The fractional reserve system of banking started when goldsmiths began:
A) Accepting deposits of gold for safe storage
B) Charging people who deposited their gold
C) Using deposited gold to produce products for sale to others
D) Issuing paper receipts in excess of the amount of gold held

Question

Quizplus · Accepted Answer

The fractional reserve system of banking began when goldsmiths started issuing paper receipts or notes that were not fully backed by the amount of gold they held in their possession. They would lend out these notes to others, while still holding onto a portion of the deposited gold as reserves. This allowed them to earn interest on the loans they made, while also having a portion of gold on hand to meet any withdrawal requests from depositors. This practice eventually evolved into the modern banking system, where banks are allowed to create money through loans and have a required reserve ratio set by central banks.

The Fractional Reserve System of Banking Started When Goldsmiths Began