A Goldsmith Exercise for Learning Money Creation

In this article, the authors outline a classroom exercise involving goldsmiths designed to improve undergraduate students' understanding of how banks create money. This concept is important to macroeconomics and money and banking courses, yet students frequently struggle with it, largely due to the nonphysical nature of deposits and reserves. In contrast, gold-based banking systems tend to be more intuitive because of the physical nature of gold. By simulating interactions among a goldsmith, a depositor, a merchant, and a borrower in a gold-based system, students gain a deeper understanding of reserves and money creation. In particular, the exercise illuminates the intricate link between lending and the creation of new money, and highlights the importance of fractional reserve banking and reserve deposits.