A 1922 10 dollar gold note exchangeable for gold coins – Then a hideous idea occurred to the goldsmiths. They found that paper being only paper, the amount of notes could easily be made into some amount greater than the amount of gold deposits entrusted to them by their depositors. They could, for instance, create double the amount of notes than they had in redeemable gold, and no one was likely to figure out their scheme. Assuming that as long as there was not a run on the gold deposits, there would be sufficient gold to back those who came to trade in their notes for gold. After all, the notes were easier to use as currency than gold and thus the deception was likely to remain undiscovered. Other men had to toil to make a living, but the alchemist goldsmith could create extra notes just from the paper he had on hand. Having thus enriched himself, he could do one of two things with his newly developed treasure. He could commit blatant fraud by using the extra notes for his own personal purchases and investments (effectively spending his customer’s gold), or he could take the more surreptitious route of appearing as an honest business enterprise that made loans with the notes to other needy merchants, with interest. This latter way served to make the goldsmith a highly valued member of society. Under either approach, the goldsmith was secretly risking his customers’ deposits to conceal an illegitimate creation of his own wealth. Having in possession gold that was only a fraction of what was represented by outstanding notes, we mentioned that the crafty goldsmith was jeopardizing his client’s wealth should there be a bank run in which everyone tried to claim their gold at the same time. Yet, even this was not all, for the extra notes created increased demand on goods and services which causes their prices to rise. In effect, the goldsmiths had also created inflation, which spoils the purchasing power of those who had worked and sweated to earn their gold.
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