Transcript:

The emergence of the second layer of money and the first central banks is a fascinating subject. This theme is extensively discussed in the book "Layered Money" by Nick Battia. I highly recommend it to those interested in the evolution and intricacies of our monetary systems. The objective of this section is to understand the origin of money creation and how it could lead to hyperinflation.

The history of money dates back to the 13th century in Italy, specifically in the city of Florence. At that time, the florin and bills of exchange were common. A notable example is the florin, adorned with the figure of Saint John the Baptist.

While owning a genuine florin is expensive today, reproductions are available. There are also other currencies from that time, such as the soldo from the Italian states of the 17th century, which features an image of Christ.

The common practice at that time was as follows: goldsmiths issued bills of exchange in exchange for deposited florins. These florins were carefully kept in their vaults. Thus, real gold, represented by the florin, formed the first layer of money, while bills of exchange formed a second layer. However, the liquidity of this system was limited. If someone wanted to redeem their gold in exchange for their bill, the transaction was simple. However, exchanging these bills between individuals was not a common practice.

The Antwerp Stock Exchange marked a key milestone in the evolution of paper money. It was there that the practice of discounting promissory notes was introduced. These notes were paper instruments representing monetary value, but their uniqueness lay in the fact that they bore names and maturity dates. This made them difficult to exchange before the due date. The revolution brought about by the Antwerp Stock Exchange lay in the possibility of discounting these notes before their due date. For example, if a promissory note was due in a month, it was possible to purchase it at a discounted price to account for the time before the due date. This innovation not only made paper currency more liquid but also introduced the concept of the time value of money.

This concept, although associated with Nick Bell through his Twitter pseudonym "time value of BTC," is not his invention. Nevertheless, he discusses it in detail in his work. The main idea is that time has value. Thus, if someone decides to pay a promissory note worth $100 one month in advance, they can obtain it for, for example, $98 and receive the $100 on the due date. This monetary innovation originated at the Antwerp Stock Exchange.

Following the establishment of the Antwerp Stock Exchange, a major milestone was the founding of the VOC, the Dutch East India Company. This company, based in the Netherlands, even issued its own currency. Following the creation of the VOC, the first stock market was established in Amsterdam, marking the beginning of the company's stock market operations. What is interesting to note is how the Dutch managed to end Antwerp's supremacy as an international economic center. They simply blocked access to the Scheldt River. This strategy was part of a larger historical movement, the revolt of the beggars. A crucial event in European history.

Following the establishment of the VOC, another significant development in monetary history was the introduction of gold coins by the Bank of Amsterdam. These coins, dating back to 1722, were made of silver. However, what truly revolutionized finance at that time was not so much the coin itself, but the accounts associated with this currency at the Bank of Amsterdam. These accounts became the primary means of international exchange. Transactions were simply recorded in registers or ledgers. Thanks to this system, Amsterdam became the global economic center. Over time, the Bank of Amsterdam decided to impose the use of these accounts. Independent money changers were required to exchange their coins for deposits at the bank on a daily basis.

The creation of the Bank of England was motivated by the need to finance the war at the end of the 17th century. Like the Bank of Amsterdam, it imposed deposits by decree. The Bank of England's particularity was to relegate private banks to a secondary position in the monetary system, thus creating what could be called a "third layer" of currency. Initially, the first layer of currency was represented by gold. Deposits made with private banks formed the second layer. However, when these deposits could no longer be converted into gold, a third layer of currency appeared. From then on, the notes issued by private banks were no longer convertible into gold but into paper currency from the Bank of England, which itself was convertible into gold. This evolution led to a complexification of the monetary system with the addition of additional layers.

Bank panic at Seamen's Savings Bank during the Panic of 1857.

Following the bank panic of 1796, a phenomenon occurred in which everyone tried to move up the "money pyramid." People wanted to exchange their third-layer currency for second-layer currency, and ultimately, for first-layer currency, which was gold. Faced with this massive rush, the Bank of England was forced to take action to stabilize the situation. To prevent a potential deflation of gold reserves, it decided to suspend the convertibility of its banknotes into gold. This suspension, initially intended as a temporary measure, lasted for approximately two decades.

Central banks have evolved to become lenders of last resort, suspending the convertibility of their currency into gold. Although this action was initially intended as a temporary solution, it ultimately became permanent, marking the advent of the concept of the lender of last resort. This transformation has shaped central banks as they are known today. However, in more fragile economies, this ability to print money at will can lead to undesirable consequences, such as hyperinflation, if used irresponsibly.