Now let's suppose that Bill, Fred and Jim each want to borrow £10 to finance some potentially-profitable venture. If I agree to guarantee them £10, they each promise me £20 back at the end of it. I only have your £10 at the time so, picking randomly, I make a private arrangement with Fred to lend him the £10, which I do by writing him a cheque promising to pay it to him if he needs it.
Once this works out, I'll get the £10 back with an extra £10 profit. I'll give you back your £10 plus the £5 I promised you, and I'll get £5 for arranging everything.
Pay attention; here comes the clever bit:
"But wait!", I think to myself. "Only Fred knows that I committed the £10 to him. I could make money three times as quickly if I simply pretend that I still have that money, and write a £10 cheque for Bill and Jim, too. So long as two of them don't actually need the actual cash at the same time, I can always pay out the money if I ever need to!"
Plus, if I don't mention this brilliant scheme to you, I can keep the £10 profit from each venture all to myself, thus enabling me to acquire greater quantities of hookers, crack cocaine, &c.
So now I'll make three times as much money by pretending that I have a lot more money than I actually do... and because I got lucky the first few times and the ventures didn't fail, everyone trusts me! Ha ha ha ha, now I'm filthy rich and can look down my nose at all of you! Ha ha ha ha!
Oh, except if several things do go wrong at the same time... oh I don't know, let's suppose that Bill, Fred and Jim each decide to lend their money on to, hmm, some not particularly rich people to, hmm, let's say, buy huge houses that they can't really afford, and then
Then I'd be pretty fucked, wouldn't I?
As, indeed, would you, if you wanted your tenner back.
And that, children, is how banking works. Or, rather, doesn't.
