The Tale of Shivgarh’s Bank: Fractional Reserve Banking

In the bustling village of Shivgarh, life revolved around farming and trade. But one challenge remained—people had no safe place to keep their gold coins. This worried the village elder, Raghav, who decided to open Shivgarh Bank.

At first, people deposited their gold with him for safekeeping, and in return, he gave them paper receipts. Soon, villagers started trading using these receipts instead of carrying heavy gold.

One day, a sharp merchant named Arjun noticed something curious.

"Raghav-ji, I see that not everyone comes to withdraw their gold at the same time. The gold mostly stays locked away!"

Raghav nodded. “That’s true. People trust these receipts more than carrying gold itself.”

Arjun had an idea. "What if you lend some of that idle gold to others who need it? Farmers could buy better tools, traders could expand their shops, and you could earn interest in return!"

Raghav hesitated at first, but the idea made sense. He started lending out a portion of the deposited gold while keeping enough in reserve for those who might withdraw.

This system worked brilliantly. The village flourished, businesses grew, and people felt richer. But there was a catch—this system relied on trust.

One day, a rumor spread that Shivgarh Bank was running out of gold. Panic struck, and people rushed to withdraw their deposits. But since most of the gold was loaned out, Raghav couldn’t fulfill all requests at once. The bank collapsed, and chaos followed.

💡 Moral of the Story?
This is how fractional reserve banking works today! Banks keep only a fraction of deposits in reserves and lend out the rest to fuel economic growth. But if too many people demand their money at once (a bank run), the entire system can collapse.

Modern banks, however, are regulated and have safety nets like central banks and deposit insurance to prevent such disasters.

[Finance]