Guest blog: ex-Investment Banker explains how money is made up!

As an ex-investment banker I am going to try and write a simple overview in relation to money and how its worth is determined. I hope it is helpful…

Firstly, this is great stuff you are doing Christopher James Pomfret…

Going back hundreds of years there was gold. When people started moving about and engaging in business  the gold had to move from one place to another to pay for goods etc. But this was dangerous as you could be robbed. So promissory notes were issued initially by various Jewish based merchants and also the Templars. These notes promised to pay the bearer on demand the sum of a certain weight in gold.

Eventually these groups writing these notes became more organised and soon realised that not everyone would ask for their gold at any time and so they could lend out a bit more in the form of paper than the gold they held in reserve for their customers. They charged for this service and today we call that charge interest. However this was small scale and the paper bills issued were still pretty much fully backed by gold.

These merchants who controlled the issue and redemption of the notes became known as bankers. They themselves began to differentiate and some focused on small traders and individuals becoming what we know today as retail banks. Some others however, began to work solely with governments funding wars and infrastructure.

These became the central banks of the world. 

The loans they issued were deemed safe as they knew the governments could always raise the repayments by taxing their citizens. Gradually these central banks whilst remaining independent and privately owned began to control the supply of money for most of the main countries in the word. They financed both sides of wars and used money supply to create boom and bust  economies which lead to ever increasing debt. The only way to pay the debt was to print more money and there was simply not enough gold to back the massive requirement for cash and so as the US entered the depression  in the 1930s the US moved away from the Gold Standard.

Up until the early 1970’s some US debt was still tied to gold until France asked for repayment of the debt in gold at the agreed exchange rate and the US under Nixon refused and the final link between Gold and the US dollar was removed (by then the world’s reserve currency was broken).

To bolster up the US dollar and create the illusion it still had some sort of intrinsic value the US government then did deals with oil countries and the concept of the petro-dollar was born. Afterwards large chunks of the US itself were taken from the US people and placed under federal control (called national parks) and they were used as collateral against the US’s ever increasing debt burden. Finally arms supply treaties with various Arab states and promises of protection in the even of conflict were the last bargaining chip that the US could use to give a perception of security for the US loans.

But like Sterling the US dollar is really just worth the paper it is printed on. Any attempt at removing the US dollar as the world’s reserve currency is met with invasion – as was the case when Iraq was allowed by the UN to sell oil in Euros or Gadaffi instigated the use of the Gold Dinar (a currency backed by gold) for trading in oil in West Africa. Both leaders met their end because of this.

One thing is clear when the US dollar loses its reserve status – and it will – the world will be plunged into complete chaos and as such only those who have something of true value will be able to buy and sell – we will see a massive resurgence in the use of gold (and possible silver) and precious metal backed mediums of exchange and that demand will increase their value exponentially against the failing FIAT currencies. That day is coming sooner than we think.

CJP – I cannot thank you enough Steven for your contribution…no doubt my audience is going to be fascinated by your words, not least because you give credence to some of the stunts I use to illustrate this crazy fairy tale called money!