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In last week’s article on Fractional Reserve Banking we discussed how the goldsmiths became really greedy and brought down their entire system that was based on fractional reserve banking, financially ruining their depositors. If you missed that, please visit Fractional Reserve Banking, Part 1
The goldsmiths resorted to creating far more in notes than double the amount of gold. Highly inflationary of the money supply, prices rose considerably. Soon, the depositors began questioning the legitimacy of the goldsmith’s banking operation and so a mad run was created on the gold deposits. Of course, the gold ran out well before all the claims by depositors and vendors could all be paid. The goldsmiths went bankrupt and the public was horrified that its wealth had been stolen. Fractional reserve banking had deservedly obtained an evil reputation.
