Final answer:
The goldsmiths were the first to institute a fractional reserve system, where they held onto a portion of deposits as reserves and lent out the rest. The fractional reserve system allows banks to create money through lending, thereby increasing the money supply in the economy.
Step-by-step explanation:
The goldsmiths were the first to institute a fractional reserve system. In this system, the goldsmiths held onto a portion of the deposits they received as reserves while lending out the rest. They realized that not all depositors would come to withdraw their gold at once, so they could safely lend out a portion of it. This practice of lending out more money than what is actually held in reserves became known as the fractional reserve system. Its significance lies in the fact that it allows banks to create money through the process of lending, thereby increasing the money supply in the economy.