We can easily extend the story of the goldsmiths (page 288 of the textbook) to show Why the Fed’s reserve requirement is inadequate to stop bank runs The reason deposit insurance is needed. Recall that the goldsmiths wrote out gold receipts when people deposited their gold for storage. The persons receiving the receipts began to use them to buy goods and services, and, thereafter, the gold receipts circulated as money in the economy. Observing that holders of gold receipts rarely withdrew gold, the goldsmiths began to issue loans in the form of newly issued gold receipts. The amount of gold receipts circulating in the economy therefore exceeded the amount of gold in storage (or "in reserve"). The fractional reserve banking system was born. Suppose that a fictional Federal Gold Reserve Board decided to place a 10 percent reserve requirement on the goldsmiths. Thus, goldsmiths would need to hold 10 ounces of gold for each set of gold receipts representing 100 ounces of gold. This requirement would not protect gold depositors from potential losses. If holders of gold receipts lost confidence in the goldsmiths and simultaneously demanded gold in exchange for their receipts, the goldsmiths would face bankruptcy. Anything less than a 100 percent reserve requirement would be inadequate to protect those holding receipts from losses. So it is with the legal reserve requirement in the modern banking system. The requirement that banks hold currency reserves equal to 10 percent of their total checkable deposits is inadequate to protect depositors from losses resulting from bank runs. As we noted in the chapter, such protection is not its purpose. In the goldsmith economy, government could prevent "gold runs" through deposit insurance that guaranteed gold payments for gold receipts. Knowing that the government has insured the gold deposits, private owners of gold would view their gold receipts "as good as gold" and therefore have no incentive to retrieve their gold from storage. So it is in the modern economy. The Federal Deposit Insurance Corporation (FDIC) ensures each individual bank and thrift deposit up to $100,000. Depositors thus view their checking account entries "as good as currency" and are dissuaded from simultaneously running to banks and thrifts to convert their checkable deposits to currency.