Bank

A bank is a financial institution, that keeps current accounts for its customers. Banking includes, but is not limited to activities as:
 * issue of banknotes
 * settlement of payments
 * lending money
 * currency exchange

History of Banking
The first precursors of banks can be traced as far back as ancient Mesopotamia, where temples, royal palaces, and some private houses served to store valuable commodities like grain, the ownership of which could be transferred via written receipts. There are records of loans by the temples of Babylon as early as 2000 BC; temples were considered safe, because they were sacred places watched over by gods, and should be protected from theft. Companies of traders in ancient times provided banking services connected to the buying and selling of goods. Many of these early "protobanks" dealt primarily in coin and bullion, money changing and supplied foreign and domestic coins of the correct weight and fineness. Around the year 3300 B.C. the temple of Uruk owned the land it exploited, received offerings and deposits and granted loans to farmers and merchants of livestock and grain, probably the first bank in history. The term banker originated in Florence, where bankers were called either banchieri or tavolieri, because they worked sitting behind a bench (banco) or table (tavola).

Banknotes
Banks issue banknotes. Historically, they were money substitutes, that the bank was prepared to exchange free of charge against money proper. With paper money, a banknote is a promise to the same amount of paper money.

Fractional Reserve Banking
If a bank would not expand its reserves, it could lend only the money of its savers and its own capital. It would be simply a financial middleman. To stay profitable in a free market, it would have to stay within narrow boundaries, determined by its savers. For example, if the bank receives credit for 5%, it would be suicidal for it to lend it for less. Since its savers are willing to part with the money for a time, it cannot demand much higher rates to its debtors or its savers could lend it directly.

But Fractional Reserve Banks can produce money substitutes essentially for free and give credit at better rates.

Lending
Contemporary commercial banks combine two essentially different functions. First, they serve as intermediaries between savers and investors. Banks issue a debt instrument (bonds or commercial paper) to lend the funds to economic agents that need financing. As financial intermediaries, banks pool and channel existing savings. This implies specific risks (credit, interest, currency, etc.) that banks may be willing to bear wholly, to manage partially or to hedge completely. Because the loans that banks make come from actual wealth that is only transferred from one individual to another, one can speak of real credit. Real credit is the foundation of capital accumulation and economic growth.

Second, banks act as fractional-reserve depository institutions. This means that they are legally obliged to keep in reserves only a (very small) fraction of money that is deposited with them. The rest of the money can be used for granting credits, i.e., to create an additional deposit that is made available to the receiver of the credit. In addition to channeling existing savings, banks are creating deposits that they lend out. Since such deposits are not brought about by existing savings, one can speak of bank credit. It is precisely their ability to create bank credit through new deposits that makes banks specific and different from other companies. The capacity to create deposits implies the capacity to increase the supply of media of exchange, for deposits are used as media of exchange.

Links

 * History of Money and Banking in the United States: The Colonial Era to World War II (pdf) by Murray N. Rothbard
 * A Short History of Paper Money and Banking (pdf) by William M. Gouge
 * Free Banking: Theory, History and a Laissez-Faire Model (pdf) by Larry J. Sechrest
 * Wikipedia on banks and history of banking