Earlier this week, one of my friends shared a thought provoking video clip, which I find very worth sharing. It breaks down the whole financial system and complex functioning of the financial securities, multipliers, economic reforms etc to something that everyone is more than capable of understanding. In essence, it is a simple, basic and amusing illustration of how the financial markets function.
It takes me back to how hundreds of years ago coinage for money was replaced with cheques against the gold coins, which later became notes and now, only a depiction of value created by the Central Banks that print currency against, nothing! However, the system really is very firm and well established, yet complex – so I don’t disregard each of its contributions (liquidity, pace, security,..) to the businesses and money management in general; it does however lay at the heart of Capitalist agendas and the system.
The very first banks (or something what could be vaguely defined as banks) was created when gold coins were used as money and it wasn’t very unusual to be looted when traveling for trade, which exposed the traders to risk and insecurity. Some people however, saw an opportunity to open ‘bank’ that would issue notes against the gold coins, which could be redeemed back for gold, allowing people to travel safe. Years of such practice meant that businessmen would just exchange the ‘notes’ against gold rather than actually redeeming that gold. The basic mechanics of financial markets can be seen to have been born in this setting, when at that point an extra charge of gold/ money was required to redeem the gold that had been deposited earlier, which is exactly the definition of interest i.e. price of money. What we have now as currency is far from what the gold or the ‘notes’ meant, but surely it represents a buying power- one that decreases every second as the currency inflates in an economy.
(Despite, the video having some strong views/ language, I think the information is rather interesting and useful!)