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The history of money: from Templars to Satoshi

The cryptocurrency market is an enigma which rests on a mystery. Founded by the anonymous (eponymous?) Satoshi Nakamoto*, "Bitcoin" seemed like the start of a new anti-banking, anti-government anarchist marketplace. From the early days of post-GFC crash, tech-geeks, black-market, dark-web gun traders and drug-dealers abounded. Now, in current times, we see early adoption of cyrptocurrencies by banks, technology firms, pharmaceutical companies and traditional business owners. We have seen thousands and thousands of new coins, new technologies and new ideas spring from the miry swamp to create an all-new financial Eden, with anonymity and justice for all... Perhaps.

What is money, and why is there a "Money Market"?

Markets have always been around: ever since the first caveman swapped some cooked pterodactyl for a bunch of fresh-picked guavas and a handful of walnuts. Humans have always seen value differently, and this has lead to all forms of markets, commerce and business that we know.

You may give an hour of your time to your boss in return for a fistful of dollars, as you value your time less than you value the money. The boss gives money to you as he values his time more than he values the cash.

In time, you pass the dollars on to someone else in exchange for food or shelter, as you value the food and having a roof over your head more than you value the cash.

Using money to facilitate trade is a relatively modern invention. The traditional barter system frequently lead to arguments over how many pigs were worth a bushel or barley, or whether a skinful of wine was worth more than a skeinful of wool.

Seeking to keep the peace, whilst stepping back from facilitating all transactions with a judgement, early governments or royalty issued coins to replace the old barter system which had existed for millenia.

Initially, most of these government or royal-issued coins held intrinsic value, as they were created from gold or silver. This also meant that they could be used across borders and for international trade; even if you didn't speak the language, gold did the negotiating for you.

The downside was that transport became an issue: large quantities of gold or silver were heavy; they could be lost at sea, or stolen by highwaymen whilst in transit across the country.

Money: from precious metal to precocious paper

A genius Knight* in the Middle Ages was often tasked with protecting travellers who were carrying large amounts of gold for trade, often risking his life to secure the money of those much wealthier than himself. He decided one day that he was sick of fighting bloody battles to make a tiny amount of protection money and help travellers preserve their funds.

Sir Christian Rosenkreuz* created a safe and lazy system whereby his brave knights could store your gold or silver and protect it safely for you, whilst they sat at home, yet you could still use the asset for trade. The knights set up gold safehouses in major cities, and issued you as the depositor with a certificate of gold ownership written on paper. The lightweight paper could be carried easily across the country or concealed safely in your pocket, making robbery or oceanic loss far less likely.

When you gave the certificate of ownership to another party in exchange for goods, it was treated exactly as the gold or silver which it represented, and the receiver could take the certificate to a knightly gold safehouse nearby and exchange the paper for its equivalent in gold on the spot.

It wasn't long before the majority of buy and sell contracts were settled by exchange of paper certificates, rather than using the underlying metals. The people trusted the knights, and trusted that each piece of paper was worth exactly as it stated, and that it could be redeemed at any time for gold or silver. Knowing that it could be redeemed at *anytime* lead to the feeling that it should be redeemed at no time; there was no urgency to reclaim the gold itself as you knew it would always be there in the Knight-safe, protected and secure.

Downsizing staff & Increasing profits: the first bank

Freed from daily dalliances with deadly highwaymen, Sir Christian Rosenkreuz* became an astute and observant businessman. He noted that with safehouses set up, he needed far fewer men to protect the actual gold assets than when they were travelling with gold across the country. He could either remove a few knights from his payroll, or allow them to go off and set up new safehouses in other cities.

The knights were paid a small amount from each deposit made, to "take an interest" in looking after and protecting the gold. For example, you may entrust the knights to look after 300 gold coins for you whilst you travel to a neighbouring town to buy silk. They would give you a certificate worth 300 gold coins and charge you 3 gold coins in exchange and protection, until your client returned to claim the gold.

This was profitable earlier on, when people would take your certificate, withdraw the gold from the knights-safe, and then deposit it into another knights-safe somewhere else at a later time. However, over time, people stopped withdrawing and depositing the gold, leading to zero "interest" for the knights to guard the gold. With most people exchanging the created paper certificates, there were no deposits being made and no protection money being paid.

Ever the astute businessman, Sir Christian* measured his business transactions and results before coming up with a solution. He discovered from his ledgers that less than one in every twenty clients ever came back to claim the gold, with most preferring to pay for other purchases using the certificates which they had received from other buyers, rather than settling purchases with the underlying gold asset.

Sir Christian* had created a vastly improved system, to enable people to transport lightweight and valuable gold papers without the fear of loss or robbery inherent in the old physical gold system. Transaction fees were charged on deposit and settlement, so that he could feed himself and pay his brave knights.

This system had now evolved, and Sir Christian* had been left behind. Transactions were being settled in paper, and scarcely 5% of people were paying the gold transaction fee. Other business people had already created a secondary market for the knightly gold certificates, by lending the paper certificates to a third party and charging them a bonus amount when the original loaned amount was returned.

After realising that 95% of gold deposits were never redeemed, Sir Christian* calculated that he could create up to twenty times more paper certificates than there was actual physical gold in stock, without losing any face. The paper money could be rationed out to his men for protection money and the world's first bankers could be paid again.

A sensible man, Sir Christian* realised that the whole gold certificate system survived on his reputation for "always being there" and "always being reliable to deliver on the gold", so he did not create a 20:1 ratio, as that could have been too risky on the day when two people in twenty came back for their gold. He also did not pay huge bonuses to his men from the enormous surplus he created: it was rationed out carefully and fairly, so each man received a nominal subsistence and did not risk becoming vain or spoiled like the royalty they despised.

Initially proposing a 10:1 safe ratio, Sir Christian* settled on a 12:1 ratio, as he was a a spiritual man and fond of numerology. Not only were there 12 disciples of Christ, there were 12 months in a year, 12 signs of the zodiac, 12 tribes of Israel, 12 gods in the Greek pantheon (six gods and six goddesses), 12 gods in Egypt, 12 Norse gods and 12 Chinese horoscopes.

This ratio of banks lending out more than deposits on record, would continue from Sir Christian Rosenkreuz* in the Middle Ages, for hundreds of years, up until the 20th Century of banking. Then the greedy banksters f^+ked everything up.

How the banksters screwed the world: the GFC

Not satisfied with charging account-keeping fees for holding people's money, lending out 1200% of their deposits, charging exorbitant interest on loans and paying a pittance to depositors, all the while paying themselves enormous bonuses, some greedy banksters decided to f^+k with the centuries old sacrosanct 12:1 ratio initiated by the spiritual and noble knight.

If you understand that the 12:1 fractional reserve banking ratio initiated by Sir Christian Roenkreuz* allowed for big banking profits, then you would realise that a deposit of $100 in asset allows for lending out $1200 in paper. Lending out $1200 at 5% interest generates $60 profit (1200 x 5/100 = 60) whereas paying 3% interest on the $100 deposit only costs the bank $3.

People who notice the interest rate differential of 2% between 3% on deposits and 5% on lending are missing the 12:1 fractional reserve banking ratio. This r