Wednesday, November 14, 2007

Making money

I'm reading Terry Pratchett's latest called " Making money". I know it's not as high-brow as what you, dear reader, scan on a daily basis, but every now and again he has an insight that makes me laugh out-loud - much to the annoyance of Mrs. Lear.
Anyway, the premise of this particular book is that a conman controls a bank on Ankh-Morpork and how he turns it into an engine for growth in the community.
My point today is that Banking - ALL Banking - is founded only on trust. When it goes, no bank is safe. You only need to think of Northern Rock, and more recently the problems RBS and Barclays are having.
In the book, the conman tries to get traders to accept his new paper money. He doesn't have a problem with this. The difficulty he has is persuading them that the gold ( known as specie) and coins are no longer needed. The following exchange takes place:
" But you don't need the gold as long as you all accept the paper!"
" Absolutely, sir. Just so long as the gold is somewhere"
There lies the rub. As long as people know and believe the gold is there, there's no problem. As soon as they think it's gone, they panic.
All banks started out issuing their own bits of paper. In Scotland, the RBS, in ancient times, used to take in lots of notes of the Bank of Scotland, then demand specie for them. Of course, BOS did the same thing to RBS, and eventually they reached an understanding. Of course, it's more profitable to fleece the customers than to do each other down. Never let it be said that Bankers are not greedy.
Anyway, the trust is still there. At the moment. Battered. Shaken. Having lots of meetings and soothing words.
But if there's another lurch, head for the hills.
Because the Trust will be gone.

1 comment:

Winchester whisperer said...

The gold standard was abandoned. GB sold our gold too early. The dollar replaced gold as the currency of trust. Now that trust has gone: even American gangsters prefer to be paid in Euros instead of dollars. Nowadays most people borrow in yen, much to the dismay of the Japanese PM. The consequence of a free global market is massive bubbles. The important thing is to avoid being there when they burst. The even smarter thing is to have the foresight and timing to be short: in my dreams!