An outline for gold, banking and money

Here's an introduction and an outline of what I will try to convey in this blog.
To understand gold and why it has value is easy, gold is used in jewelry and it looks nice, therefore people want it and that gives it value ... Since gold is rare, doesn't corrode and can be easily formed into a coin it is ideal for use in trade as money. Gold and Silver have served in this function for centuries, so why aren't they used in that function today? The answer is long and complicated, but I'll try to get the basics across so you can understand what's happening with all the worlds financial problems. This is just the start of the explanation and I'm not a pro at writing or blogging so don't be surprised if I say, oh yeah you also need to know about this other complex topic ....
These four topics will be a good start to understand the basics about banking and credit and what real money really is and why it's important.


1. Inflation

2. Gold and Silver backed money

3. Early Banking before fractional reserve banking

4. Credit and Fractional Reserve Banking

Inflation - Inflation is one thing and one thing only, an increase in the money supply. When money was backed by gold the only way to get inflation was to increase the amount of gold stocked in the vault. A side effect of inflation is price increases but that only happens if the total economy is the same before and after the increase. A simple definition for the economy is "the total supply of goods and services". It can get really confusing when you watch so called financial shows on TV and hear the head spinners talking about inflation without talking about an increase in the money supply, that's because the average viewer doesn't really understand the word "inflation", but he/she does understand the words "price increase" and nobody wants to hear that. When people hear things they don't want to they turn the channel or just turn off the boob tube. That's what I recommend, in fact you can live better if you just throw the damn thing away.
Gold and Silver backed Money - When gold and silver are used in a monetary system that means there are coins made of both in circulation and also bills or paper certificates that are redeemable in gold or silver. Our monetary system is defined in the Constitution and it's really a system of weights of gold or silver. I don't know off the top of my head how it reads and I should get that down as a matter of fact for future discussion, but what I do know is the ratio is twenty dollars and sixty seven cents per ounce of gold. So one dollar is the inverse of 20.67 in ounces of gold. We operated on this system until the great depression in 1931 when FDR removed the gold backing of the dollar within the U.S. ... more on that later. Under this system the rate of inflation is equal to the rate at which new gold and silver come out of the ground and are put into circulation as money. This way the inflation is arrested, it's under tight control. This is not true in a paper monetary system, more on that coming up. Boy, as I write this I find more things to talk about to get the concept across.
Early Banking before fractional reserve Banking - Before the Federal Reserve Act of 1914 there were an assortment of banks that issued their own money, or gold and silver certificates. The investors and depositors would accumulate the gold and hold it in a vault, then hire a printer to print up the certificates on a one to one basis. If there is $1000 worth of gold in the vault then there were only $1000 worth of currency printed up, that way if everyone wanted to redeem their certificates for the gold (called a run on the bank) everyone would get all they were due. Sometimes a dishonest banker would be tempted by the devil and print more certificates than there was gold, maybe so he could loan out the money to his friends or buy something for himself. As long as the depositors and/or investors weren't any wiser this banker could get away with it, but if word got out this could start the run and that would be the end of the bank and the last person in line would just get an awkward look from the teller.
Credit and Fractional Reserve Banking - When the banker could convince the law makers to pass a fractional reserve banking law, then they could print more certificates than there is gold. Lets assume the bank has $1000 worth of gold in the vault but they print $2000 worth of certificates, that would put the reserve ratio at 50%, or two to one. When the economy is really hot and growing rapidly this kind of thing could go on without any bad effect, as long as the depositors don't panic and try to redeem their certificates for the gold.
Credit and Fractional Reserve Banking - Todays banks operate on about a 9% fractional reserve ratio. That means if I deposit $100 the bank can loan out $91 of it. So then Ken goes into the bank and borrows that amount and he deposits it into his account. The bank can then loan out $81 of that amount. Then Valerie borrows that amount and deposits it into her account. And so the process goes on and on until that initial $100 has been loaned out and turned into about $1000, in loans, in credit. And each loan has an interest rate associated with it, say 5% to make it easy. Where will the 5% come from? It's not money, it's credit and it only exists on the banks ledgers. This is what makes banks unique, only they have the power to extend credit, i.e. create "money?" out of nothing more than the power to extend credit. That power was created in the banking laws of the community and then handed over to the bankers and only the bankers. Except in North Dakota where the only state run bank is still in existence. The states tax revenues are deposited and then loans are made to farmers and merchants to make the economy roll forward, more on that later.