Bank History in 30 Seconds

Did he miss anything important?

[B]anks need to hold only a fraction of their liabilities in reserve .. [The system] is known as “fractional reserve banking” … . The modern version dates back to the days when merchants traveled the country weighed down by bags of gold coins. They realized that the safest place to store their gold was with the people who had the strongest safes: the gold merchants. In return for storing the gold there, the merchant would give them as slip of paper-effectively an IOU. As the system gained in popularity, the IOUs became a currency, relieving people of the need constantly to take out or deposit the gold itself.

The gold merchants, over time, realized that they were storing far more gold than was ever taken out. So, rather than issue IOUs on a like-for-like basis with the gold deposited, they began to issue (sell) far more IOUs with a far greater total value than the gold they held, profiting handsomely from the proceeds.

From a letter to ther editor of the London review of Books by one Rob Best of Morpeth, Northumberland, otherwise unknown to me, published in the edition for January 24, 2008, pp. 4-5.