Now, over time, three important things happened with this system.
First the depositors
figured out that they could trade their
gold receipts for goods rather than go back
to the goldsmith to redeem the paper every time they needed to make a transaction.
These receipts function in effect as the first paper money.
Second, the gold depositors soon figured out that they didn't have to leave their
gold with the goldsmith for free. In fact, it wasn't long before goldsmiths
began competing for depositor's gold.
In those good old days, they didn't offer
people free toasters or rebates to open an account.
They did offer them interest on their gold deposits.
Finally, the goldsmiths figured out that they could operate
under what is today called the system of fractional reserves.
For example, they might take in a $1000 of gold deposits and issue
receipts for that amount to the depositors.
however they then might turn around and also issue another
thousand dollars in gold receipts as loans to other people.
Even thought they didn't have enough gold deposits
to redeem all the receipts that they issued.
The goldsmiths could operate this way because it was
highly unlikely that everyone who held the receipts would come
in at the same time to demand their gold.