Fractional Reserve Banking

The history of money is fascinating. And it is not easy to get your head around it in one go. The way I understand it, banking began with goldsmiths being entrusted by normal people with their gold for safekeeping. They realized that at any point in time, only a fraction of the people (say 10%) will come back to demand their gold back. This fact allowed them to lend out gold to others, gold that was not theirs to begin with, and charge interest on it. This was the birth of fractional-reserve banking.

Most banks work on the same principle nowadays. Each bank has to maintain a capital ratio, a ratio of the amount of money in reserve, and the amount of money it lends out. This ratio changes, but is always less than one...