where did fractional reserve banking originate 
nobody knows when fractional reserve banking originated but it is certainly not a modern innovation goldsmiths during the middle ages issued demand receipts for gold on hand that exceeded the amount of physical gold they had under custody knowing that on any given day only a tiny fraction of that gold would be demanded the bottom linefractional reserve banking is the banking system used throughout the world today banks use fractional reserves to create loans for businesses and consumers without the ability to do this an economy s growth is stunted leaving it to flounder while those that need money for large purchases and investments rely on a bank s substantial holdings fractional reserve banking is important for modern economies because the alternatives limit the amount of money that can be created or manipulated in an economy to encourage or discourage growth correction april 9 2023 this article has been edited to correct a calculation error in a hypothetical example in the section fractional reserve banking process 