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The Wise Investor

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
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
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."