The History of Banking, Simplified

Banking

History of Banking, Simplified

The History of Banking, Simplified

Modern banks are supposed to have originated with goldsmiths, whose primary business was making jewelry but who developed a profitable sideline as keepers of other people's coin: since goldsmiths' shops had good safes, they provided more secure places for the wealthy to stash their cash than, say, a strongbox under the bed. (Think of Silas Marner.)

At some point goldsmiths discovered that they could make their sideline as keepers of coin even more profitable by taking some of the coin deposited in their care and lending it out at interest. You might think this would get them in trouble: what if the owners of the coin showed up and demanded it right away? But what the goldsmiths realized was that the law of averages made this unlikely: on any given day some of their depositors would show up and demand their coin back, but most would not. So it was enough to keep a fraction of the coin in reserve; the rest could be put to work. And thus banking was born.

Banking

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