Final answer:
Goldsmiths lending out receipts represents the early development of fractional reserve banking, which significantly contributed to the broader transition towards paper currency. However, this practice also introduced new risks and contributed to economic crises such as the Panic of 1819 when the public demanded specie for their banknotes en masse.
Step-by-step explanation:
When goldsmiths began issuing receipts that were lent out, it marked an early practice in the evolution of banking where entities other than formal banks began to create credit and paper currency. The practice emerged due to the fact that goldsmiths were initially relied upon for the safekeeping of gold and silver, which led to the issuance of receipts that represented the depositor's claim to the specie stored with the goldsmith. Eventually, goldsmiths realized that not all depositors would claim their holdings at the same time, leading to the practice of lending out receipts representing more metal than they had on hand. This process is an early example of fractional reserve banking, essential for the development of the modern financial system, yet also inherently risky if too many holders of the receipts demanded their specie at once.
The case during the War of 1812 where the Bank of the United States suspended specie payments, opting for paper banknotes, further illustrates the systemic risks associated with currency not backed by adequate reserves of gold and silver. The Panic of 1819, caused in part by banks' excessive issuance of paper money not backed by specie, led to widespread economic hardship. Similarly, the presidency of Andrew Jackson was marked by a significant shift towards a hard money policy to mitigate economic volatility from inflation and the issuance of non-backed paper currency.