Wednesday, 14 November 2007

Paper Money History: Paper Money in England in 17th Century

In the 17th Century England came into its own in the field of paper money banknotes, banking and banking economics. Gold and Silver were the two methods used as monetary exchange but with the wars against Scotland and the Civil war in the mid 1600's the precious metals were no longer safe: in actual fact King Charles I, took not borrowed money of merchants and the gentry kept in the tower of London, a whole £130,000. After this bad experience people no longer felt that it was safe to leave their hard currency at the Tower, they needed an alternative and people started depositing their gold and silver with goldsmiths and thus a new age was born. The Goldsmiths soon became the new bankers.

First, they gave each depositor a paper receipt, a promissory note, for gold or silver kept with them for safe keep. Very soon these receipt were used as proof of hard currency and could be used for monetary exchange. So a system was born whereby the public started to trust value of the paper money notes that were in circulation. The goldsmiths soon discovered that the depositors were not redeeming their gold or silver with any immediacy, so they decided to start loaning money to other merchants at a small interest this then became the norm.

The Goldsmiths were soon loaning out more money than they had stored in their vaults, luckily for them things never got so dire as to be taken to court, in actual fact the opposite happened in England. Gold and silver was left with the goldsmiths for many years, so as long as the public trusted the integrity and financial competence of the goldsmiths, their paper money notes became an acceptable form of money.

Thus the Goldsmiths of London became the founders of modern banking upon which the Bank of England was founded in the late 17th Century: more importantly this was the first time money was created on trust and not measured in actual weights of precious metal. So the Goldsmiths of London created new money, modern money, money based on public trust.

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