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How Goldsmiths Created Banknotes
- Goldsmiths started issuing receipts for stored gold which people used as a medium of exchange instead of carrying coins.
- Those deposit receipts became the practical origin of modern banknotes and banking trust.
Trust Enables Money Creation
- Banks began writing more receipts than they had gold and effectively created money by issuing claims people accepted as valuable.
- This practice works until too many depositors demand real gold and triggers a bank run.
Central Banks Prevent Contagious Runs
- Central banks emerged as lenders to banks to prevent contagious runs by pooling reserves across institutions.
- This reduced individual bank failure risk but concentrated monetary control in one institution.