Most countries, including the United states, have what s called a fractional reserve system; in other words, only a fraction of all checkable deposits (basically all the money a bank owes people) is found inside the bank s vault. So if a bank carried 500 million dollars in money deposited by its members, it would only carry just a fraction of that at one time! What if we all came to withdrawal our money at once?!
Remember September 11th, 2001? As soon as people could, they ran down to their local banks and withdrew millions of dollars! In order to avoid mass panic and total bank failures (because banks don t carry all that money people have deposited in their vaults at one time), the Federal Reserve loaned $45 billion to U.S. banks and thrifts! And that s one of the biggest purposes of the Federal Reserve; it acts as a bankers bank, making it to where if liquid cash is low for a bank, they can always get money loaned to them by the Fed. But what happens if the Fed gets low? Doubt that will happen anytime soon, as they re the ones that print the money.
The Goldsmiths
When early traders began to use gold in making various transactions, they soon realized that it was unsafe where do banks come from?and totally impractical to carry gold and have it weighed and judged for purity every time they negotiated a transaction. The idea of depositing gold to goldsmiths became big in the sixteenth century and why not, right? Rather than carrying and measuring their gold all the time, they deposit it with a goldsmith and have them weigh it and measure the level of purity; once done, they are issued a little receipt that had value to come back to the goldsmith and claim their gold.
So these goldsmiths began accumulating tons of gold! And that s where the early bankers came from! You can look at the early goldsmiths as embryonic bankers.
Here s where it gets really interesting:
Some clever goldsmith came up with a great idea! After this system was in place for awhile, they noticed that people just plain weren t coming back to pick up their gold. Why would they? The paper was deemed just as valuable and began circulating around the society. So what were those little paper receipts in our terms? Paper money! So the goldsmith decided to lend out MORE than they actually had in gold in their reserves, which really meant that if everybody hurried back to take all their money out, the goldsmiths would be in a lot of trouble! But because such an event was so unlikely, they would lend out paper receipts and put interest rates on them to make more money. This was the beginning of loans!
Since then, banks have been loaning money out to individuals for various interests rates so they, too, can turn a profit. All of this came about because some wise goldsmith out there figured there was an real opportunity to make some money! What a great idea?!
It s also comforting to know that our money these days is backed by the Federal Reserve. So when you see accounts that are backed by the FDIC, you know you re money is safe, even in the toughest of economic times. Just know even a bank can t save you against interest! So be careful!
Author Resource:-
Trevor Shipp, the author, works as an online business consultant, student, husband, and business owner. Only just recently married, he and his wife take a serious approach to personal finance in their early years. Follow him on his personal finance blog, http://www.financialnut.com.
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