Issue and Reissue

In days gone by when one spoke of money, "hard money" came to mind. "Precious" metal. "Specie" -- though that word is as obsolete today as money made of gold.

People kept their money at the goldsmith's. The goldsmith gave out receipts when he took in gold. People found it convenient to use the receipts for money, rather than trudging down to the goldsmith, exchanging receipts for gold, carrying the gold to market, and making their purchases. People found it convenient to use gold receipts for money, rather than the gold itself. Thus, paper money was born.

As gold receipts circulated more and more, goldsmiths found that they almost always had more gold on hand than they needed to cover incoming receipts. So they started lending out some of that excess gold. With gold on loan, goldsmiths had more receipts outstanding than they had gold in-house. Thus, fractional reserve banking was born.

Of course, the goldsmiths did not really have "excess" gold. They didn't have more than they needed to cover their outstanding receipts. They only had more than they needed at the moment.

And every once in a while there was a "panic" and a "run" on the bank, when everybody grabbed their gold receipts and went running down to the bank to get their gold, all at the same moment. That's when problems would arise with fractional reserve banking.