Modern Banks are Not Like Your Piggy Bank

• Some people use a piggy bank to put money away for safe keeping and future use. In the future, when they want the money, they just open the piggy bank and there the money is. In economist-speak, a piggy bank could be described as “100% reserve bank”. Looked at from the bank’s perspective, the bank is keeping a reserve of cash to pay back the depositor. If the bank keeps all of the money deposited in it’s reserves, then it is 100% reserve bank.

• But, a 100% reserve bank cannot afford to pay interest on the deposits. The piggy bank or coin jar you used as child never paid back more than you deposited.

• But modern banks do pay interest on some deposits. They can afford to pay interest on some deposits because they are fractional-reserve banks.