How the U.S. Banking System Works  The United States banking
system is a “fractional reserve” system. This began in the 1800s
when the courts declared that money on deposit in banks was no
longer the property of the depositor, but rather was a debt owed
by the bank to the depositor in the amount of the deposit. This
meant that the money deposited became the property of the banks
to do with as they pleased, which opened the way for lending
“their” money. It wasn’t long before they realized that only a
small fraction of depositors wanted to withdraw “their” money at
one time. Thereafter, banks began lending a large percentage of
the money depositors placed with them and keeping only a small
“reserve” to meet depositors demands for cash. This gave rise to
two potential problems for banks: 1. a solvency problem (if the
bank’s liabilities exceeded its assets, creditors/depositors
were not all able to withdraw “their” deposits and the bank went
bankrupt), 2. a liquidity problem (even though a bank might have
assets