Hello again everyone! Today I will be a writing part 3 of my 10-part discussion on the topic on Achieving Personal Financial Freedom, titled: Money is no longer Real money. As this is a very long post, I will be splitting the post to 3 parts for easier reading. This will be part 2 of the post. The previous post can be found here: Part 1.
It is the trading of the medium by itself that bankers are now able to achieve extremely high returns. Now giving a very simplified example, just imagine that BUYER wants to exchange a bottle of water for $1. The idea is that SELLER sells the bottle of water to BUYER for $1. There is a trade involved. And there is a medium involved, now shown as the 1 dollar note.
But wait. the BANKER (or trader), who controls the supply of the $1 bank note, says that due to an abundant supply of $1 bank note, the bottle of water now has the value of $0.50. So SELLER therefore exchanges the bottle of water with BANKER for a $0.50 bank note.
Next, BUYER wants to drink the bottle of water. Therefore they have to buy it from the BANKER. However, the BANKER now turns to BUYER and says, “I am sorry, due to a shortage of $1 bank note, the bottle of water is now worth $2”. BUYER has to pay $2 now, for the same product that SELLER sold to the banker for only $0.50. By repeating this game, and when everyone trusts the medium of exchange, in this case the bank note, the BANKER can effectively make an infinite amount of money without creating anything of value.
However, commercial bankers that do not have ownership of the entire country, still has to deal with competition (other bankers). Therefore, it meant that there will be limit in terms of the differences of money between a BUYER and a SELLER. Otherwise, BUYERS & SELLERS can simply opt for another bank.
However, and eventually, the governments of every country (basically the rulers, kings, monarchies, or whatever big organization ruling the state) know about the power of banking. Using the sheer power of physical force (which is the ultimate power that rules above all, even higher than finance), they started implementing their own banks called central banks, and forcing (or perhaps collaborating?) all other commercial banks to obey their rules of engagement.
Now, due to the control of the medium of trade by the government as compared to commercial banks, for any person intending to obtain the medium itself, the government has to charge you some form of commission (like a ransom). For that, they do it in various ways, the most common way is via taxes (a topic for a subsequent post), and charging a base interest rate (also called Cash Rate, Benchmark Interest Rate, etc).
Governments technically have to govern themselves from financial ruin however, therefore they (usually) separated the central bank from the government. Where the government makes money from taxes, the central bank makes money by charging an interest for using their money. Imagine, every single time you want to do a trade, you get penalized by the banks! Governments are the biggest bullies of all!
Now, with so much cash, what do the banks do with them? There is only so much wheat, chicken, or any other physical items that money can buy. Some genius therefore came up with the idea of providing credit.
According to Wikipedia:
Credit (from Latin credit, “(he/she/it) believes”) is the trust which allows one party to provide money or resources to another party where that second party does not reimburse the first party immediately (thereby generating a debt), but instead promises either to repay or return those resources (or other materials of equal value) at a later date. In other words, credit is a method of making reciprocity formal, legally enforceable, and extensible to a large group of unrelated people.
Giving credit is another amazing power that banks provide to the masses. By providing a BUYER or SELLER a certain quantity of the trade medium (in this case bank notes), he or she can actually start doing something first, before the need to own money in the first place. Sometimes, credit doesn’t even require the medium. By affirmation from someone having a superior reputation, people can trade without the need of money. This is called trade credit. Your buyers or sellers can provide you with the goods first, without requiring the money on the spot.
And if there is someone with superior reputation vouching for you for the trade, this person is called a guarantor. But of course, bankers don’t provide credit facilities for free. No one does. They all want something back. So the idea of Interest is born. If I borrow you money, I want you to pay me back later, my original amount, plus a certain percentage as interest. It’s fair, isn’t it? I think it is an extremely useful tool to boost commerce.
Please read the next part for a continuation of this article! Thanks for reading!