If Sid asks me for a loan of £5 the loss is all mine if he fails to pay it back
If I ‘lend’ £5 to the bank & they lend £5 to Sid they do not give him a £5 note with a label on it saying ‘This is hedgehog’s £5’. If Sid fails to pay it back the loss is shared, & covered one way or another by other depositors & shareholders if the bankers have been prudent & clever
Even money – cash – is a way of spreading risk, the risk that some of the myriad promises or expectations of future exchanges of good or services in the market will not be met. The beauty of the system is that it requires no detailed tracking of who owes or owns specific promises of goods, services, or bits of paper – an important kind of freedom
At some level however there has to be true & fair accounting for the balance of obligations, reassurance that the weight on one side will not tip the system into instability
Generally, governments have the ultimate responsibility for ensuring that the risks are covered by maintaining confidence in the value of the currency & the stability of society
Throughout history people have been very good at finding new forms of money, & governments have struggled to maintain regulation of supply in the changed circumstances
Part of the problem is that people are slow to adjust, they tend to behave as if the new money works in the same way as the old
Some of the responses are incredibly stupid & rash, especially in retrospect. Like thinking a plastic card with a credit limit is the same as cash in the pay packet, a deposit in a bank account, or even a win on the lottery
In the banking scandals of the 1850s, boards of directors were found to have behaved in ways which seem downright criminal. Some deliberate fraudsters were involved, but many were decent, ‘respectable’ people who could not see anything wrong in treating customers’ deposits as loans to themselves
After such an upset, rules & regulations are painfully worked out to make sure it does not happen again
But it will. New money appears ‘because we are worth it’ & even clever people fail to recognise that the new money needs new rules – everyone is just too busy getting their share
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