History of International Monetary System Banking was believed to have originated in Egypt but it is not clear that there

was a sophisticated system of accounting in place not to mention circulation. Banking actually originated in Mesopotamia today this is Iraq. They were believed to have had a sophisticated accounting system whereby they recorded debts and deposits on clay tablets which was they first evidence of double entry accounting. Coinage In Lydia a mix of gold and silver called electrum was mined and became used for trading. Circulation of coinage is associated with the Kings of Lydia – known as Midas. They put a stamp on the electrum coin. The stamp meant the value of the coin will not decrease because it can be exchanged at the mint for full weight coins. This innovation enormously simplified commerce and introduced the state and the credibility of the state. Credibility came from believing in the stamp. The mints needed reserve of metal to create the stamp, the reserve came from taxes – This means the state must be capable of collecting tax. Historically, the number of stated that have the ability to collect taxes have been few. The French revolution was largely born from the failure to agree on a system of tax – the French Monarchy were not able the raise enough money through taxes. Coinage rests on credibility and credibility rests on the ability to tax. Coinage – greatly simplified by denominations of coins and that value is what the mint will give you in exchange for the coin. However, value may not always be the weight – mint might out 80c of metal into 1 dollar therefore a problem arises. This issue emerged in the Roman Empire. Therefore a market judgement is required on the reliability of the state and the intrinsic value of the coins. Convertible Paper Money Paper money was introduced for a number of reasons; • It was not as heavy as coins • It was easier to conceal • It was safer There was a printed promise of the paper. E.g. on the US Federal Reserve notes it used to say ‘I promise to pay the bearer 10 dollars’, this essentially meant the paper was backed by silver. This still exists on the Sterling notes. The Bank of Amsterdam issued notes into circulation which led to the distinction between Real Money V Nominal Money. Real money has an intrinsic value determined by supply and demand whereas Nominal money involves credibility, it is the promise written on the paper.

The Bank of Amsterdam created a scandal in 1695 by issuing more notes than they had a reserve due to the fact that very few of the notes return to them. Bank runs have been endemic in banking. Principles that have been at the basis of the financial expansion to the crisis have been the same. There exists the same problems; banks have always been over leveraged. Historically Bankers dressed very conservatively, the idea is that banks must look conservative because they are borrowing short (deposits) and lending long (buying assets). A crisis will arise if a few people take the short money out. It is a tricky situation and if it works you can fund anything but it also has right within it the seeds of a terrible crisis. Next Step – Go from Convertible Paper to Inconvertible Paper.

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