Good Faith and Filthy Lucre

I mentioned this post in yesterday’s BookFunnel email, while telling everyone about the deal for Promissory Note, this week.

Actually, the original version of this post ran in another BookFunnel email, this time last year.

But it’s interesting (to geeky me, at least!), so I thought I’d post it for everyone to see.

Today in 1661, the first European banknotes–that is, paper money–were issued by the Swiss bank, Stockholm Banco.

Wikipedia reported this event as the first banknotes in use, period.  Only the Chinese introduced paper money–that is, Promissory Notes–way back in the 11th century, which Wikipedia also faithfully reports.  It pays to research well!  🙂

From the beginning of history, civilizations had used coins as a medium of exchange.  It was a reflection of growing financial sophistication that bank notes were created in the 17th century.

Bank notes are a form of promissory note:  The bank promises that if you present that note to them, they will exchange it for the equivalent value in gold.  Honest banks would not issue more notes than they had gold to exchange for them.

If a bank puts out more notes than they have gold in reserve for, it can stimulate inflation.

These days, the direct relationship between bank notes and gold has fallen away.  That makes our currencies “fiat” money — it’s money based on nothing but the good faith of the society that uses it that the value will hold.

That good faith can actually be measured indirectly.  When I was travelling around Europe (well before the EU was formed), I found that I could use British Sterling, and US currency instead of exchanging for local currency at a bank or exchange service.  The exchange rate sucked, but the merchants were willing to take the foreign “bank notes” (which they still are) because they knew they would hold their value.  But they wouldn’t take my native Australian dollars.  🙂

This is the reasoning that underpins most of the non-romance storyline in Promissory Note. (Gee, wonder where I got the book title from?)