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The Wise Investor

Although they did not have to pay interest on this gold,
there was nothing to stop the government earning money
from it by lending it out or depositing it in banks.
The governemt proceeded to lend the gold out in return
for interest, and to deposit the remaining gold in bank vaults,
which also earned interest. Through this process, the
government soon had another source of income in addition to
collecting taxes.
To this day, if a person has a currency note in their hand,
then this represents an interest-free loan from them to the
government.
Over time, real gold was used less and less in financial
transactions. The government passed laws to make their
currency 'legal tender', which meant that a person was
legally obliged to accept a currency note in payment of a
debt.
A long time passed, and eventually gold was no longer
used at all. The government stopped printing the promise to
exchange the note for gold, and simply printed: 'legal tender
of the valley' in small print on the bottom of the note. Thus
developed the modern system of currency."
Kate was impressed. It was an interesting story, and one
that put the whole business of cheques and dollars into
historical perspective. "Is it necessary that I understand all
this, John?" Kate said with a smile.
John looked a little embarrassed. "Not really, Katie, but I
got a little carried away. Still, I hope it was an interesting
story. Everything that I tell you about the history of our
financial systems helps you understand the mysteries of its
operation."
"Bastard!" Kate said with a smile, slapping her
grandfather on the arm. "You know I'm desperate, and
you're telling me bedtime stories!"
John went even redder.
"Don't worry," Kate said quickly, "It was very interesting.
The more you tell me, the more I see the complete picture,
how the whole system fits together. You know John, you
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