A Goldsmith Experiment for Learning Money Creation

Abstract

The paper presents a classroom experiment 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 non-physical nature of deposits and reserves. In contrast, gold-based banking systems tend to be more intuitive due to the physical nature of gold. By simulating interactions between a Goldsmith, a Depositor, a Merchant and a Borrower in a gold-based system students gain a deeper understanding of reserves and money creation and of the intricate link between lending and the creation of new money. Highlighting the importance of gold reserves to Goldsmiths’ ability to make new loans and create new money, helps students understand the importance of reserves to modern banking.

JEL Classification: A22, E40, E51