and needed bread, you could negotiate with your neighbour

who had an abundance of bread, exchanging two tomatoes for a loaf.

However, the barter system had its limitations. Sometimes, you might have a product of equal value to what you needed,

but the seller wasn’t interested in what you were offering.

This lack of flexibility often left people uncertain about the value of their assets. Over time,

the barter system gave way to the use of money as a medium of exchange.

The First Bankers: Banking Through the Ages

Almost 2,600 years ago, gold coins were minted and used as a medium of exchange.

This created flexibility in the marketplace, allowing people to trade goods and services without needing a direct barter exchange.

During this time, goldsmiths laid the foundation for institutional banks as we know them today.

Goldsmiths, who crafted jewellery and coins from gold and other precious metals, played a crucial role.

Robert Kiyosaki has described gold as “God’s Money” in some of his talks and interviews.

Gold has been universally accepted as currency for many years due to its rarity and resistance to tarnishing.

However, some individuals attempted to create counterfeit gold coins. To counter this,

goldsmiths established a reputation for producing coins with 100% purity and weight.

They would seal the coins they minted with their unique marks, making it difficult for counterfeiters to replicate their work.

Sealing gold coins allowed people to instantly determine their value, saving time and effort in verifying their authenticity.

Additionally, it was risky to carry large amounts of gold, prompting people to entrust their coins to trusted goldsmiths

for safekeeping in vaults, similar to modern-day banks’ savings accounts.

People were comfortable leaving their wealth with goldsmiths because the success of a goldsmith’s business relied heavily on their reputation.

Vaults where gold was stored were heavily guarded, and citizens paid fees for the secure storage of their wealth.

The similarities between banking practices in the 17th century and modern-day banking are striking.

Just as goldsmiths charged fees for depositing gold, banks today charge interest on savings accounts.

This arrangement benefits both parties, but primarily the goldsmiths or banks.

Key Weapon That Goldsmiths Developed: Banking Through the Ages

For example: Bridget hands over 20 gold coins to her trusted goldsmith, then in return,

the goldsmith hands over a rectangular receipt (similar to our currency notes today) back to Bridget, detailing that this note is as good as 20 gold coins.

Basically, this receipt meant that anytime Bridget desired, she could go back to her goldsmith and trade it back for her 20 gold coins.

What happens next is that more and more citizens begin to accept this system. I mean, it was easier to carry around paper receipts than to go around carrying heavy gold coins.

This system of trade functioned successfully because people believed that these receipts were as good as gold.

People trusted that they could go and convert the receipts into gold coins at their trusted goldsmith anytime they wanted.

People then started exchanging these receipts for goods in the marketplace as if the notes were gold itself.

While people were enjoying the flexibility of trade, goldsmiths had other operations running.

Goldsmiths started lending out their own gold to the community in the form of debt while also charging interest on the loan.

How Goldsmith Banking Catered to Borrowers

Later on, borrowers started asking for their loans in receipts instead of metals because they were much more convenient to trade with.

As time went on, more and more people started asking for loans, expanding the goldsmith’s corporation. This indeed enriched goldsmiths.

As time went on more and more clients started to believe that the goldsmiths were using their deposits (gold) to finance their new expensive lifestyles.

What their client did next was to threaten to withdraw their gold deposits from the vaults if they didn’t come clean about their newfound wealth.

Goldsmiths would then need to prove that the gold is still there, stored safely in the vaults and not used unethically.

After the goldsmiths prove that the gold is still locked safely and was not used unethically,

the citizens were relieved but were eager to make some of the profits too on the interest goldsmiths made, so they pleaded with their goldsmiths.

Goldsmiths found themselves in a tricky situation because if they had refused to allow the depositors to make some form of profit,

they might have risked depositors cashing out their gold, and this would have ended the goldsmith’s corporation.

Goldsmiths had to be crafty to combat this situation. What happens next was the start of banking.

The goldsmith decided to pay a low-interest rate on deposits of other people’s money that he then loaned out at a higher interest.

The gross pay covered expenses necessary to run the organization and most importantly left a good amount of profits which made the new bankers (goldsmiths) rich.

As time went on, goldsmiths started noticing patterns in their depositors’ behaviour. They realized that no one really withdrew their gold deposits.

People were constantly using receipts for trade. What the goldsmiths did next was to loan out more receipts than there was gold to back it up.

For example: if the Carter family deposits 5 gold coins, the Atkinson deposits 5 gold coins and the goldsmith had 5 gold coins of his own.

The goldsmith would have a total of 15 gold coins in his vault.

This would mean that there are 10 receipts that the goldsmith issued out. The Carter’s would have 5 receipts and the Atkinson’s would have 5 receipts that they use in the market to buy goods.

Then later came the Walker, Wilson, Davies and the Williams family who all took on loans of 10 coins per family with the same goldsmith.

Meaning that the total loan for all the 4 families =40 gold coins. Instead of the goldsmith telling the families that he only has 15 gold coins

stored in his vaults. The goldsmith wrote out 40 receipts and issued them out to the 4 families and they could use this receipts in the market place.

Allow me to break it down step by step:

Initial Deposits:

1. Carter Family deposits 5 gold coins.
2. Atkinson Family deposits 5 gold coins.
3. Goldsmith has 5 gold coins of his own.

Total gold coins in the vault = 5 (Carter) + 5 (Atkinson) + 5 (Goldsmith) = 15 gold coins.

Receipts for Deposits:

• 5 receipts to the Carter family.
• 5 receipts to the Atkinson family.

Total receipts issued for deposits = 5 (Carter) + 5 (Atkinson) = 10 receipts.

Loans:

4. Walker Family takes a loan of 10 coins.
5. Wilson Family takes a loan of 10 coins.
6. Davies Family takes a loan of 10 coins.
7. Williams Family takes a loan of 10 coins.

Total loans issued = 10 (Walker) + 10 (Wilson) + 10 (Davies) + 10 (Williams) = 40 gold coins.

Receipts Issued for Loans:

• 10 receipts to Walker family.
• 10 receipts to Wilson family.
• 10 receipts to Davies family.
• 10 receipts to Williams family.

Total receipts issued for loans = 10 (Walker) + 10 (Wilson) + 10 (Davies) + 10 (Williams) = 40 receipts.

Total Receipts Calculation:

Total receipts issued = 10 (for initial deposits) + 40 (for loans) = 50 receipts.

Gold Coins in the Vault:

The goldsmith still has only the original 15 gold coins in the vault.

Analysis:

• Gold coins in vault: 15.
• Receipts in circulation: 50.

The goldsmith has issued 50 receipts representing 50 gold coins, while he only has 15 gold coins in his vault.

This is another example of a fractional-reserve banking scenario where the amount of money (represented by receipts) exceeds the actual reserves. The goldsmith would make a lot more profits on interest with money that was not backed.

What can go wrong? Just as long as people believed that the receipts had value.

Conclusion: Banking Through the Ages: A journey of Power and Influence Part 1

Goldsmiths wasted no time in seizing the opportunities presented by the evolving trade systems to maximize their returns.

This might be the first time some of us are hearing about “fractional-reserve banking,”

where goldsmiths issued more loans than they had gold to back them up.

This practice was sustainable as long as people continued to use receipts as a form of trade and did not demand to convert their receipts back into gold.

This system laid the foundation for modern banking, allowing the economy to grow and prosper while also introducing potential risks, such as bank runs.

A bank run occurs when a large number of clients attempt to withdraw their deposits simultaneously,

often triggered by rumours or loss of confidence in the goldsmiths’ ability to honour their obligations.

As we close Part 1 of ‘Banking Through the Ages’, it’s clear that the financial practices developed by goldsmiths have had a lasting impact,

setting the stage for the complex banking systems we have today. However, the evolution of banking didn’t stop there.

Curious about how these historical practices have shaped our modern financial systems and what it all means for you today?

Don’t miss out on Part 2 of “Banking Through the Ages: A Journey of Power and Influence.”

Dive deeper into the mechanics of modern banking, the implications of fractional-reserve banking

(The practice of keeping a fraction of bank deposits in reserve while lending out the rest),

and discover how these financial principles affect your daily life. Click here to continue the journey!