An early goldsmith banker earned a profit (sometimes a large profit) simply by w

Question

An early goldsmith banker earned a profit (sometimes a large profit) simply by writing notes to certify that a person had deposited a certain amoumt of gold in his vault. By writing more notes than the amount of gold held, the goldsmith could lend the notes and charge interest on them. Did the goldsmith bankers make money out of thin air in a form of legal theft? Should the goldsmith bankers have been regulated to ensure that the amount of gold in their vaults equaled the value of the notes they created? What were the main benefits fromt he activities of the goldsmith bankers?

Explanation / Answer

The goldsmith was involved in an early form of fractional reserve banking. Just as a modern banker makes loans against its assets and creates money, so, too, were goldsmiths making loans (by issuing notes) against their assets and, in the process, creating money. If the goldsmith bankers were regulated to ensure that the amount of gold in their vaults equaled the value of the notes they created, then it would not have been possible for them to create new money. The main benefits of the goldsmiths accrue from the benefits of money. Money benefits society by eliminating the use of barter. Money also benefits society because it acts as a medium of exchange, so that buying and selling goods and services is easier. Goldsmiths, by creating money, helped to create these benefits.

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