
A Medieval British Anti-Counterfeiting System: Split Tally Sticks (2017) - jamesfisher
https://www.core77.com/posts/67600/A-Medieval-British-Anti-Counterfeiting-System-Split-Tally-Sticks
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smitty1e
> Whomever first came up with the ripped-bill idea probably got the idea from
> British split tally sticks.

Or another creative person came up with it independently.

We have better resources now, but I am skeptical that per capita creativity is
any better now than it ever has been in human history.

~~~
alimw
There's a different logic to the tally stick anyway

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derriz
I groan every time I read something along the lines of "before long, they
began issuing additional receipts for gold even if they were not backed by a
deposit. This came to be known as ‘fractional reserves banking’ – lending out
far more money than one actually has on deposit – and the road to banking ruin
was firmly in place."

That is not what "fractional reserves (sic) banking" is. What the author is
describing is pure and simple fraud and nothing to do with the mechanics of
fractional reserve banking. The goldsmiths were passing off paper certificates
under false pretence that they correspond with real stored gold.

Fractional reserve banking is really simple: you gather up a pile of money by
convincing others to deposit their money with you (although when the
depositors are other banks and institutions such "deposits" are often
structured as bonds); you RESERVE a fraction of gathered money (varies but
usually between 6% and 15%) while lending out the rest. At no point does
fractional reserve banking involve "lending out more than what you have on
deposit".

~~~
alimw
> What the author is describing is pure and simple fraud ... The goldsmiths
> were passing off paper certificates under false pretence that they
> correspond with real stored gold.

Where there are no false pretences there is no fraud. From
[https://en.wikipedia.org/wiki/Gold_certificate](https://en.wikipedia.org/wiki/Gold_certificate):
_Banks may issue gold certificates for gold that is allocated (non-fungible)
or unallocated (fungible or pooled). Unallocated gold certificates are a form
of fractional-reserve banking and do not guarantee an equal exchange for metal
in the event of a run on the issuing bank 's gold on deposit._

> you gather up a pile of money by convincing others to deposit their money
> with you ... you RESERVE a fraction of gathered money ... while lending out
> the rest.

If this were true then the only money in circulation would be that created by
the Central Bank. Far from accurate.

~~~
derriz
> Where there are no false pretences there is no fraud

It most certainly would constitute fraud if a bank were to issue gold
certificates for more gold than it had claim to - whether allocated or
unallocated.

What happens during a bank run has no relevance here. A bank run isn't caused
by a bank issuing more loans than it has borrowed itself. It's caused by the
mismatch between the nature of a bank's liabilities and assets. Much of its
liabilities have short terms or even worse - deposit accounts can be demanded
from the bank at any time - while their assets which are generally loans which
are generally fixed term or at least not recallable at will by the bank.

A bank with $1B worth of depositors money could in theory suffer a bank run
even if it has only lent out $1m while holding the other $999m in it's vaults.
No excess lending required is required for this to happen.

> If this were true then the only money in circulation would be that created
> by the Central Bank. Far from accurate.

No, that's certainly not implied by the simple statement of fact that the
amount of money a bank loans out is strictly less than the amount of money
that the bank has borrowed from others, whether from depositors or other
institutions.

The sum of the balances of deposit accounts in the banking system easily
exceeds the amount of money created by central bank but that does not require
banks to "lend out more than they've raised" \- it's a simply a result of
simple arithmetic and the fact that loans exist in the system.

~~~
alimw
Suppose you are a goldsmith and someone makes a deposit with you of two bars
of gold, for which you give them two certificates. Now the regulator demands
you keep 50% of your assets in gold. According to your way of thinking there
is just one way to proceed: lend out one gold bar and stick the resulting IOU
in its place on the asset side of your balance sheet. But suppose your would-
be-debtor really wanted a larger amount, and in addition thinks she can pay
her suppliers in your certificates as easily as in gold. Then you might hang
on to the gold, write out two certificates for her and put the resulting IOU
against them on the asset side of your balance sheet. Either way the
regulator's demands have been met and you remain fully legal and solvent.

~~~
zhte415
To add in both sides of the balance sheet in this example:

Balance sheet, ignoring Capital (Assets = Liabilities + Capital).

In your example:

Before IOU lending, the goldmith's balance sheet is: 2 Gold (asset); 2 Gold-
equivalent Deposit Certificates (liabilities). 100% backed deposits.

Lending 1 Gold: 1 Gold (asset), 1 Gold-loan (asset); 2 Gold-equivalent Deposit
Certificates (liabilities). 50% backed deposits, as the regulator asks for.
That sounds like a Liquidity Coverage Ratio though, not a capital requirement
(as above, ignoring Capital for this).

Lending 0 Gold, 2 Gold-like Notes: 2 Gold (asset), 2 Gold-like Notes (asset);
2 Gold-equivalent Deposit Certificates (liability), double-entry required for
2 Gold-like Commercial Paper/Note/Bond Certificates issued (liabilities). As
50% is the LCR, within regulator requirements.

Issuing more than 2 Gold-like notes, outside the LCR.

Just adding, to make it clear balance sheets always need to balance, I find
this makes clarity much.. well, clearer.

~~~
derriz
Yes this is a very good way to think about it.

I've had this argument many times - it's seems the web has endless sources
erroneously "explaining" how retail banking works that has convinced people
that there is shenanigans involved in retail banking. Generally they mix up M2
money supply with retail bank operations. It's very difficult to convince
people that they are wrong in this regard as they become convinced they've
been let into some huge Matrix-like secret of how the financial system
operates and tend to savour such knowledge (wow - money doesn't really
exist!!) even in defiance of reasonableness or logic.

~~~
alimw
I find both zhte415's comments in support of my argument that your initial
contention was wrong. It's very strange that you interpret them otherwise. To
quote you:

> What the author is describing is pure and simple fraud ... The goldsmiths
> were passing off paper certificates under false pretence that they
> correspond with real stored gold. ... At no point does fractional reserve
> banking involve "lending out more than what you have on deposit".

Yet that is exactly what happens in the second hypothetical course of action I
described. Are we now agreed that it is fine?

I will concede that this hastily written statement of mine was ill-thought-
through: "If this were true then the only money in circulation would be that
created by the Central Bank." I cannot edit it now.

~~~
derriz
zhte415 comment covers two cases: lending out no gold and lending out one unit
of gold. I don't see it supporting your argument that a bank can loan out more
gold than it has borrowed.

The reason I welcome zhte415's comment is that thinking in terms of balance
sheets usually clarifies things (as noted in the comment).

For example, the top 5 biggest retail banks in the US hold between 20%-40%
more in deposits than they have issued loans individually as well as in
aggregate. Don't you think that if retail banks worked in the way you are
claiming - i.e. raising $X in deposits but issuing >$X in loans that there
would be some example of this happening? For at least one bank in the US? It
just doesn't happen.

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evgen
Didn't notice it in the article, but I believe this is also the source of the
term 'short end of the stick' (the foil that was held by the debtor was often
shorter than the stock.)

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dbuxton
On the dollar bills: I've always wondered how the "rip it in half" strategy
works in practice given that getting it precisely right is hard and presumably
the person with 50+% can cash in for full face value (see
[https://www.bep.gov/resources/faqs.html](https://www.bep.gov/resources/faqs.html)).
Did people really do this?

~~~
netsharc
I doubt banks would take 52% notes... So if it's "around" 50%, both pieces are
probably worthless.

And writing this it occurred to me: the way to tear it well is the way you do
with a piece of paper: fold it in half aligning the corners, make a good
crease, and tear slowly...

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aww_dang
An early example of debt monetization. The article fails to mention that taxes
were payable in these tally sticks, thereby creating a market for these pieces
of wood.

Here's a more in-depth article

[https://glintpay.com/money-en_us/how-equating-wood-with-
gold...](https://glintpay.com/money-en_us/how-equating-wood-with-gold-left-
englands-citizens-short-changed/)

"However, the reality was that the vaults soon contained more wooden sticks
than gold and the King soon began to issue tally sticks as he pleased."

Anti-counterfeiting is a somewhat laughable turn of phrase in this context.

"Overnight the Kings’ tally sticks reverted back to their real worth:
firewood. The Kings’ creditors, the goldsmiths and their customers had “drawn
the short end of the stick” (the origin of a still used expression)."

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b0rsuk
A 8-minute video on the subject:
[https://www.youtube.com/watch?v=2DkyahZplFo](https://www.youtube.com/watch?v=2DkyahZplFo)

(Modern History TV)

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sdoering
I really loved the history lesson. Being a history nerd I wonder why I never
stumbled upon this.

Thanks for sharing.

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chrisseaton
What I don't understand is - if the two parts of the tally stick presented
don't match, what do you do then? How do you resolve that? How do you know
which party is the one in error?

~~~
CodeShmode
Since you can't undo a cut, the one with the fewest cuts would be the
legitimate one.

~~~
chrisseaton
> the one with the fewest cuts would be the legitimate one

How's that? If I throw away my old half, split a new one, and add fewer cuts
to it, you'd apparently assume it was the legitimate one, but it wouldn't be.

~~~
jedimastert
If you make a new one it will be fairly obvious that it doesn't match the
original sticks after looking at the grain

~~~
chrisseaton
> that it doesn't match the original sticks

Lol but which is the original?

That's the point.

If you have two that don't match you don't know which one is the legitimate
one you just know that they don't match and at least one is not legitimate.

~~~
shaftway
It doesn't matter which one is the original. The creditor has a stick with the
debtor's imprint or mark on it of some kind. That's enough. Presenting a false
stick as the debtor doesn't undo the existence of the creditor's stiick, and
is essentially claiming that you have ___both_ __debts.

Otherwise you, as the debtor, could just throw your stick away, claim the
creditor's is false, and be done with it.

~~~
chrisseaton
If the debtor claims the creditor's stick is fraudulent how is that resolved?
The tally stick doesn't solve this problem.

