London Goldsmiths Invent Fractional-Reserve Banking
Coin-keepers realize depositors rarely all show up at once, and start lending out what they hold in trust
Quick facts
- Practice concentrated in
- London, mid-1600s CE
- Earlier deposit-transfer record
- Italy, c. 1200 CE
- Mechanism
- Lending out more in notes than coin held in reserve
- Direct successor
- Bank of England, founded 1694
What happened
London goldsmiths, artisans who worked gold into jewelry and plate and who also traded coin, began accepting deposits of silver and gold for safekeeping in their vaults. Around 1200 CE, deposit transfer as a form of payment had already begun in Italy, but in mid-17th-century London goldsmiths took the practice further: they issued paper receipts against deposited coin, and by the mid-1600s were issuing banknotes and paying interest on deposits to attract more of them. A goldsmith who realized depositors would rarely all demand their coin back on the same day could safely lend out more in banknotes than the gold actually sitting in the vault, collecting interest on those loans, a practice now called fractional-reserve banking. The Mercatus Center's research on this period notes that offering interest is itself evidence depositors understood their funds were being lent onward rather than merely stored, meaning the system developed through open market practice rather than concealment.
Why it matters
Fractional-reserve banking, first practiced informally by London goldsmiths, became the operating model for nearly every commercial bank that followed, including the Bank of England after its 1694 founding. It multiplies the effective money supply beyond the physical gold or silver in any vault, which is exactly why the system needs both public confidence and, eventually, deposit insurance and central-bank oversight to prevent bank runs when depositors' confidence breaks.
How we know
Surviving goldsmith-banker ledgers and account books from 17th-century London document deposit levels, note issuance, and interest payments, letting economic historians trace how and when reserve ratios fell below the total of deposits on the books.
Sources
- Mercatus Center at George Mason University. Fractional Reserve Banking · General sourcemercatus.org · Cited as a "reference" source (no stronger domain match).
- NatWest Group Heritage Hub. Goldsmiths Ledger, 1671-72 · General sourcenatwestgroup.com · Cited as a "reference" source (no stronger domain match).
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