But times were bad. Highwaymen and robbers helped create an environment that prompted the townspeople to leave their money with the local goldsmith. They were the logical choice - they had the best vaults, by virtue of their trade.
In return, the goldsmith would issue a receipt, which was kept by the grateful depositor until he wanted to give it back in order to re-obtain his gold. But in the process of time the community began to trade with the paper receipts instead of withdrawing the actual money. The merchants and shopkeepers didn't mind because it had become customary that whoever held the receipt was able to claim the real thing, though few ever bothered.
Inevitably the strong rooms became choked with gold and silver coins that were rarely asked for, so it was not surprising that the goldsmiths conspired to lend a little on the side. They would never be found out. By the time the owners came to get their money it would be back, and a tidy heap of interest to boot!
The goldsmiths prospered, but what came next exceeded their wildest dreams. One day the amount of the loan was so large that the borrower didn't want to carry the gold away. Could he simply re-deposit it and have receipts instead? The lender benevolently agreed. After his client left, the goldsmith smiled broadly. He could have his cake and eat it too. He had made the loan; he was receiving the interest; and he still had the gold! The possibilities were well nigh limitless.
The following day another borrower arrived. The goldsmith was ready to oblige. He lent the same money a second time. He tactfully suggested the advantages of a paper receipt. He bade the thankful client goodbye. Then he contemplated the miracle unfolding before his eyes. For the gold was still lying on his strong-room floor and yet another borrower respectfully standing at his door!
In this manner the goldsmiths discovered a simple key. It was inconceivable, indeed punishable by death, that an individual should illegally mint the nation’s coins. This was unquestionably the prerogative of the crown. But their receipts had become money in its own right, not because it was legal tender, but because that people believed it as good as such. Now they could create money with the stroke of a pen, up to 10 or 20 times that was in their vaults, and on the basis of a gold reserve which was not theirs anyway.
The goldsmiths rose to unusual prominence in the community. Their humble businesses moved to premises more magnificent. No longer were they goldsmiths, but BANKERS - a title more fitting to their new-found role. Powerful family dynasties arose, their wealth and influence stretching far and wide. To them the representatives of governments stooped in reverent awe. Entire nations were indebted to them. For theirs was an economic dominion. Yet their power was usurped from government and their basis of operation, not a miracle, but in truth, a wicked fraud.