So now let me go back to the beginning- where I was at the beginning.
Remember I was talking about how in the 15th century before we were born,
okay, there were two parallel monetary systems.
There was the international system based on gold or
silver and there was the king's money domestic system, okay,
and each of them had sort of a credit superstructure,
not very much credit superstructure as a matter of fact,
but some, built on top of that.
And if you want to really, you know,
enter that world, [inaudible] ,
it's really the best source.
That's not the world we live in today.
How did we ever, evolve?
Mostly, historically, it was about war.
So let's think about a world in which there are two separate systems.
There's the king's money system,
and there's the international money system,
and there's a government central bank and a private banker's bank.
So there's the government bank here.
Which has treasury bills,
and issues domestic currency.
The king's money.
So this is the king's money the domestic money, we're talking about.
And then there's a private bank,
a banker's bank over here
which has some reserves of
gold here and issues
its own deposits which are promises to pay gold.
And there some private credit here.
I'm showing for the government bank that all the credit is state credit,
okay? Its treasury bills.
And there are no,
there don't have to be any reserves here, okay.
Because the king is just promising to
pay these little piece of paper with his own head on it.
And he can always print more of those.
So he's just using those to fund his operations.
These are separate, these are separate currency systems at the moment.
Promises to pay gold and fiat currency sort of here.
That's just a cheap way for the government to fund itself.
And they are separate.
Now comes war.
Now we go back to, what is it?
Lecture two or three?
When we talked about how is it that
the treasury secretary funded the civil war. What did he do?
It was the very first thing I showed you in this class.
What he did was to say,
to go to the private bank.
And say "I need a loan please".
Plus loan.
Plus loan.
And the banker's bank made that loan by creating deposits.
Just like banks always do.
And then, what did Salmon P. Chase Do?
He withdrew those deposits in gold.
Here's hybridity now.
Okay? Now, the government bank that's funding the government operations has all the gold,
has taken all the gold from the private bank.
And the consequence of that was that the bankers bank,
starts to use as its reserve the domestic currency.
So there are three- And that's the origin of hybridity.
This is what, this is- That's the origin of the hybridity that happened.
Is that the state,
used the private bank and that the International Bank,
as a source of war finance.
This happened in the bank of England.
This happened in the United States.
It happened in most of them,
and now they are combined.
Now they did this for war finance.
And they sort of snuck up on the banking system and
twisted their arm and forced them to do this, if you remember.
But after the war they kept it going.
And why did they keep it going,
was a marriage made in heaven.
Ultimately both sides realized "Why are we having these competing systems?
We can both be better off.
We can both be better off.
Why?" Because the king will bless
these deposits and will say "It's okay to issue private money, that's okay.
I'm not going to insist that my money is better than your money.
You you have legal protection that is money."
That's one side of the transaction.
And the private market said, "Well,
if treasury bills are a promise to pay money,
we're gonna like treasury bills,
you can borrow more".
The ability of governments to borrow in capital markets,
to fund their operations is a lot more when they're tied in
to the bankers bank situation
than it is when they're just funding themselves by printing money.
You know, a government that is funding it's up by printing money can't fund very much.
A government that funds itself by selling
treasury bills to the private sector can fund a huge war.
So that's a win win.
This hybridity gave the modern government access to capital markets,
and it gave the private money issuers political cover by the King.
So, modern monetary systems are always hybrid in one sense or another.