In Part 1 of this entry we reviewed the story of how modern-day money originated with goldsmiths, and how everyone benefited. Now we go to the second part of the story. Be forewarned; it does not have the same happy ending.

One day, a particularly crafty goldsmith noticed that his inventory of depositor gold hardly changed from day to day, or even from month to month. He wondered: "What if I start loaning depositor money? If I work it right, I can earn interest on depositor money, and my depositors will never know the difference!"
So the crafty goldsmith loaned some gold to a few enterprising friends who wanted to expand their businesses. He made a schedule for them to pay back part of the gold loan every month, plus one percent interest on the outstanding balance. After this worked a few times, he realized that there was still a lot of unused depositor gold in his vault. So he started making more loans, and earning more interest. To be safe, he paid the local magistrate to review and approve each loan schedule.

Before long, other goldsmiths heard what the crafty goldsmith was up to, and started to do the same thing. Eventually, many goldsmiths quit their craft and became deposit and loan bankers.

For centuries, this story has been told by economists and other members of the ruling elite as a glorious tribute to industrious enterprise. Some like Milton Friedman and his enthusiasts go so far as to say growth of the banking greatly increased our quality of life and even freedom itself.

But huge ethical issues lurk in the shadows of this tale.
  • Who actually owned the deposited gold: the goldsmith or the depositor?
  • Did the banker ask depositors if it was OK to loan out their gold?
  • Did the banker ask depositors how much of their gold could be loaned out versus held in reserve?
  • Did the banker share any of the loan interest with depositors?
  • Did the relationship between the goldsmith/banker and the magistrate compromise the role the magistrate was supposed to play in protecting the interests of common citizens?
  • What happens to depositors if the banker cannot satisfy their requests to redeem their gold?
  • What happens to borrowers who have trouble paying back the loan?
Each one of these questions call on us to make ethical judgments. The answers unavoidably involve value judgments, or bias. So, the critical issue is: Who's interests are being served by our answers to these big ethical questions?

The sad tale of human history is that these questions are almost always answered with a heavy bias favoring the one percent, or the wealthy few. Deep Economics embraces a different approach: answering big economic questions with a strong bias for the 99 percent. Isn't it about time? Isn't that what protests all around the globe are essentially about?

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