Wikipedia defines fractional reserve banking as:

the practice whereby a bank holds reserves in an amount equal to only a portion of the amount of its customers' deposits to satisfy potential demands for withdrawals.

The practice of fractional reserve banking is said to have originated with European (or perhaps English) goldsmiths.

The outline of the story is:

  1. Goldsmiths had nice vaults in order to protect their wares.
  2. Other people ended up renting space in the vaults to protect their valuables. These people would receive notes indicating what they had deposited.
  3. An economy of trading these notes (rather than the hard assets) developed.
  4. The goldsmiths realized that they could write, i.e. lend out, more notes than they had gold and coins stored in their vaults, since it was rarely the case that everyone wanted all of their deposits back at the same time.

The claim is that this story is a reasonable summary of a real episode in the history of banking.

Several versions of this story can be found:

The key details that I'm suspicious of are:

  1. that it was literally goldsmiths, and
  2. that they were private actors without explicit government backing (i.e. that some goldsmith just "invented" the idea.)
  • I would be surprised if it never happened. Sort of an article of faith, isn't it? Jun 5, 2014 at 20:57
  • Its seems plausible, but it also seems to fit too cleanly into these narratives, thus I hope someone can provide an answer with a specific instance.
    – Dave
    Jun 5, 2014 at 22:16
  • The problem is that it's almost certain to have happened at least once. In any venture where there's money going around, there's bound to be a thief or two. There's plenty of thieves in every banking system. The question is whether the thievery is sufficient to be damaging to the overall economy. Counterfeiting of US currency happens quite frequently, but it's still a small enough factor that it doesn't bankrupt us. Jun 5, 2014 at 23:34
  • 3
    None of the testimony, the Classroom Economist article, the awful Debt as Money Video (or my recollection of the first 18 minutes I managed to sit through) nor the Wikipedia article claim that anyone "made a business decision to write more notes than it had assets as a matter of policy", although the Money as Debt video was suggestive that this was the case. They all share the idea that the goldsmith did not have maintain sufficient GOLD in reserves to simultaneously meet the demands of all the depositors at once. However, they retained ASSETS at least equal to the deposits.
    – Oddthinking
    Jun 6, 2014 at 4:28
  • 2
    It's hard to see how the story really explains the origin of the excess notes. Bearer notes work like, you deposit gold and you get notes that say "this certifies there is held X ounces of gold in Y vault payable to the bearer". Deposit gold, get notes, trade notes. In this story, who are the people who receive notes from the bank without making a hard deposit?
    – hobbs
    Jul 16, 2014 at 2:51

1 Answer 1


1 is true as common knowledge. 2 is true by common knowledge.

3 is incorrect. Scriveners formed the deposit / lending hierarchy prior to goldsmiths, but didn't issue instruments. (470) Goldsmiths issued notes on hand on deposits in relation to money, not valuable goods, deposited and deposited with full authority to the goldsmith. (474)

3a Goldsmiths issued notes in relation to lending real money on bills of exchange. (475)

3b These goldsmiths were known as "exchanging goldsmiths" rather than "working goldsmiths" though the exchanging goldsmiths evolved directly from working goldsmiths. (474)

4 The primary trade in notes was between goldsmiths as partially clearing trust networks. (474ff) Though their notes became generally acceptable to settle debts. (478)

4a While goldsmiths were private actors, who invented a system of notes where notes exceeded the fraction reserved in actual cash (474ff)

4b They were utterly dependent upon state bills, their ability to reclaim their working capital being based on reclaiming debts signed over to them that they endorsed for real money (474ff)

4c The 1672 Stop of the Exchequer, where the government refused to pay capital falling due for a year, and instead paid only interest, broke many Goldsmiths, caused a run on the notes, and resulted in the dishonouring of Goldsmith's notes (478)

Geva, Benjamin (2011) The Payment Order of Antiquity and the Middle Ages: A Legal History. Bloomsbury 474-485.

  • 2
    Whilst this has a reference, please provide quotes of the passages that support your point. As it stands it is hard to judge the validity of your statements.
    – Sklivvz
    Dec 11, 2014 at 9:44
  • 2
    I do not have the book in question, but those look like line or page entries that indicate that these are quotes. Dec 11, 2014 at 15:22
  • They're standard page quotes following inline sociological form for a single source. This is a more standard system of annotation than basic LaTeX citations; one widely known and available to people who read social sciences, including history. History, too, defaults to this citation style when providing a summary of a sufficiently canonical text for a question: ie, where only one text need be cited for a common account. Mar 1, 2021 at 9:10

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