Originally Posted by Beingist
Banks need to maintain capital reserves, per the authority of the central bank (at least in the U.S.) Where do they get those reserves? From the government that just printed it.
Beingist can also maintain capital reserves. In fact, he should.
Let's use a simple illustration. Suppose Beingist wishes to go to college. He wishes to study a four-year course that will cost $50,000 a year. So he needs $200,000.
Beingist does not have $200,000 right now. He does have some savings. He intends to use some of those savings; his parents will contribute some money; and finally, Beingist plans to work part-time while studying, to earn some money to finance his own studies.
Analysing his 4-year plan, Beingist decides that he must also set aside some capital reserves. This simply means that after thinking about his costs for the 4-year college course, Beingist decides that he will take $X from his savings and keep it under his mattress. This is in case any other part of his plan goes wrong - in that case, he will have some "backup" money to rely on.
That's "capital reserves".
For the banks, the government has lots of complicated rules. But the basic idea is that generally for every business transaction that the bank gets itself into, it should set aside a certain amount of money, as "backup" money, in case the transaction goes wrong.