William Bramley/The Gods of Eden/21/217
who laid this foundation were reportedly the goldsmiths. Goldsmiths usually owned the strongest safes and lockboxes in town. For this reason, many people deposited their coin metals with the smiths for safekeeping. The smiths issued receipts to the depositors that promised to pay to the receipt holders on demand those quantities of gold or silver shown on the receipts. Every such receipt was actually a note which could be circulated as money until a holder of the note went back to the goldsmith to redeem it for the specified amount of metal.
The goldsmiths made an important discovery. Under normal circumstances, only about 10% to 20% of their receipts ever came back for redemption at any given time. The rest circulated in the community as money, and for good reason. Paper was easier to carry than bulky coin and people felt safer holding receipts in lieu of actual gold and silver. The smiths realized that they could lend out the unredeemed metals and charge interest, and thereby earn money as lenders. In making such a loan, however, the smith would try to convince the borrower to accept the loan in the form of a receipt instead of actual metal. The borrower could then circulate that note as money. As we can see, the goldsmith has now created "money" (his receipts) for double the actual quantity of metal he has in his safe: first to the original depositor, and then to a borrower. The goldsmith did not even own the metal in his safe, yet by simply writing upon a piece of paper, someone now owes him money up to the full value of the gold in his safe. The smith could continue writing his notes as long as the notes coming in for redemption did not exceed his actual deposits of precious metals. Typically, a smith would issue notes four to five times in excess of his actual supply of gold.
As profitable as this operation may have been, there were some pitfalls. If too many of the goldsmith's notes came back for redemption too rapidly, or the smith's borrowers were slow to repay, the smith would be wiped out. The credibility of his notes would be destroyed. If the smith ran his operation cautiously, however, he could become quite wealthy without ever producing anything of value.
