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:
- Goldsmiths had nice vaults in order to protect their wares.
- Other people ended up renting space in the vaults to protect their valuables. These people would receive notes indicating what they had deposited.
- An economy of trading these notes (rather than the hard assets) developed.
- 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:
Professor Lawrence White's 2012 Testimony to the House Subcommittee on Domestic Monetary Policy and Technology.
Debt as Money animated documentary.
- History of Money Wikipedia entry, although it also mentions the role of scriveners and I have not checked the cited references.
- The Federal Reserve Bank of Atlanta's classroom training materials shares the story, but suggests it is apocryphal.
The key details that I'm suspicious of are:
- that it was literally goldsmiths, and
- that they were private actors without explicit government backing (i.e. that some goldsmith just "invented" the idea.)