But that's not the only thing that happened.
[MUSIC]
Second, the gold depositors also figured out that they didn't have to
leave their gold with the goldsmith for free.
In fact, wasn't long before goldsmiths began competing for depositors' gold.
In those good old days, these goldsmiths didn't offer people free toasters or
rebates to open an account to receive bags during the day.
But the goldsmiths did begin to offer depositors interest on their gold deposits
and this became the precursor to interest bearing bank and savings accounts.
[MUSIC]
Now here may be the most interesting and important aspect of the goldsmith's story.
The goldsmiths, themselves, figured out that they can under
what is today called the system of fractional reserves.
For example, a goldsmith might take in $1,000 of gold
deposits from one depositor and issue a receipt for that amount.
At the same time, that same goldsmith might turn around and issue additional
$1,000 in gold receipts as an interest bearing loan to another person.
And note that the goldsmiths would do that because even though the goldsmith knew
full well that he or she didn't have enough gold deposits to
redeem all the receipts that he or she issued.
They thought they could do it.