Have You Ever Wondered Where Banks Come From

Most countries, including the United states, have what's calleda fractional reserve system; in other words, only a fraction ofall checkable deposits (basically all the money a bank owespeople) is found inside the bank's vault. So if a bank carried500 million dollars in money deposited by its members, it wouldonly carry just a fraction of that at one time! What if we allcame to withdrawal our money at once?!
Remember September 11th, 2001? As soon as people could, theyran down to their local banks and withdrew millions of dollars!In order to avoid mass panic and total bank failures (becausebanks don't carry all that money people have deposited in theirvaults at one time), the Federal Reserve loaned $45 billion toU.S. banks and thrifts! And that's one of the biggest purposesof the Federal Reserve; it acts as a "bankers' bank," making itto where if liquid cash is low for a bank, they can always getmoney loaned to them by the "Fed." But what happens if the Fedgets low? Doubt that will happen anytime soon, as they're theones that print the money.
The Goldsmiths
When early traders began to use gold in making varioustransactions, they soon realized that it was unsafe where dobanks come from?and totally impractical to carry gold and haveit weighed and judged for purity every time they negotiated atransaction. The idea of depositing gold to goldsmiths becamebig in the sixteenth century- and why not, right? Rather thancarrying and measuring their gold all the time, they deposit itwith a goldsmith and have them weigh it and measure the level ofpurity; once done, they are issued a little receipt that hadvalue to come back to the goldsmith and claim their gold.
So these goldsmiths began accumulating tons of gold! And that'swhere the early bankers came from! You can look at the earlygoldsmiths as embryonic bankers.
Here's where it gets really interesting:
Some clever goldsmith came up with a great idea! After thissystem was in place for awhile, they noticed that people justplain weren't coming back to pick up their gold. Why would they?The paper was deemed just as valuable and began circulatingaround the society. So what were those little paper receipts inour terms? Paper money! So the goldsmith decided to lend outMORE than they actually had in gold in their reserves, whichreally meant that if everybody hurried back to take all theirmoney out, the goldsmiths would be in a lot of trouble! Butbecause such an event was so unlikely, they would lend out paperreceipts and put interest rates on them to make more money. Thiswas the beginning of loans!
Since then, banks have been loaning money out to individualsfor various interests rates so they, too, can turn a profit. Allof this came about because some wise goldsmith out there figuredthere was an real opportunity to make some money! What a greatidea?!
It's also comforting to know that our money these days isbacked by the Federal Reserve. So when you see accounts that arebacked by the FDIC, you know you're money is safe, even in thetoughest of economic times. Just know- even a bank can't saveyou against interest! So be careful!
About the Author: Trevor Shipp, the author, works as an onlinebusiness consultant, student, husband, and business owner. Onlyjust recently married, he and his wife take a serious approachto personal finance in their early years. Follow him on hispersonal finance blog, http://www.financialnut.com.
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