How is Money Created?

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The process of money creation and the evolution of our current banking system are best explained using stories. One such popular story is the story of a goldsmith. Let's assume a goldsmith by the name Mark, operating from a small city.

Mark is the only goldsmith in his city, and has a strong vault where he stores his own gold and also other people’s gold. For safekeeping, people will come and deposit their gold with Mark, for which Mark will charge them a small fee. For record purpose, Mark will issue them a receipt, which they can come and produce anytime to Mark and take their gold back. Many people deposited their gold with Mark and held these receipts. As time passed, people started using these receipts for payment purposes or for paying their debt. For example, someone may buy food from a shop and pay using Mark’s receipt. The shopkeeper will then go to Mark and exchange the receipt for gold. The receipts were actually circulating as money. These receipts can be called bank loans.

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