In the Middle Ages, goldsmiths took in customers’ deposits (gold coins) and issu
ID: 2429406 • Letter: I
Question
In the Middle Ages, goldsmiths took in customers’ deposits (gold coins) and issued receipts that functioned much like checks do today. People used the receipts as a medium of exchange. Goldsmiths also issued loans by writing additional receipts against which they were holding no gold to borrowers. Were goldsmiths engaging in fractional reserve banking? Why do you think that customers turned their gold over to goldsmiths? Who bene?ted from the goldsmiths’ action? Why did such a system generally work? When would it have been likely to fail?
Explanation / Answer
Ans.
Goldsmith were engaged in fractional reserve banking .When people used to deposit there coins for safekeeping , goldsmith used to issue a certificate with which depositor could redeem his gold at later date.They nioticed that these certificate of deposits were being used as method of payment and realized that as long as they kept gold coin in reserve which is enough to cover demand for cash ,they can lend out rest of coins at interest.So goldsmith were engaged in fractional reserve banking like today where banks have to keep fraction of total depositsas cash to meet demand of customers for withdrawls. Customers turned there gold over to goldsmith as to maintain safe storage of gold because it is a precious metal having both use value and exchange value.Goldsmiths acted as depositors and lenders of money.Goldsmith benefited because by lending gold to customers for investment purposes he was able to create loans.Moreover goldsmith kept gold safe and secure for there customers on which he earned interest.This system worked as goldsmiths accepted deposits on which interest was piad,make loans from funds deposited ,issue there own promissory notes and allow depositors to access there accounts by use of drawn notes or through certificate of deposits redeem their gold.This system of banking fails when goldsmith runs short of reserves and cannot meet withdrawl demands.Such that customers will not trust goldsmith again for deposits and without deposits this system of goldsmith banking fails.