William Bramley/The Gods of Eden/21/217/1

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.