Silver Birds and the Bank of Last Resort
Consider the familiar term, ‘food bank’. It is a bank that actually stores food. The idea that a bank is a place where assets are stored is a pretty good one. That description used to be true for monetary banks. This essay is going to explore a contrast between banks that only store pictures of wealth and the bank of Bank of Last resort that has silver birds.
Public banks were invented a long time ago so customers could safely deposit and store their wealth in a single guarded place. The bank would issue a receipt of ownership to the depositor. The receipts became paper money; and originally, paper money was backed 100% by the deposit held in the bank as a reserve against the receipt. Banks learned how to print new money against those deposits to make loans; and the process went viral when governments became the borrowers. This was called fractional reserve banking. The receipts should be called fractional reserve money.
We should think of our money as only a fraction of real money. Here’s why. If we consider money a picture of wealth, the picture of fractional reserve money has two parts. One part of the picture is wealth that has been brought into existence by real work to be used or stored as a real physical tangible asset right now. The debt portion of the picture is the part that is waiting for future work to bring that asset wealth into existence. The debt fraction has become so large now that if you think about this, you will understand why a run on the bank leaves many holding an empty bag. The empty
bag is the substance of the assets that haven’t been produced yet.
Does the proverb, “a bird in the hand is worth two in the bush”, mean anything important in this context? I think it does. The way I read that proverb is like this: A physical asset held in possession now is worth more than twice the promise of that kind of asset in the future. The proverb is just a fore shadow. Today’s ratio of birds is quite different from what that proverb suggests.
Let’s rephrase that proverb into an important question relevant to the modern times. What if a bird in the hand becomes so hard to catch that it is worth 100 birds in the bush? What if you knew that for every ounce of physical silver you own there are more than one hundred receipts out there in circulation claiming to represent that ounce? Silver gurus across the Internet have repeatedly shown us that silver receipts have already been fractionalized. Only 1% of silver investors own actual physical silver in their hands. The other 99% only hold only paper receipts or paper promises.
So consider this question: What do you think will happen in the future when the holders of paper receipts try to turn them in to the bullion banks for real physical silver? Can you spell Bankruptcy? Next, ask yourself how high your silver bird in the hand will fly when you are the president the last real silver bank standing, a bank that is solvent, a bank that actually stores the wealth as at the beginning, the bank that will be know by a new title: The Bank of Last Resort.