Have You Ever Wondered Where Banks Come From?

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!

About the Author: 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.

Source: http://www.isnare.com

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