The Wise Investor
potential to improve their own financial position, and so the
government issued notes of their own. These notes
contained a promise from the government to pay the holder
of the note one ounce of gold.
All one had to do to obtain a government currency note,
was to hand over one ounce of gold to the government.
In return, the government would give the person a single
note. This note could be used to pay debts, and at any time
returned to the government and exchanged for gold.
The bankers, understandably, were furious. They were
making large profits from the arrangement and did not want
to share them with the government.
Many people, however, withdrew some of their gold from
the banks, and deposited it with the government in exchange
for currency notes. The government, they reasoned, would
be even safer than a bank. The government bravely ignored
the banker's protests.
They made grand speeches about free and open trade in
the valley, and about how a single currency note would
make the system even easier.
The government, of course, began paying all its
employees using this new currency. Since this comprised a
large percentage of the valley's population, the new currency
notes quickly dominated the valley's finances and the banks
gradually gave up issuing banknotes of their own.
There was, however, another reason why the
government took this course of action. It was a less noble
reason than the one that it presented to the public. The
government now had large amounts of money sitting in its
vaults. Although it may have to pay it all back to the
noteholders, there would be no interest due.
A currency note worth one ounce of gold would still be
worth one ounce of gold in ten year's time. Because of this,
the government had a large amount of gold which it didn't
have to pay interest on. Effectively, everyone who had
exchanged gold for currency notes had given an interest-
free loan to the government.