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 functioned 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 depositors' gold.
In those good old days, they didn't offer free toasters and
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, a system of fractional reserves.
For example, they might take in a $1,000 of gold deposits and
issue receipts for that amount to the depositors.
However, they then might turn around and
also issue another $1,000 in gold receipts as loans to other people, even though
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 everybody who held the $2,000 of receipts
would all come in at once to demand their gold.