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A century ago, there were no Federal Reserve Notes. There were gold coins in wide circulation. Americans recognized gold coins as money. The double eagle, or $20 gold piece, was how millions of workers were paid each week.

A person could walk into a store and buy what was for sale for $20 or less. There was no doubt about a $20 gold piece as lawful money. A buyer did not have to explain what a $20 gold piece was. He did not have to offer a discount to the seller because he was using a $20 gold piece. He did not have to make any prior arrangements before coming into the store in order to make a purchase with a $20 gold piece. American gold coins were money. He probably would have been able to buy anything with a gold coin issued by any other government. When it came to gold, sellers were not picky.

For smaller purchases, silver coins were popular. A silver coin functioned as money in the same way that a gold coin did. People did not have to be told what silver coins were.

The problem facing every fractional reserve bank in the United States in 1909 was simple: if it issued too many IOUs for money, anyone owning an IOU could come down to the bank and exchange it for either gold or silver coins. If the bank faced a long line of depositors coming down to get silver coins or gold coins, it might go out of business. It would run out of coins.

A bank had promised depositors that they could get gold or silver coins on demand. When a bank was incapable of delivering the coins on demand, it was legally bankrupt. This was always the fear of every commercial banker in the days before the FDIC.

The problem arose because banks always issued more IOUs for gold and silver coins than they had coins on hand to redeem. They issued these receipts because they were paid interest on the money loaned. The more receipts to gold and silver coins that they issued, the more money they would receive in interest. This is the logic of all banking.

The depositors could demand payment in legal money – U.S. coins – at any time. On the other hand, the bank could collect money from borrowers except on whatever terms the original contract specified. The banks were borrowed short and lent long. They could be caught in a squeeze whenever depositors decided it was time to redeem their written promises for real money.

Bankers therefore wanted protection. They wanted protection from depositors. Bank robbers were only rarely a problem for a bank. They could collect only the as-yet unloaned money in the vault. In contrast, depositors could wipe out a bank at any time. They could force it into bankruptcy: ruptured bank status.

Depositors are always the enemies of fractional reserve banks, because the banks have lent long and borrowed short. The banks face bankruptcy whenever depositors believe that it is time to redeem the promises for real money. This is the Sword of Damocles hanging over the head of every banker. — The Market Oracle

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Now showing at the DeYoung museum in in San Francisco. Soon to be wallpaper everywhere.

"If the American people ever allow private banks to control the issuance of their currencies, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered." — President Thomas Jefferson, letter to Treasury Secretary Albert Gallatin, 1802.

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