A Medieval British Anti-Counterfeiting System: Split Tally Sticks (2017)
core77.com
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Or another creative person came up with it independently.
We have better resources now, but I am skeptical that per capita creativity is any better now than it ever has been in human history.
That is not what "fractional reserves (sic) banking" is. What the author is describing is pure and simple fraud and nothing to do with the mechanics of fractional reserve banking. The goldsmiths were passing off paper certificates under false pretence that they correspond with real stored gold.
Fractional reserve banking is really simple: you gather up a pile of money by convincing others to deposit their money with you (although when the depositors are other banks and institutions such "deposits" are often structured as bonds); you RESERVE a fraction of gathered money (varies but usually between 6% and 15%) while lending out the rest. At no point does fractional reserve banking involve "lending out more than what you have on deposit".
https://bankunderground.co.uk/2015/06/30/banks-are-not-inter...
An excerpt:
> In the simple ILF model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers. Lending starts with banks collecting deposits of real resources from one agent, and ends with the lending of those resources to another agent. In the real world, however, banks never intermediate real loanable funds, an activity that, correctly understood, can only amount to barter.
> Rather, the key function of banks is the provision of financing, meaning the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor. Specifically, whenever a bank makes a new loan to a non-bank customer X, it creates a new loan entry in the name of customer X on the asset side of its balance sheet, and it simultaneously creates a new and equal-sized deposit entry, also in the name of customer X, on the liability side of its balance sheet. The bank therefore creates its own funding, deposits, through lending. It does so through a pure bookkeeping transaction that involves no real resources, and that acquires its economic significance through the fact that bank deposits are any modern economy’s generally accepted medium of exchange. This understanding of the function of banks, which we will refer to as the financing and money creation (FMC) model, has been repeatedly described in publications of the world’s leading central banks—see McLeay, Radia and Thomas (2014a,b) for an excellent summary. What has been challenging is the incorporation of these insights into macroeconomic models.
Where there are no false pretences there is no fraud. From https://en.wikipedia.org/wiki/Gold_certificate: Banks may issue gold certificates for gold that is allocated (non-fungible) or unallocated (fungible or pooled). Unallocated gold certificates are a form of fractional-reserve banking and do not guarantee an equal exchange for metal in the event of a run on the issuing bank's gold on deposit.
> you gather up a pile of money by convincing others to deposit their money with you ... you RESERVE a fraction of gathered money ... while lending out the rest.
If this were true then the only money in circulation would be that created by the Central Bank. Far from accurate.
It most certainly would constitute fraud if a bank were to issue gold certificates for more gold than it had claim to - whether allocated or unallocated.
What happens during a bank run has no relevance here. A bank run isn't caused by a bank issuing more loans than it has borrowed itself. It's caused by the mismatch between the nature of a bank's liabilities and assets. Much of its liabilities have short terms or even worse - deposit accounts can be demanded from the bank at any time - while their assets which are generally loans which are generally fixed term or at least not recallable at will by the bank.
A bank with $1B worth of depositors money could in theory suffer a bank run even if it has only lent out $1m while holding the other $999m in it's vaults. No excess lending required is required for this to happen.
> If this were true then the only money in circulation would be that created by the Central Bank. Far from accurate.
No, that's certainly not implied by the simple statement of fact that the amount of money a bank loans out is strictly less than the amount of money that the bank has borrowed from others, whether from depositors or other institutions.
The sum of the balances of deposit accounts in the banking system easily exceeds the amount of money created by central bank but that does not require banks to "lend out more than they've raised" - it's a simply a result of simple arithmetic and the fact that loans exist in the system.
Balance sheet, ignoring Capital (Assets = Liabilities + Capital).
In your example:
Before IOU lending, the goldmith's balance sheet is: 2 Gold (asset); 2 Gold-equivalent Deposit Certificates (liabilities). 100% backed deposits.
Lending 1 Gold: 1 Gold (asset), 1 Gold-loan (asset); 2 Gold-equivalent Deposit Certificates (liabilities). 50% backed deposits, as the regulator asks for. That sounds like a Liquidity Coverage Ratio though, not a capital requirement (as above, ignoring Capital for this).
Lending 0 Gold, 2 Gold-like Notes: 2 Gold (asset), 2 Gold-like Notes (asset); 2 Gold-equivalent Deposit Certificates (liability), double-entry required for 2 Gold-like Commercial Paper/Note/Bond Certificates issued (liabilities). As 50% is the LCR, within regulator requirements.
Issuing more than 2 Gold-like notes, outside the LCR.
Just adding, to make it clear balance sheets always need to balance, I find this makes clarity much.. well, clearer.
I've had this argument many times - it's seems the web has endless sources erroneously "explaining" how retail banking works that has convinced people that there is shenanigans involved in retail banking. Generally they mix up M2 money supply with retail bank operations. It's very difficult to convince people that they are wrong in this regard as they become convinced they've been let into some huge Matrix-like secret of how the financial system operates and tend to savour such knowledge (wow - money doesn't really exist!!) even in defiance of reasonableness or logic.
> What the author is describing is pure and simple fraud ... The goldsmiths were passing off paper certificates under false pretence that they correspond with real stored gold. ... At no point does fractional reserve banking involve "lending out more than what you have on deposit".
Yet that is exactly what happens in the second hypothetical course of action I described. Are we now agreed that it is fine?
I will concede that this hastily written statement of mine was ill-thought-through: "If this were true then the only money in circulation would be that created by the Central Bank." I cannot edit it now.
The reason I welcome zhte415's comment is that thinking in terms of balance sheets usually clarifies things (as noted in the comment).
For example, the top 5 biggest retail banks in the US hold between 20%-40% more in deposits than they have issued loans individually as well as in aggregate. Don't you think that if retail banks worked in the way you are claiming - i.e. raising $X in deposits but issuing >$X in loans that there would be some example of this happening? For at least one bank in the US? It just doesn't happen.
And writing this it occurred to me: the way to tear it well is the way you do with a piece of paper: fold it in half aligning the corners, make a good crease, and tear slowly...
Here's a more in-depth article
https://glintpay.com/money-en_us/how-equating-wood-with-gold...
"However, the reality was that the vaults soon contained more wooden sticks than gold and the King soon began to issue tally sticks as he pleased."
Anti-counterfeiting is a somewhat laughable turn of phrase in this context.
"Overnight the Kings’ tally sticks reverted back to their real worth: firewood. The Kings’ creditors, the goldsmiths and their customers had “drawn the short end of the stick” (the origin of a still used expression)."
(Modern History TV)
Thanks for sharing.
How's that? If I throw away my old half, split a new one, and add fewer cuts to it, you'd apparently assume it was the legitimate one, but it wouldn't be.
Lol but which is the original?
That's the point.
If you have two that don't match you don't know which one is the legitimate one you just know that they don't match and at least one is not legitimate.
1. Have an artisan make the sticks. These required tools to make, and I don't know how prevalent the tools were, so it's entirely possible that it would be completely infeasible for anyone not the local carpenter to make these sticks, and would also make him a sort of arbitrating third party.
Otherwise you, as the debtor, could just throw your stick away, claim the creditor's is false, and be done with it.