langreiter.com plain, simple: Fractional Reserve Banking

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Fractional Reserve Banking

CREATED BY chris • LAST EDITED BY chris 8201 days AGO

To understand Fractional Reserve Banking it's necessary to understand where bank notes came from: In the olden times, people deposited their silver and gold money at goldsmiths (where it was safely deposited in the goldsmiths' strongboxes). In return they received a note. Over time those notes got used in trade, as they were much more convenient to carry around than heavy metal money - thus paper money was born.

As soon as bank notes were accepted as a means of payment, the goldsmiths/money lenders recognized that at no time all people who had their gold and silver money deposited at their place would want it back at the same time. Therefore they could lend "virtual" money in the form of notes, keeping only a fraction of the "real" gold and silver money in reserve (usually around 10% of the amount lended out in note form).

Today, Central/National/Federal Reserve Banks usually have a nation/union-wide monopoly of issuing bank notes.