30 Pages Posted: 14 Apr 2010 Last revised: 3 Apr 2011
Date Written: April 14, 2010
Modern accounts of the origins of fractional-reserve banking, in economics textbooks and elsewhere, often assert that London goldsmiths came up with the idea around the middle of the 17th century, and first implemented it by clandestinely lending coin that they were supposed to keep locked away in their vaults. I assess the veracity of this claim by examining contemporary, circumstantial evidence bearing upon it, and also by considering the circumstances under which, according to English legal doctrines at the time in question, goldsmiths were entitled to lend coin that had been surrendered to them. I conclude that the goldsmiths were almost certainly innocent of the crime for which they are so frequently accused, and that the accusation may well have taken shape through later writers’ confusion of (1) crimes other than embezzlement of which goldsmiths were accused by their contemporaries and (2) documented embezzlement of stored coin, not by goldsmiths but either by the British crown or by merchants’ servants.
Keywords: Goldsmiths, fractional reserves, bailments
JEL Classification: G21, N23, K12
Suggested Citation: Suggested Citation