The gold system turns into a fractional reserve system.

As the goldsmith became obsessed with his wealth from his gold vault keeping business, he came up with a new idea. Why not loan his own profits from his business, with interest, to other individuals or businesses?

Soon, the goldsmith became even wealthier. The goldsmith was running a gold vault keeping business, as well as a loan service.

The goldsmith soon realized that he could make a lot more money by loaning out his depositors gold to individuals and businesses, at interest, without the depositors knowledge. Since the entire town was now using paper as money instead of gold, the banker could easily lend out his depositors gold in the form of paper without his depositors ever knowing it was being loaned out!

The goldsmith soon ran out of his depositors gold that he was using to back his paper loans. This led to an even more sinister idea.

Related Pages:

Inflation | Introduction to money | The birth of usury | Fractional reserve banking | Debt as money | How gold can manipulate inflation | There is hope | Conclusion

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