The goldsmith's ability to create money was based on the fact that
A) withdrawals of gold tended to exceed deposits of gold in any given time period.
B) consumers and merchants preferred to use gold for transactions, rather than paper money.
C) the goldsmith was required to keep 100 percent gold reserves.
D) paper money in the form of gold receipts was rarely redeemed for gold.

Question

Quizplus · Accepted Answer

The goldsmith's ability to create money was based on the fact that paper money in the form of gold receipts was rarely redeemed for gold. The goldsmith would issue paper receipts for gold that was deposited with them, which could then be used as a form of currency. However, these receipts were often used as a medium of exchange rather than redeemed for gold, allowing the goldsmith to create more receipts than they actually had gold on reserve. This is known as fractional reserve banking.

The Goldsmith's Ability to Create Money Was Based on the Fact