Fractional Reserve Banking

Hi guys, did some research when i came back, thought you might be interested in knowing what our banking system is based on - "Fractional" Reserve Banking as opposed to "Full" Reserve Banking.

In 16th century England people who had gold would deposit it with goldsmiths for safekeeping. In exchange they got a signed receipt guaranteeing that they could retrieve it. The value assigned to that note backed by the gold in the goldsmith’s vault made it possible for one to use it in payment.

That means if A deposited £10 worth of gold and had in his possession a receipt, he could settle his debt with it. That receipt became money. The person who took it in payment could either use it as it is, or at some later point retrieve the gold in the goldsmith’s keeping.

At the same time B borrows £10 worth of gold from the goldsmith but receives a promissory note. He settles his debt to C with that note. Now there are two notes in circulation for one amount of gold. The goldsmith being smart realises that these notes can actually be in circulation for quite some time, several years even. He issues further notes knowing that it's highly unlikely that everyone would claim their gold at the same time.

According to contemporary economical calculations he can safely lend at least ten times the amount deposited. If there are two or more people who suddenly wish to retrieve their gold, he can also rely on the fact that he has debtors who owe him gold, although they originally received nothing but a piece of paper. They then have to pay him in gold, and should they default he could seize whatever possessions they had, sell these, buy gold and settle the claims. I might add that the goldsmith of course lent out promissory notes for non-existent gold at interest.

Today’s banks do the same.

Simply put, every loan given is a deposit. You go to the bank, ask for a loan of say $1000 and they open an account for you to that amount. If you ask for it in cash to settle a debt, someone else will eventually deposit that amount. You of course still owe your bank that money, which was created out of nothing the moment you opened your mouth. The money created is debt to which they add interest.

And that is Fractional Reserve Banking for you.

haha.

for further reading, check out gold standard on wikipedia, or investing in gold

ok v tired liao, going to sleep. gdnite everyone!