dailyreckoning.com / By Bill Bonner / July 26, 2013
Over the last 10,000 years, humans have tried two different kinds of “money.” They began with exchanges based on credit — “You give me a chicken… I’ll pay you back later, maybe by helping you build a new wigwam.”
Then, when society became too large and extensive, they switched to gold and silver. The advantage of this was obvious: You didn’t have to remember who owed what to whom. You could settle up right away. “You give me a chicken. I give you a little piece of silver. Done deal.”
Periodically, governments were tempted to go back to credit systems. Essentially, they issued pieces of paper — IOUs — and declared them “money.” Usually, these hybrid systems began with some collateral backing up the paper. Issuers typically had gold in their vaults and agreed to exchange the paper for metal at a fixed rate. Holders of the paper money were told that it was “good as gold.”
In some cases, people believed the IOUs were better than gold. When John Law began modern central banking in France, he backed his paper money with shares in a profit-seeking business — the Mississippi Co. You could take his scrip and imagine that it would grow in value along with the profits of the company.
Trouble was the Mississippi Co. never made any profit. It was a failure… and a fraud. Great prospectus. Few real investments. When people realized, they wanted to get rid of their paper money as soon as possible. In 1720, the system collapsed, and John Law fled France.
Thanks to BrotherJohnF