Exchanges, bubbles and central banks · 1600s–1790s
1600s
Goldsmiths lend out their deposits
London goldsmiths keep merchants' gold, issue receipts, and lend some of it out.
In the mid-1600s, London merchants left gold with goldsmiths for safekeeping and got receipts that began to change hands like money.
Goldsmiths noticed that depositors rarely all came back at once, so they lent part of the gold out at interest and kept the rest in reserve.
💡 Why it made sense then
Gold sitting in a vault earned nothing. Lending most of it out was profitable, as long as not everyone asked for their money on the same day.
Ideas it gave us
- 🏦 Fractional reserve banking
Fractional reserve banking is the system in which banks keep only part of their deposits as cash reserves and lend out the rest, which creates new money in the economy.
Practise with $10,000 in play money
Free. No real money involved.